Legal Realities by Power Trade Media

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Legal Realities

Presented by: Anthony & Middlebrook and the Church Law Group

CHURCH EXECUTIVE â&#x20AC;¢ L E G A L R E A L I T I E S

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Table of Contents DOS AND DON’TS FOR PASTORS DURING AN ELECTION YEAR

Every election year, we receive lots of questions asking what’s permissible and impermissible for churches and church leaders when it comes to political campaigns and legislative activities — in particular, regarding discussing the elections with their congregation, the public, and even their employees and board members. Participating in prohibited political campaign activity can result in your church jeopardizing its tax-exempt status, thus harming its reputation, and putting the tax deductibility of every donation at risk. So, as we kick off this election year, here are some different ways pastors and churches can (and can’t) be involved in political campaign and legislative activities. By David O. Middlebrook

EXAMINING ORGANIZATIONAL STRUCTURE — INCLUDING (AND ESPECIALLY) CHURCH MEMBERS’ RIGHTS

There are more than 400,000 churches in the United States, each with its own governance structure and decision-making model.

EXAMINING ORGANIZATIONAL STRUCTURE — HOW THE HOURLY WAGE RULES WILL AFFECT CHURCHES 10 For church leaders, finances are often a stressful topic — usually not an issue pastors enjoy talking about. Add to that stress numerous Department of Labor (“DOL”) and IRS regulations that drive up the cost and hassle of employment, and sometimes conducting formal ministry seems all but financially impossible. By David O. Middlebrook

EXAMINING CHURCH BYLAWS

The purpose of bylaws is to reflect how your church operates, as well as to provide protection and structure. The bylaws contain a detailed framework of operations, and what seems important to the church in this season might not be in the next. So, you need to have a framework that can change. Bylaws contain the church’s internal rules and set forth the guidelines for operation. The bylaws could be described as a “rulebook.” But, what goes in the bylaws? By David O. Middlebrook

With so many different models and terminology used to describe church governance structures — elders, deacons, trustees, directors, pastor and apostle — it can be quite confusing to determine what’s the best and most biblicallysound corporate structure for your own church.

INTELLECTUAL PROPERTY CONSIDERATIONS FOR CHURCH LEADERS

By David O. Middlebrook

Churches are some of the most creative places on earth.

Every week, church staff is called upon to create sermons, songs, Bible and Sunday school lessons, music, books and teaching materials, and all other kinds of creative works. Churches routinely use media — such as movies and audio clips — to emphasize sermon and teaching points. They frequently make use of original art design, clip art, computer graphics and animation, photographs, words and lyrics for songs displayed on screens, dramatic readings, plays, and dance.

The State’s grounds for denial? The preschool was ineligible because it was run by a church, citing an 1875 Missouri constitutional amendment — known as the Blaine Amendment — prohibiting public funds from being used “in aid of any church.”

Churches are also frequent creators of new names for the church itself, new projects, church ministries, products, and services. The church’s creative works, ideas and concepts are what the law calls “intellectual property.”

Here, Attorney David O. Middlebrook offers his take on this potentially pivotal case for churches.

By David O. Middlebrook

WHAT YOU SHOULD KNOW BEFORE RECRUITING A CHURCH INTERN

A SUPREME COURT CASE TO WATCH: TRINITY LUTHERAN CHURCH v. PAULEY

Many churches look to unpaid internships to provide muchdesired experience in ministry-related activities for students looking to obtain not only ministry skills and experience, but also suitable skills for a secular workforce. However, there have been recent concerns that some unpaid internships violate state and / or federal law. By David O. Middlebrook

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L E G A L R E A L I T I E S • CHURCH EXECUTIVE

Dos and don’ts for pastors during an election year By David O. Middlebrook Since 1954, churches — and other nonprofits in America — have been prohibited from engaging in certain kinds of political activity. While these limitations might be an affront to the moral conscience of many pastors across America, it has become a way of life for 501(c) (3) organizations. Specifically, Congress prohibited nonprofits — including churches — from participating or intervening “in (including the publishing or distributing of statements) any political campaign on behalf of (or in opposition to) any candidate for public office.”1 These prohibited activities are known as “Political Campaign Activity” and occur when a church — or any 501(c)(3) organization — directly or indirectly participates or intervenes in “any political campaign on behalf of, or in opposition to, any candidate for elective public office.” 2 It’s very important for all churches to understand that this prohibition is for campaign activity regarding candidates; churches may, however, engage in some legislative activity — lobbying and advocacy for issues, for example. Every election year, we receive lots of questions asking what’s permissible and impermissible for churches and church leaders when it comes to political campaigns and legislative activities — in particular, regarding discussing the elections with their congregation, the public, and even their employees and board members. Participating in prohibited political campaign activity can result in your church jeopardizing its tax exempt status, thus harming its reputation, and putting the tax deductibility of every donation at risk. So, as we kick off this election year, here are some different ways pastors and churches can (and can’t) be involved in political campaign and legislative activities. Personal endorsements The most common question we hear from church clients regarding elections and candidates is: As long as I say I’m supporting a candidate personally — and not in my position as the church’s pastor — am I OK? Personal endorsements are permitted; however, unless they’re done correctly, the surrounding facts and circumstances might lead the IRS to determine that a pastor was acting in his or her official capacity. The IRS looks at the conditions surrounding the endorsement. If an endorsement was made during a church’s official event — a Sunday morning service, for example — or in an official publication, such as a church newsletter (regardless of who pays for it), the endorsement won’t be considered “personal.” Asking a congregation to vote for a candidate during a church service will likely be viewed as a prohibited political campaign activity. On the other hand, a local newspaper advertisement depicting a candidate with his or her supporters — including the name of a pastor and the church where he or she is employed — does not run afoul of IRS regulations. This is because the pastor didn’t endorse the candidate in his or her position during an official church activity. Rather, identifying the pastor and the church where the pastor is employed is only identifying one of the candidate’s supporters. 4

CHURCH EXECUTIVE • L E G A L R E A L I T I E S

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https://www.irs.gov/uac/Charities,-Churches-and-Politics https://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Political-and-Lobbying-Activities churchexecutive.com

Public appear ances It’s not uncommon for churches to invite candidates or current public officials to speak to their congregations during regularly scheduled worship services or at special events open to the public (“public forums”). However, each opportunity for a candidate or public official to speak must be handled in a way that doesn’t interfere with elections. For instance, a church can hold a public forum — and invite all the candidates seeking election to an office — to address the attendees. However, the church may not ask questions that lead the attendees toward one candidate, or a group of candidates. Typically, when churches host public forums, it’s advisable to ask all the candidates the same slate of questions and give each candidate equal time to speak. Cutting some candidate off early might be seen by the IRS as an indirect intervention into a campaign. If your church invites public officials to speak, the timing of the upcoming election is considered in determining whether or not your church is endorsing a candidate for office. If the mayor of your city is invited to preach, pray or otherwise address the congregation on the Sunday morning before an election the following Tuesday, and the mayor is running for reelection — and the mayor encourages those in attendance to vote — this can easily be seen as a tacit endorsement by your church. This is especially likely if other candidates aren’t given the same opportunity. Like all members of the general public, elected officials are welcome to attend church events. A pastor can acknowledge his or her presence, or even honor the elected official for non-political activity, such as a distinguished military career. Voter guides and drives For those who want to inform their congregants of the upcoming issues to be voted on, a voter guide — one which factually shows where candidates stand on issues — can be helpful. Here again, these tools must be neutral toward the candidates, fact-based and neither supportive nor dismissive towards any candidate.

Helping your congregants register to vote (without ties to any candidate) is also a great way to involve your members. Recently, some states have adopted specific regulations about how voter registration events must be conducted. If you don’t know the rules in your state, consult an attorney to make sure you’re in compliance. 3 Issue advocacy Sometimes, issues themselves can identify a candidate — particularly in smaller elections with only two or three candidates. If you promote an issue that leaves only one choice of candidate, you run the risk of prohibited political campaign activity. Issues are important, and they should be discussed by pastors. But, if the issue promotion activity leaves only one available choice, then those activities are likely intervening with the election. Voter rules are a difficult dynamic. Often, pastors feel prohibited from speaking out on topics on which our society is voting. Being able to navigate the legal dos and don’ts helps churches engage society at the voter booth. The materials in this article are provided for informational purposes only and do not constitute legal advice. This article is intended, but not promised or guaranteed to be current, complete or up-to-date and should in no way be taken as an indication of future results. Transmission of the information in this article is not intended to create — and the receipt does not constitute — an attorney-client relationship between sender and receiver. David O. Middlebrook is a founding shareholder of Anthony & Middlebrook and the Church Law Group [ www.churchlawgroup.com ] in Grapevine, TX. His clients include high-profile charitable and religious organizations, both domestic and international. 3

Texas recently adopted new voter photo ID rules.

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L E G A L R E A L I T I E S • CHURCH EXECUTIVE

Examining organizational structure — including (and especially) church members’ rights There are more than 400,000 churches in the United States, each with its own governance structure and decision-making model. By David O. Middlebrook

CHURCH EXECUTIVE • L E G A L R E A L I T I E S

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ith so many different models and terminology used to describe church governance structures — elders, deacons, trustees, directors, pastor and apostle — it can be quite confusing to determine what’s the best and most biblicallysound corporate structure for your own church. As an attorney with more than 25 years of experience representing churches, I’m often asked which structure is the best. The truth is that there are many large and healthy churches that have incredibly diverse governance structures. However, the key to any governance structure is that it’s clearly defined as to who’s in charge. One major pitfall for church leaders is a lack of understanding around the legal rights of your church’s members. Without understanding exactly what your church members are entitled to do, or to know, church leaders run the risk of creating a problem by not going through the decision-making matrix outlined in the governing documents of the church. But, not all church members have rights, and not all churches have legal corporate members. In fact, most states give religious nonprofits the ability to choose, at the time of incorporation, whether they will have legal members. If the incorporators choose not to have legal members, then the board of directors, or trustees, will be 100-percent responsible for the organization. SO, WHAT ARE THE OPTIONS FOR CHURCH GOVERNANCE? There are three basic models you’ll find in a majority of churches across the United States: #1: Congregational. In a Congregational Model, the members of the church have the right to vote and make almost every decision regarding the church’s management and operation. There are monthly, (or at least regular) business meetings in which all current members are allowed to attend and vote on various matters. This model is more prevalent in smaller, older churches that don’t have significant business activities or that believe such a model is required by their understanding of scripture. It’s important to understand that most states generally say that the board of directors has authority over the corporation unless the corporate documents clearly state that the power is specifically designated to the members. Accordingly, if your church wants to follow the congregational model in which members retain the right to vote on all issues, the corporate documents must clearly articulate that fact; otherwise, the typical default rule is that a board will control. #2: Contemporary. This model allows the senior pastor to lead the daily church affairs with a board of directors having oversight and co-management authority. There are no corporate “members” (there can still be “members” as far as having affiliation to the church, they just might not have corporate voting authority). This model is based upon the modern view that a church is best served by a vocational staff who are at the church daily and have a better understanding of its needs. This model also imagines that the church’s business activities are too numerous or complex to wait for congregational meetings and/or that the average congregant does not want to be bothered with the church’s business decisions, but only wants to attend as a worshipper.

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#3: Hybrid. Finally, many churches seek to find some balance between the other two structural models and opt for a “hybrid” structure. Under this model, the church is run by the vocational staff who — with oversight from a board of directors — are accountable to members who retain limited voting rights on big issues. This model often reserves big decisions for the members while the board of directors and the staff leadership make the remaining decisions. For example, under the hybrid model, members may retain the right to vote on issues such as dissolution, the acquisition of debt over a certain amount, or the selection and removal of the senior pastor. This hybrid structure creates a middle ground that allows everyone to be involved and fosters accountability. Over the past several years, this structure has increased in popularity — particularly for churches that previously followed a congregational structure but determined that the members lacked meaningful participation on all issues. With a desire for accountability, some congregational churches have opted for the hybrid model, forming a board of directors, yet allowing members to maintain limited voting rights on issues of great importance. IDENTIFY WHO’S IN CHARGE No matter which management model your church chooses, it’s important that the corporate documents clearly identify who’s in charge. Since clearly drafted documents affect basic church operations, it’s important for both the staff and congregation to know who to look to for leadership. If the corporate documents are unclear, the church is exposing itself to many problems. For example, if the church is seeking a loan, the lending institution can delay or reject financing if it’s unclear who’s in charge of the corporation and who has authority to make decisions. Furthermore, a lack of clarity can lead to trouble if there’s ever a church dispute or split. If the congregation believes it has the right to vote and the leadership thinks the opposite, then who’s in control of the church? Also, should a church decide to submit a 1023 application for taxexempt recognition, the IRS will want to know who has the power to make decisions and vote on issues within the church. Now that you know the different models typical of church governance, go ahead: break out your governing documents and read them, cover to cover. You might be surprised to discover that your church’s operating structure doesn’t align with the governance structure set out in your articles of incorporation or bylaws. Churches can run into serious issues when they aren’t following their corporate documents, or if their bylaws are in conflict with the church’s articles of incorporation. You might even be surprised to hear that in most cases, if the articles of incorporation contradict the bylaws, state law provides that the articles supersede the bylaws, thus rendering the bylaws ineffective. Today is a perfect day to review your church’s corporate documents. Remember: Moses didn’t go to the mountain to retrieve these documents; they should be reviewed and updated periodically to make sure the church is operating in a manner consistent with its corporate documents. The materials in this article are provided for informational purposes only and do not constitute legal advice. This article is intended, but not promised or guaranteed to be current, complete or up-to-date and should in no way be taken as an indication of future results. Transmission of the information in this article is not intended to create — and the receipt does not constitute — an attorney-client relationship between sender and receiver. David O. Middlebrook is a founding shareholder of Anthony & Middlebrook and the Church Law Group [ www.amlawteam.com ] in Grapevine, TX. His clients include high-profile charitable and religious organizations, both domestic and international.

L E G A L R E A L I T I E S • CHURCH EXECUTIVE

A Supreme Court case to watch: Trinity Lutheran Church v. Pauley

Earlier this year, the U.S. Supreme Court agreed to consider Trinity Lutheran Church v. Pauley, a 2013 lawsuit filed by the church after the state of Missouri rejected its application for a grant to replace its preschool’s playground pebbles with repurposed rubber from old tires. The State’s grounds for denial? The preschool was ineligible because it was run by a church, citing an 1875 Missouri constitutional amendment – known as the Blaine Amendment – prohibiting public funds from being used “in aid of any church.” Here, David O. Middlebrook – a founding shareholder of Anthony & Middlebrook and the Church Law Group in Grapevine, TX, and Church Executive “Legal Realities” Series author – offers his take on this potentially pivotal case for churches.

CHURCH EXECUTIVE • L E G A L R E A L I T I E S

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Church Executive: David, why do you think this case could turn out to be important? David O. Middlebrook: This case has the potential to enhance or limit the flow of government funding to religious organizations through grants and subsidies. There has been a lot of confusion in this area, particularly with faith-based grants through the White House’s Office of Faith-Based and Neighborhood Partnerships. Many individuals are under the mistaken belief that no government agency can fund a religious organization’s projects. While government funding is limited to secular projects, we can see – as represented in this case – some states go further by implementing complete prohibitions on government funding to religious organizations. The importance of the underlying case really comes down to what the parties are asking for. The State of Missouri – represented by Sara Parker Pauley, Director of the Missouri Department of Natural Resources – is asking the Supreme Court to uphold the Missouri Constitution, which prohibits the distribution of state funds to be used to fund any religious organization, for any reason. The Petitioner (Trinity Lutheran Church of Columbia, Inc.) is asking for churches to be considered for grants along with secular organizations, as long as they meet secular criteria. If the State of Missouri wins, it could embolden other states to enact similar constitutional provisions; if the Petitioner wins, a lot more churches will be seeking state funding for their projects in their community. CE: So, what’s the Pauley case all about, in plain English? Middlebrook: In a nutshell, and skipping the tangential issues and background, this case is about whether state governments can prohibit funds from going to religious organizations. It is not about whether religious organizations can receive government funding; this already happens. As I said before, the White House’s Office of Faith-Based and Neighborhood Partnerships has a history of funding projects through religious organizations. In this case, Trinity Lutheran Church applied under a Missouri subsidized program to have its playground resurfaced with ground-up tires, and the record is clear that its application would have been granted but for its identity as a church. The federal courts reviewing the denial of the application concluded that the prior decisions of the Supreme Court required them to agree with Missouri and, in particular, that Missouri law could validly prohibit state funds from being used to benefit a church, even if the church would have qualified but for its identity as a church. Trinity Lutheran asked the Supreme Court to review the case, and the Court agreed to do so – it did not have to, so perhaps the Court is willing to consider expanding religious organizations rights under state law. CE: What would be the practical effect of a Supreme Court reversal of the Pauley case? Middlebrook: If the Court sides with the State, you will likely see a measurable increase in prohibition of funds distributed to religious

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organizations. If the Court sides with Trinity Lutheran, this may result in increased funds available to churches for community projects. Remember, regardless of the outcome of this case, the funding must be used for a neutral purpose, not religious in nature. Practically, this means that financial grants or funding from a government to a church may not directly and conspicuously benefit a “religious” activity of the church. Thus, it is possible that the government funding can be used by the church to build a playground that will be used by church members and the broader community, whereas the grant could not be used for a religious purpose such as buying new hymnals or bible study curriculum. CE: What would this mean for the readers of Church Executive? Middlebrook: In this day and age when churches are asked to carry a heavier burden in their communities because of the cutbacks in local, state and federal services, a less-hostile attitude toward churches when they apply for government grants and subsidies would be of direct benefit to your readers and their operating budgets. Perhaps not immediately, but if the playing field can be leveled, over time this could turn out to be a major sea change for churches. CE: For our readers who would like to learn more about the Pauley case, what resources are available to them? Middlebrook: Go to the SCOTUS blog on the Pauley case and you can find links to PDF copies of the 8th Circuit opinions and the various filings with the Supreme Court leading up to the Court’s decision to review the case. CE: What’s the timetable, here? Middlebrook: The case will be set for oral argument, but that won’t be scheduled until the Court’s 2016-2017 Term starting in October, meaning that the decision won’t be handed down until late this year or 2017. But there are several wild cards here, starting with the recent death of Justice Scalia and that 2016 as an election year, which will likely tangle up any appointment of a replacement Justice, possibly delaying that appointment until the next President takes office. Right now, there is a distinct possibility that the Pauley decision could end up being a 4-4 tie, having the effect of affirming the 8th Circuit decision below “by an equally divided court” (meaning that the Supreme Court’s decision is not treated as a binding precedent) and punting the issue to a future case. The materials in this article are provided for informational purposes only and do not constitute legal advice. This article is intended, but not promised or guaranteed to be current, complete or up-to-date and should in no way be taken as an indication of future results. Transmission of the information in this article is not intended to create — and the receipt does not constitute — an attorney-client relationship between sender and receiver. David O. Middlebrook is a founding shareholder of Anthony & Middlebrook and the Church Law Group in Grapevine, TX. His clients include high-profile charitable and religious organizations, both domestic and international

L E G A L R E A L I T I E S • CHURCH EXECUTIVE

How the hourly wage rules will affect churches

By David O. Middlebrook

For church leaders, finances are often a stressful topic — usually not an issue pastors enjoy talking about. Add to that stress numerous Department of Labor (“DOL”) and IRS regulations that drive up the cost and hassle of employment, and sometimes conducting formal ministry seems all but financially impossible.

ecause of the tedious nature of ever-evolving employment laws, ministries and churches often adopt a far too simplistic approach: pay everyone a stagnate salary the organization can afford, regardless of time worked. Thoughts about clocking in and out — and paying overtime — are overlooked or disregarded because they are burdensome and not seen in the spirit of “doing what it takes.” The Department of Labor’s Wage and Hour regulations affect almost every employer, regardless of finances. The Fair Labor Standards Act (the “Act”) is the main legislation that effects wage and hour rules and gives authority to the DOL to enact and enforce regulations regarding wage and hour rules (such as the payment of minimum wage) and requires overtime pay for nonexempt employees working more than 40 hours in a set week. All employers — even churches — must be aware that the DOL takes the default position that all employees are nonexempt. This means they are eligible for minimum wage and overtime pay unless the employer can demonstrate that an exemption outlined by the DOL and the Act applies.

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So, when does the Act apply? The Act applies only in cases of employment and does not apply to independent contractors. To understand whether the person you are paying is an employee, the DOL looks at the following factors: 1) “The extent to which the work performed is an integral part of the employer’s business.” The more important the worker’s value, skill and work are to the employer, the more likely the position will be considered an employed position rather than a contracted one. 2) “Whether the worker’s managerial skills affect his or her opportunity for profit and loss.” The managerial duties and skills of a worker indicate an employment relationship. Rarely, if ever, would there be a scenario where an independent contractor would exercise managerial control of the organization, employees or capital.

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Administrative: “Performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers; and the employee’s primary duty includes the exercise of discretion and independent judgment with respect to matters of significance.” Executive: “The employee’s primary duty must be managing the enterprise, or managing a customarily recognized department or subdivision of the enterprise; the employee must customarily and regularly direct the work of at least two or more other full-time employees or their equivalent; and the employee must have the authority to hire or fire other employees, or the employee’s suggestions and recommendations as to the hiring, firing, advancement, promotion or any other change of status of other employees must be given particular weight.” Professional: “The employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment; the advanced knowledge must be in a field of science or learning; and the advanced knowledge must be customarily acquired by a prolonged course of specialized intellectual instruction.”

3) “The relative investments in facilities and equipment by the worker and the employer.” Under this factor, the DOL looks at whether the worker owns their equipment and facilities in which the work is performed. While an independent contractor may use the facilities of the employer, often the contractor will bring their own equipment, and maintain it themselves. 4) “The worker’s skill and initiative.” While employees might have specialized skills, independent contractors possess skills that allow them to operate separate businesses and command market value for their services from other customers. 5) “The permanency of the worker’s relationship with the employer.” Typically, employees have either a long employment term or no term. 6) “The nature and degree of control by the employer.” This factor focuses on the control of the employee’s schedule and their method of work. None of these factors alone can tip the scale in favor of an employee or independent contractor. However, the DOL analyzes each factor individually, and in each given case determines whether employee benefits or overtime should be extended to those the employer improperly classified as independent contractors. Remember: the DOL’s default position is all workers are employees, and the burden is on the employer to demonstrate the individual worker is actually an independent contractor. If you determine that an employment relationship exists, you can now ask whether your employee qualifies for a FLSA exemption, meaning they are not entitled to minimum wage, nor are they eligible for overtime, regardless the number of hours they work. Once the worker is determined to be an employee, they must meet the following threepoint test to be exempt: • Paid at least $455 per week — subject to change to $951 with possible upcoming regulations • Paid on a salary basis; and … • The job duties must fall into one of the following exemptions: churchexecutive.com

Computer Employee: “The employee must be employed as a computer systems analyst, computer programmer, software engineer or other similarly skilled worker in the computer field performing the duties described below; the employee’s primary duty must consist of: 1) The application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications; 2) The design, development, documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specifications; 3) The design, documentation, testing, creation or modification of computer programs related to machine operating systems; or 4) A combination of the aforementioned duties, the performance of which requires the same level of skills.” Highly Compensated: “Highly compensated employees performing office or non-manual work and paid total annual compensation of $100,000.” Many ministerial positions are exempt from the Act; but, if you have questions about the Act and ministerial positions, contact legal counsel as several appellate courts have laid out specific requirements for the ministerial exception to apply to the Act. Regardless of an organization’s size, the Act affects almost every employer. Failing to comply with the Act can result in stiff monetary penalties. Organizations should take heed of the rules affecting their employees, conduct an internal review to determine if the organization has any trouble spots — such as the misclassification of workers and failing to properly keep time records for non-exempt employees; and consult experienced legal counsel to resolve questions or issues regarding these employment issues. The materials in this article are provided for informational purposes only and do not constitute legal advice. This article is intended, but not promised or guaranteed to be current, complete or up-to-date and should in no way be taken as an indication of future results. Transmission of the information in this article is not intended to create — and the receipt does not constitute — an attorney-client relationship between sender and receiver.

David O. Middlebrook is a founding shareholder of Anthony & Middlebrook and the Church Law Group [ www.amlawteam.com ] in Grapevine, TX. His clients include high-profile charitable and religious organizations, both domestic and international.

L E G A L R E A L I T I E S • CHURCH EXECUTIVE

Examining church bylaws By David O. Middlebrook

CHURCH EXECUTIVE • L E G A L R E A L I T I E S

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But, what goes in the bylaws? Generally, bylaws should contain the following: Name and Principal Office: The church’s name is obviously important since it will be used in contracts, intellectual property filings, registrations and business transactions. By filing the name as a corporation, it might also protect the name from being taken by another church. A principal location does not mean that the church cannot be moved or that it cannot establish multiple campuses, but it does at least provide some framework to establish its intended location. Statement of Faith: A Statement of Faith sets a church apart from other corporations by articulating beliefs or teachings with regard to religious matters. Putting the church’s basic beliefs or teachings into the bylaws helps create orthodoxy, reducing the likelihood of future dispute, and serves as a safeguard for the church. Autonomy: If your church is autonomous — that is, not under direct management or authority from a higher corporate organization or another church — it should be made clear in the bylaws. This provision has proven to be important for some churches who believed they were part of a voluntary association but later learn that the association did not consider the church free to disaffiliate from its authority. Purposes: Having a section that describes the church’s intentions is important because it helps fulfill IRS expectations. The purpose section needs to firmly establish that the church has been created to engage in religious worship as well as other similar activities. Powers and Restrictions: This is a governmental compliance section used to reaffirm that the church is allowed to do anything allowed under applicable law. We usually insert language expected by the IRS or demonstrates the church understands its requirement to follow certain laws. Membership: It is important for your bylaws to outline the following facts about your members: Does the church have members? If so, how does a person become a member? Who is responsible for verifying membership? Do members get to vote on church business matters? If so, generally describe what those matters are and the process and procedures for voting.

Books and Records: There needs to be requirements on who maintains the church’s books and records. While not required, the language should call upon the church to have an annual financial audit by a CPA. Indemnification: In just about every jurisdiction, the church corporation has the authority to protect its officers and directors from liability claims based upon actions they took on the church’s behalf. We recommend adding an indemnification provision outlining this protection in your bylaws. Alternative Dispute Resolution: It is usually not in the best interests of the church to be involved in lawsuits. To avoid public disputes and reputational harm, we recommend including a faith-based mediation and arbitration alternative provision within the bylaws. How do I change our Bylaws? If your church’s bylaws do not reflect how you operate — or perhaps you have learned they are not sufficient from a state law, federal tax compliance, or good governance perspective — where do you go from here? The first step is to locate the current bylaws. You then must determine the procedures for amendments. You are generally required to follow the procedure articulated in your current documents until they are amended.

When can a member be removed as a member, and how? And, if a member has been removed, how can he or she be reinstated? Management: Leadership for daily church affairs needs to be clearly stated. Almost every church must have a Board of Directors or Trustees; however, this group may be called other names such as “Board of Elders” or “Leadership Team.” Officers: The bylaws should address how officers are chosen and removed.

What about a Constitution? Absent a requirement from a denominational authority requiring a church to maintain a constitution, we generally recommend that churches do not maintain the constitution as a third document. There are two reasons for this recommendation. First, state law only recognizes and defines the articles of incorporation and the bylaws. Second, the more documents that you have in place, the more likely they will not align. If that happens, members might be confused as to which document is controlling. This confusion can lead to discord and possible legal problems for the church.

Independent Compensation Committee: The IRS expects to see the Independent Compensation Committee as a standing committee charged with reviewing and recommending the compensation for the church’s highest-paid employees.

Transactions and Policies: We usually have a section clearly reaffirming the church’s general business practices, in language consistent with IRS guidelines.

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Intellectual property considerations for church leaders By David O. Middlebrook

Churches are some of the most creative places on earth. Every week, church staff is called upon to create sermons, songs, Bible and Sunday school lessons, music, books and teaching materials, and all other kinds of creative works. Churches routinely use media — such as movies and audio clips — to emphasize sermon and teaching points. They frequently make use of original art design, clip art, computer graphics and animation, photographs, words and lyrics for songs displayed on screens, dramatic readings, plays, and dance. Churches are also frequent creators of new names for the church itself, new projects, church ministries, products, and services. The church’s creative works, ideas and concepts are what the law calls “intellectual property.”

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So, if it’s “property,” then who owns it?

enerally, when a person creates an original work, that person is considered the author; however, there is an exception to this general rule called works made for hire. This rule comes into effect when an employee creates a work while on the job. If a work is a work made for hire, the employer — not the employee — is considered the author of the work. This scenario is commonly seen in churches where many pastors or other church employees develop sermons, books, worship music and other materials while employed at the church. If a work is to be considered a work made for hire, then (1) the person creating the work must actually be a church employee, and (2) the employee must have created the work within the scope of his or her employment. Keep in mind that even if an individual — such as a pastor — is treated as “self-employed” for federal income tax purposes, it is possible (and likely) that a court would consider the individual to be an “employee.” When it comes to copyright issues, courts have taken a liberal approach in qualifying an individual as an “employee.” Churches should also consider the following factors when deciding whether a work was created in the course of employment: • Was the work written or composed during office hours? • Was the work created on church property? • Was the work created using church equipment? • Was the work created using church personnel? If the creator of the work is an employee, and it can be shown that the work was created “in the course of employment,” then the church has the right of ownership to the materials. However, if it can be proven that the works were created on the pastor’s own time, without using church equipment and personnel, there could be an argument that the pastor owns the copyright to the materials.

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Rather than face a potential dispute as to whom the rightful owner of the intellectual property is, many churches and pastors choose to enter into works-made-for-hire agreements. This is a written agreement between the church and the pastor specifying that the materials prepared by the pastor belong to the pastor as his or her intellectual property. These agreements might even allow the pastor or employee to sell their intellectual property, such as books, on the open market. For any pastor or other church employee who is currently developing materials — whether books, sermons or children’s curriculum — we recommend that the church and pastor enter into a works-made-forhire agreement. The same goes for music and song writers. Typically, when a songwriter creates an original song, the writer owns one-hundred percent (100%) of the song, until the writer conveys or assigns the right to a music publisher. However, if the songwriter is an employee of a church, then it is likely the song is owned by the church as a “works made for hire.” The original “owner” can be the church, in a work made-for-hire arrangement, or the owner can be both the songwriter and the church through a songwriter agreement or employment contract. Many times, the church can operate as both the songwriter and the publisher, or the publishing rights can be conveyed to another publisher. In this situation, the song / copyright is assigned to the church with the agreement that the songwriter will always receive fifty percent (50%) or some other amount of the royalties depending on the details. For purposes of understanding how to set up your church as a music publisher, it is helpful to have a general understanding of how songs are written and how royalties are collected. Understanding the music business takes some effort, and there are a lot of players and moving parts; thus, finding competent legal counsel to help you is invaluable. In order to set your church up as a music publisher, the church can churchexecutive.com

needs and the church’s philosophy in publishing sermons, books or music, and staff or pastoral ownership of that intellectual property. The most important part of intellectual property ownership is good communication with the church’s board, and the employees creating the intellectual property. A clear understanding of expectations, along with written agreements, will limit conﬂict and confusion around who owns created material.

simply file a “doing business as” (d/b/a) in accordance with your state / county rules and simply operate the church’s publishing as a ministry of the church. This preserves the non-profit and tax-advantaged nature of the activities. As long as the publishing ministry is narrowly focused on Christian music, then this is very likely to be deemed consistent with the church’s charitable purposes and will not raise issues with the Internal Revenue Service. Of course, there are some situations where a separate entity may be used to house the publishing ministry, but the majority of the time the model explained above is used — even in large churches with a substantial music and publishing ministry. Regardless of how the church chooses to structure it, we strongly advise using the services of competent legal counsel to handle the setup and songwriter agreements, as well as any other legal details required to establish a church music publishing ministry.

The materials in this article are provided for informational purposes only and do not constitute legal advice. This article is intended, but not promised or guaranteed to be current, complete or up-to-date and should in no way be taken as an indication of future results. Transmission of the information in this article is not intended to create — and the receipt does not constitute — an attorney-client relationship between sender and receiver. David O. Middlebrook is a founding shareholder of Anthony & Middlebrook and the Church Law Group [ www.amlawteam.com ] in Grapevine, TX. His clients include high-profile charitable and religious organizations, both domestic and international.

We’re just getting started You probably have many more questions about the creation and ownership of intellectual property. To start, take time to analyze your churchexecutive.com

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What you should know before recruiting a church intern By David O. Middlebrook Many churches look to unpaid internships to provide muchdesired experience in ministry-related activities for students looking to obtain not only ministry skills and experience, but also suitable skills for a secular workforce. However, there have been recent concerns that some unpaid internships violate state and / or federal law. Employment law experts around the country agree that this is the new hot topic for the Department of Labor. In fact, some states have increased their investigation of this issue, and other states are looking to follow; therefore, it is appropriate to first consider when an intern must be paid and when it is permissible to classify and treat an intern as an unpaid intern. So, how do we know who qualifies as an unpaid intern, rather than an employee? A 1947 United States’ Supreme Court case, Walling v. Portland Terminal Co., 330 U.S. 148 (1947), and a subsequent U. S. Department of Labor issuance of a six-part test help to determine whether an individual is a trainee, or unpaid intern: 18

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• The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school; • The training is for the benefit of the interns; • The interns do not displace regular employees, but they do work under regular employees’ close supervision; • The employer that provides the training derives no immediate advantage from the activities of the interns and, on occasion, the employer’s operations may actually be impeded; • The interns are not necessarily entitled to a job at the conclusion of the training period; and • The employer and the interns understand that the interns are not entitled to wages for the time spent training. (Tuition assistance and nominal stipends for students are not considered wages.) This six-part test can be helpful guidance for determining if a worker is truly an unpaid intern. It is important to understand that in some cases, it might not be necessary for all six of the above factors to be satisfied for a worker to be classified as an unpaid intern. Any questions on this factorbased test should be directed to your legal counsel.

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The Department of Labor focuses on two main factors: training and education. Meaning, that the internship must be primarily for the benefit of the intern and not the employer. The more directly related an intern’s tasks are to those that might otherwise be performed by staff, the more likely that the intern will be considered an “employee” under the Fair Labor Standards Act and entitled to compensation. When is an intern not an intern? So, how do we know when an intern is not really an intern, but an employee? The Department of Labor has named some examples of when an intern will not be considered an intern; these are otherwise known as the “Unpaid Intern Prohibited Factors.” The presence of any one of these factors means the intern should be classified as an employee: •T he employer uses the intern as a substitute for regular workers or as a supplement to its current workforce; or • But-for the intern, the employer would have hired additional employees or asked its existing staff to work additional hours; or •T he intern is engaged in the employer’s routine operations and / or the employer is dependent upon the intern’s work. Note: If you use an intern for seasonal work — such as summer camps, or holiday services — they may be called interns, but they should be paid at least minimum wage as they are being used to augment your current workforce. Academic credit Internships that are part of a formal academic experience (for example, the intern receives formal academic credit from an educational institution for the internship) are usually considered Internship by the Department of Labor. This can be very helpful for those churches and ministries that have college and seminary students serving as interns and the students’ degree program requires internship experience. churchexecutive.com

Because the tests outlined above are very fact-specific, your church should always seek legal counsel when developing its unpaid internship program. David O. Middlebrook is a founding shareholder of Anthony & Middlebrook and the Church Law Group [ www.amlawteam.com ] in Grapevine, TX. His clients include high-profile charitable and religious organizations, both domestic and international. The materials in this article are provided for informational purposes only and do not constitute legal advice. This article is intended, but not promised or guaranteed to be current, complete or up-to-date and should in no way be taken as an indication of future results. Transmission of the information in this article is not intended to create — and the receipt does not constitute — an attorney-client relationship between sender and receiver. L E G A L R E A L I T I E S • CHURCH EXECUTIVE