Court Rules Former Employee of Church School Ineligible for Unemployment Benefits

Key point. Employees of churches and church-affiliated schools are ineligible for unemployment benefits in most states.

An Illinois court ruled that a former employee at a church-affiliated school was not eligible for unemployment benefits.

A former church employee (the "plaintiff") filed a claim for unemployment benefits with the Illinois Department of Employment Security. A hearing was conducted to determine the plaintiff's eligibility for benefits. Testimony at the hearing demonstrated that the church is a nonprofit Illinois corporation organized for religious purposes, and that it operates a school. The church hired and supervised all school personnel and determined their compensation.

The plaintiff was hired by the board of directors of the church. The school did not have a separate corporate charter or legal organization. The church did not pay unemployment contributions because it was tax-exempt. The church did not inform its employees that they would not be able to receive unemployment benefits.

The school had been an elementary school that instructed children from preschool through sixth grade. The church building and the school building are physically attached. Four teachers had been employed at the school. The plaintiff worked as a food service coordinator from 2004 through 2013. She also worked at the church's school. Her check stubs indicated that her employer was the church. In 2013, the church closed the school and the plaintiff was laid off.

After the hearing, the judge issued her decision in which she determined that the plaintiff was not eligible for unemployment insurance benefits under the Illinois Unemployment Insurance Act. The judge explained that under the Act, "employment" does not include services performed in the employ of a church.

The judge reasoned that because the school was not separately incorporated from the church, it constituted an arm of the church and school employees constituted church employees. The judge stated because the plaintiff had not been in the church's employment for purposes of the Act, the money she was paid by the church did not constitute wages for purposes of the Act and could not be considered when determining the plaintiff's eligibility for benefits. The plaintiff appealed.

The appeals court's decision

A state appeals court agreed that the plaintiff was not eligible for unemployment benefits. It noted that the state's unemployment law "was enacted to provide economic relief to individuals who become involuntarily unemployed, through the collection of compulsory contributions from employers and the payment of benefits to eligible unemployed persons." Liability for contributions and eligibility for benefits "is dependent, in part, on the existence of an employment relationship."

The Illinois Unemployment Insurance Act defines "employment" as "any service … performed by an individual for an employing unit." Section 211.3 provides that the term "employment" for purposes of the Act shall not include services performed: "In the employ of (1) a church or convention or association of churches, or (2) an organization or school which is not an institution of higher education, which is operated primarily for religious purposes and which is operated, supervised, controlled or principally supported by a church or convention or association of churches."

The court noted that "where, as here, a school is not separately incorporated from a church or convention or association of churches, it is exempt from coverage under the state unemployment system under section 211.3 because the teachers and other personnel are direct employees of the church."

The court pointed out that "as in other states, Illinois' unemployment insurance legislation implements mandatory federal minimum standards of coverage established by the Federal Unemployment Tax Act (FUTA)," section 3309(b) of which states, in part:

This section shall not apply to service performed … in the employ of (A) a church or convention or association of churches, (B) an organization which is primarily for religious purposes and which is operated, supervised, controlled, or principally supported by a church or convention or association of churches, or (C) an elementary school which is operated primarily for religious purposes … .

The United States Supreme Court has held that subsequent amendments to FUTA did not alter the exemption for church-operated schools that had no separate legal existence from a church or association of churches. See St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. 772 (1981).

The court concluded:

Section 3309(b)(1)(A) was meant to apply to schools, like the one in this case, that have no separate legal existence from a church. [The church] financed, supervised and controlled the school's operations. The school did not have a separate legal charter or existence. Thus, the employees working within this school plainly were "in the employ … of a church" [and since] employees of churches and/or organizations operated primarily for religious purposes and controlled, supervised, operated or mainly supported by a church are exempted, it is readily apparent that the church was entitled to the religious exemption, and accordingly, the plaintiff as an employee, was not eligible to receive benefits.

What this means for churches

Nearly every state unemployment compensation law contains an exemption identical to the one addressed by the Illinois court in this case. As a result, this ruling will be relevant to any church that operates a school or preschool. Reed v. Illinois Department of Employment Security, 2015 WL 1422233 (Ill. App. 2015).