Part 1 of this two-part post covered the basics of AB 5 and how to understand and apply the ABC Test when determining whether a worker is considered an independent contractor or an employee. Equipped with this essential knowledge that childcare workers are considered employees, not independent contractors, churches can evaluate how AB 5 impacts their policies and budget. To uncover the full impact of AB 5, churches must first assess their compensation ratios (compensation percentage and FTE ratio) and then discover the effect on their church budget.
Healthy Church Compensation Ratios
Many factors make up a healthy, growing, thriving church that pursues its mission and impacts its local community. Since compensation typically consumes a large portion of the budget, it’s essential to understand two metrics that measure compensation health: compensation percentage and FTE ratios:
Calculating Compensation Percentage: Healthy churches generally spend between 45%-55% of their total operating budget on compensation. To determine the compensation percentage:
- Calculate the annual compensation total for the year. Include everything related to compensation like salary, housing, taxes, benefits, etc.
- Take the annual compensation total and divide it by the total operating budget.
(Example: A church with an annual compensation of $230,000 and a total budget of $500,000 spends 46% on compensation.)
Calculating FTEs: According to The Unstuck Group and other church leadership groups, a healthy church should have 1 Full-Time Equivalent (FTE) employee for every 75 attendees (75:1). Calculating the FTE ratio is a two-step process:
- Sum the total annual hours of all employees and divide the total by 2,080 (40 hrs a week x 52 weeks).
- Divide the average weekly church attendance by the FTE number to produce the ratio.
(Example: A church with an average weekly attendance of 500 and 10 FTEs has a 50:1 congregation-to-staff ratio.)
In 2020, Faith Communities Today (FACT) studied over 15,000 congregations in the U.S. and found that 7 in 10 U.S. churches have 100 or fewer weekly worship service attendees. Churches with an average Sunday attendance of 100 should have 1.33 FTEs, approximately 53 hours of payroll per week.
The Impact of AB 5
Churches accomplish their mission in various ways beyond weekend worship services. Many provide mid-week studies and programs that invite the community to connect and learn in a safe environment. Childcare is an essential element to the success of these programs. AB 5 and the application of the ABC Test and FLSA guidance change how churches compensate workers in California by making all of them employees – even those who may only work once a week, once a month, or one time. (IMPORTANT: this applies to paid childcare workers, not volunteers.) Here are a few considerations on how AB 5 impacts the church budget:
- It Skews Compensation Ratios: According to the FACT congregation size data, most small—to medium-sized churches have approximately 1.3 to 2 FTEs. Adding childcare workers to the church roster may dramatically increase the number of employees and adversely impact the compensation percentage and FTE ratio.
- Paying FICA: The Federal Insurance Contributions Act allocates 6.2% of each employee’s wages to Social Security and 1.45% of their earnings to Medicare tax. The employee and the employer each pay into this tax – be sure to budget the employer portion.
- Workers’ Compensation: It’s important to add all childcare workers when calculating the workers’ compensation costs for the year.
- Year-End Tax Documents: The number of W2s can easily double or triple when including all paid childcare workers. Of course, this means the church saves on processing 1099s.
- Increase in Administration: While the other costs listed above are obvious, it’s important to discover the hidden administrative costs when adding childcare workers as employees. Small and medium-sized churches can rarely afford to outsource their HR needs, which increases the burden of implementing and tracking mandatory employee training. For example: Child Abuse Prevention (AB 506), Workplace Violence Prevention (AB 553), Harassment Prevention (SB 1343), etc. Since childcare workers are non-exempt employees, accurately tracking their hours requires consideration of additional timecard software or bookkeeper time.
Regardless of individual perspectives or interpretations of AB 5 regarding childcare workers as employees, it’s no longer up for debate. Childcare workers are employees, not independent contractors. Scripture instructs followers of Jesus to submit to the ruling authority (Romans 13:1-7, Titus 3:1, 1 Peter 2:13-14). Remember, Jesus provided the perfect example of submitting to the ruling authority. With this knowledge comes the responsibility to act and plan accordingly. First, churches need to make each paid childcare worker (this does not apply to volunteers) an employee. Next, when preparing the compensation budget, churches must project the increase in FICA tax and workers’ compensation costs. It’s crucial that churches discover and budget for the hidden administrative costs of onboarding, tracking hours, and ensuring compliance training is up-to-date for each employee, even childcare workers who may only work once a week or less.
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