Application of the FLSA Minimum Wage and Overtime Requirements to a Church Employee

New York court rules Episcopal church custodian not entitled to overtime or minimum wage under FLSA.

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State: New York
Categories: Compensation and Benefits, Overtime Pay

Key point 8-08.2. The Fair Labor Standards Act mandates that employers pay the minimum wage, and overtime compensation, to employees who work for an enterprise engaged in commerce. There is no exception for religious organizations, but there are exceptions for certain classifications of employees.

Key point 8-08.3. The Fair Labor Standards Act mandates that employers pay the minimum wage, and overtime compensation, to employees who are engaged in commerce or in the production of goods for commerce. There is no exception for religious organizations, but there are exceptions for certain classifications of employees.

A federal district court in New York ruled that a custodian who worked for an Episcopal church was not entitled to minimum wage or overtime pay under the Fair Labor Standards Act since the church was not an "enterprise" and the custodian did not qualify for individual coverage.

In 1982, a church hired a new custodian (the "plaintiff") to clean the church. The plaintiff worked seven days a week. On Sundays, he worked from 7 a.m. until services ended. On all other days he worked from 8 a.m. to 5 p.m., though he often cleaned the church after evening services. His custodial duties included sweeping, mopping, and vacuuming the buildings and bathrooms, removing garbage, flushing the air conditioner, maintaining the boiler, and clearing the sidewalks of trash, leaves, and snow. The plaintiff was on-call at all hours if a problem arose with the electricity, plumbing, air conditioner, or boiler. When a new pastor was hired by the church in 1999, he increased the hours the plaintiff worked by requiring him to turn off the building's alarm at 7 a.m. and turn on the alarm after church functions concluded every evening.

The plaintiff paid the electrical, plumbing, and oil vendors on behalf of the church, purchased cleaning supplies, picked-up church vestments and the pastor's personal clothing from the dry-cleaners located across the street, delivered mail to the post office, and folded 800 church bulletins each week or took the bulletins to a local printing shop. The church reimbursed the plaintiff by check for these church-related purchases.

From 1982 until 2007 the plaintiff lived in the two-bedroom apartment located in a church building. Beginning in 1982, he earned $70 per week in wages and lived in the apartment rent-free. In 1986, the church's finance committee began requiring the plaintiff to pay $250 per month in rent for the apartment. In 2000, the church increased the plaintiff's bi-weekly wage to $519.76. In 2002, the church increased his bi-weekly wage to $625, an amount the pastor believed to be adequate compensation for forty hours of work per week. In addition to his wages, the plaintiff received $50 per event for helping during each event and cleaning afterward. He also received Christmas bonuses, though not every year. No one at the church recorded the hours the plaintiff worked. In 2004, the church paid two additional people to clean the buildings.

In September 2005, the plaintiff requested medical leave to undergo surgery and receive treatment. Throughout his convalescence, he continued to turn the alarm off and on every day and perform some of his custodial duties, such as shoveling snow and vacuuming the church, and the church continued to pay him. In February 2006, he provided the church with a letter from his doctor stating that he could return to work full-time in March 2006. On February 10, 2006, the pastor and an associate pastor met with the plaintiff and terminated his employment because the church "could no longer afford to wait for him and decided instead to let him go." The church offered the plaintiff several severance packages, but he rejected them all.

In 2007, the plaintiff sued the church to recover unpaid minimum wages and overtime compensation pursuant to the federal Fair Labor Standards Act (FLSA) and the New York Labor Law (NYLL). The plaintiff also complained that the church failed to maintain adequate written records for hours worked and wages earned in violation of the FLSA and NYLL. The church asked the court to dismiss the case on the ground that the FLSA does not cover the church as an "enterprise" or the plaintiff as an individual employee.

The Fair Labor Standards Act

The FLSA requires that an employer pay minimum wages and an overtime wage of not less than one-and-a-half times the regular rate for hours worked in excess of 40 hours in a single work week if an employee is either (1) employed by an enterprise engaged in commerce or in the production of goods for commerce, or (2) engaged in commerce or in the production of goods for commerce. The two categories are commonly referred to as "enterprise" and "individual" coverage, respectively.

The employee bears the burden of establishing either enterprise or individual coverage. The burden then shifts to the employer to establish a specific exemption.

enterprise coverage: combining the church and diocese

The FLSA covers an enterprise engaged in commerce or in the production of goods for commerce if:

employees engaged in commerce or in the production of goods for commerce, or employees handled, sold, or otherwise worked on goods or materials that have been moved in or produced for commerce by any person, and
the enterprise has no less than $500,000 in annual gross volume of sales made or business done.

The plaintiff conceded that the church did not meet this definition of an enterprise, but he claimed that the combination of the church and local diocese did meet the definition. The court conceded that two entities can be combined in applying the definition of an enterprise if (1) the entities engage in related activities performed through unified operation or common control, (2) for a common business purpose. To support the claim of unified operation or common control, the plaintiff described the hierarchical structure of the Episcopal Church where parishes financially support the dioceses and in return receive administrative and financial support and the right to perform religious activities.

(1) related activities performed through unified operation or common control

However, the court stressed that the diocese was not a party to this lawsuit, and that if the plaintiff claims that separate entities perform related activities through unified operation or common control, then he must "name each entity as a defendant in the action." Since he did not do so, the court "cannot consider the diocese in determining whether the church constitutes an enterprise because the diocese is not a party to this action. Even if the plaintiff had named both the church diocese as defendants, the court concluded that they could not be combined in determining enterprise coverage:

Even if the plaintiff had sued the diocese, the court would not reach the merits of whether the diocese constitutes an enterprise because summary judgment would be granted in favor of the diocese on the threshold question of FLSA coverage. The FLSA applies only to an "employer" who "suffers or permits" an "employee" to work. If the plaintiff sued the diocese and church, then he would have the burden of proving that he constitutes an employee of the diocese or an employee of both the diocese and church as joint employers. [A federal appeals court] has identified nonexclusive factors to aid the courts in determining the "economic reality" of the relationship between an individual and an alleged employer, such as whether the alleged employer (1) had the power to hire and fire the individual, (2) supervised and controlled employee work schedules or conditions of employment, (3) determined the rate and method of payment, and (4) maintained employment records. Where an individual alleges that two entities constitute joint employers, courts must also consider whether both entities have "functional control over workers even in the absence of the formal control measured by the [preceding] factors."

Considering all factors and facts to ascertain the economic reality here, the plaintiff constituted an employee of the church alone. Employees of the church had the power to hire and fire the plaintiff; the pastor hired the plaintiff in 1982 and his successor fired him in 2006. [The pastors] supervised and controlled the plaintiff's work schedule and conditions of employment; [one of the pastors] required the plaintiff to work seven days a week from eight in the morning until at least five in the evening and his successor increased the hours the plaintiff worked to include turning off the building's alarm at seven every morning and turning on the alarm after church functions concluded every evening. The pastors determined the rate and method of payment …. Checks used to pay the plaintiff for all wages and reimbursements were printed with the account name and address of the church and signed by church employees. Neither the diocese nor the church maintained employment records. There is no evidence that the diocese had any control over the plaintiff's work as a custodian for the church. He could not prove that the diocese and church constitute joint employers. The diocese is not relevant in this action or in theory.

(2) common business purpose

The second factor that must exist for two entities to be combined in determining enterprise coverage is a common business purpose. The court noted that a Department of Labor ("DOL") regulation provides nonprofit organizations with an exemption from the definition of an "enterprise." 29 C.F.R. § 779.214. An organization that performs religious, educational, or charitable activities "does not perform these activities for a business purpose, and thus does not constitute an enterprise, unless the activities compete in the marketplace with ordinary commercial enterprises."

The court noted that in only two cases had a religious organization been found to have a business purpose:

Tony & Susan Alamo Foundation v. Secretary of Labor, 471 U.S. 290 (1985). A church operated 33 businesses, including service stations, retail clothing and grocery outlets, hog farms, roofing and electrical construction companies, a recordkeeping company, a motel, and companies engaged in the production and distribution of candy, in three states. The United States Supreme Court found that the church constituted an enterprise because the businesses engaged in ordinary commercial activities that competed with other commercial enterprises, even though employees were "spreading the gospel."

Boekemeier v. Fourth Universalist Society, 86 F.Supp.2d 280 (S.D.N.Y. 2000). A New York church employed a staff to solicit, through monthly mass mailings, press releases, and advertisements, intrastate and interstate renters for events. The court found that the church constituted an enterprise because the extent and result of the church's efforts to secure rental activity competed directly with other commercial landlords and rental facilities. The court also highlighted the fact that income from the rental activity supplemented church operations, as rental fees constituted 80 percent of the church's income.

The plaintiff insisted that the church was engaged in a business purpose because of the rental of its facilities for weddings and other social events, and that it was competing with commercial enterprises. The court concluded that the church's rental activities did not constitute a business purpose that competed with commercial enterprises, since (1) the church rented its facilities for weddings and social events only 10 times per year; (2) the church did not advertise or market its properties for events; (3) the church did not employ a staff to solicit renters; (4) rental fees constituted only 4 percent of the income raised by the church. The court concluded that "no reasonable inference can be drawn in favor of the claim that this activity competes with ordinary rental facilities to serve the general public or that the church relied on rental income to support church operations."

enterprise coverage: employees engaged in commerce

The FLSA covers an enterprise where "employees engaged in commerce or in the production of goods for commerce, or employees handled, sold, or otherwise worked on goods or materials that have been moved in or produced for commerce by any person." The court concluded that the plaintiff's handling of janitorial goods that had moved in commerce was more than sufficient to invoke enterprise coverage.

enterprise coverage: the $500,000 annual sales requirement

The court noted that the FLSA will not cover an entity that has less than $500,000 in annual gross volume of sales made or business done. Charitable contributions donated to a nonprofit "are not included in this calculation unless the organization solicited or used the contributions for the purpose of furthering commercial activities." The court concluded that the plaintiff had failed to prove that the church received business income of $500,000 or more.

In conclusion, the plaintiff "failed to prove two of the three essential elements of enterprise coverage with respect to which he has the burden of proof," and therefore the FLSA "does not cover the church as an enterprise engaged in commerce or in the production of goods for commerce."

individual coverage

The FLSA requires that an employer pay minimum wages and an overtime wage of not less than one-and-a-half times the regular rate for hours worked in excess of 40 hours in a single work week if an employee is engaged in commerce or in the production of goods for commerce. This is commonly referred to as "individual" coverage. The court noted that the FLSA can cover an employee "engaged in commerce or in the production of goods for commerce" regardless of whether the employer constitutes an enterprise.

The DOL provides custodial employees with a specific ground for individual coverage where the employee "performs maintenance and custodial work on the machinery, equipment, or premises where goods regularly are produced for commerce or from which goods are regularly shipped in interstate commerce." 29 C.F.R. § 779.116.

The plaintiff compared himself to the plaintiff in the Boekemeier case (summarized above) where the court found that the employee-custodian engaged in commerce by ordering cleaning supplies and equipment one to six times a year from out-of-state vendors by telephone and fax on behalf of the employer-church. The court reasoned that the employee purchased goods "important" to the employer in a "recurrent and frequent" manner.

The court conceded that the plaintiff purchased cleaning supplies in a recurrent and frequent manner, and regularly contacted (by telephone) electrical, plumbing, and oil vendors, paid for their services, and received reimbursement from the church. However, unlike the church custodian in the Boekemeier case, he did so exclusively from in-state vendors. The Boekemeier case "is distinguishable from this case because the employee was closely related to the movement of commerce by purchasing goods directly from out-of-state vendors, while [the plaintiff in this case] simply affected commerce by purchasing goods from local vendors."

The court conceded that the plaintiff delivered mail to the post office on a regular and recurrent basis. But, it noted that DOL regulations "make clear that this activity must be of an interstate nature to establish individual coverage." 29 C.F.R. § 779.102. There was no evidence in this case "that mail delivered by the plaintiff to the post office was of an interstate nature."

What this means for churches

This case is important because it is one of the most extended discussions of the application of the FLSA minimum wage and overtime requirements to a church employee. Few churches will meet the FLSA's definition of enterprise coverage. But of greater relevance is the court's interpretation of "individual" coverage. The court's conclusion that church custodians who order janitorial supplies from in-state vendors by phone or the mail are not "engaged in commerce" will make it more difficult for church employees to pursue a claim for minimum wage or overtime pay under the FLSA. Note, however, that such claims may be more likely to succeed under state employment laws. Locke v. St. Augustine's Church, 690 F.Supp.2d 77 (E.D.N.Y, 2010). See also "Compensation," Tarasi v. Jugis, 692 S.E.2d 194 (N.C. App. 2010), in the Legal Developments section of this website.

Legal Developments

Job Applicant Sues Church-Operated School for Age Discrimination

Avoid discriminatory hiring practices.

Richard R. Hammar, Attorney, CPA

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State: Federal
Categories: Employment Practices, Overtime Pay

Church Law & Tax Report

Job Applicant Sues Church-Operated School for Age Discrimination

Avoid discriminatory hiring practices.

Richard R. Hammar, J.D., LL.M., CPA

Key Point 8-11. Employees and applicants for employment who believe that an employer has violated a federal civil rights law must pursue their claim according to a specific procedure. Failure to do so will result in the dismissal of their claim.

Key Point 8-13. The federal Age Discrimination in Employment Act prohibits employers with 20 or more employees, and engaged in interstate commerce, from discriminating in any employment decision on the basis of the age of an employee or applicant for employment who is 40 years of age or older. The Act does not exempt religious organizations. Many states have similar laws that often apply to employers having fewer than 20 employees.

Resource. For more information on this topic, purchase the download, “Understanding Wage and Hour Laws” on ChurchLawAndTaxStore.com.

A federal court ruled that a 56-year-old woman failed to establish that a church-operated school committed unlawful age discrimination when it rejected her application for employment as a teacher and instead hired a 21-year-old woman for the position. To fill a vacancy for a third-grade teacher position the school placed an advertisement in an online job bank. It received six applications for the position, one of which was from a 56-year-old woman (the “plaintiff”). All six applicants were interviewed, and school officials and church leaders chose a 21-year-old female applicant. This prompted the plaintiff to sue the school, and church, for age discrimination in violation of the federal Age Discrimination in Employment Act (ADEA). The ADEA prohibits employers with 20 or more employees, and engaged in interstate commerce, from discriminating in any employment decision on account of the age of an employee or applicant for employment who is at least 40 years of age.

The court noted that a “burden shifting analysis” must be used in evaluating age discrimination claims. This analysis involves the following four steps:

First, the plaintiff must prove a “pri-ma facie case,” which consists of the following elements: (1) the plaintiff is at least 40 years of age; (2) she applied for a position for which she was qualified; (3) she was subject to an adverse employment decision, such as termination or not being hired; and (4) the adverse employment decision was made under circumstances giving rise to an inference of unlawful discrimination.
Second, if the plaintiff establishes a pri-ma facie case, the burden shifts to the defendant to produce evidence of a legitimate, nondiscriminatory reason for its decision not to hire the plaintiff that rebuts the presumption of discrimination created by the plaintiff’s pri-ma facie case.
Third, should the defendant produce such evidence, the burden shifts back to the plaintiff to show both that the employer’s purported reason is mere pretext for discrimination and that the plaintiff’s age was the actual motivating factor behind the defendant’s hiring decision.

The court noted that “a plaintiff’s burden in proving a pri-ma facie case is minimal,” and that the plaintiff had done so. This meant that the burden shifted to the church defendants to produce evidence of a legitimate, non-discriminatory reason for not hiring the plaintiff. The court concluded that the church defendants met this burden by establishing that the plaintiff’s interviewers were dissatisfied with her interview performance, and in particular her responses to questions concerning lesson plans and classroom discipline.

The court stressed that “an employer may use subjective criteria, such as the employer’s impressions of job applicants during an interview, to make hiring decisions,” and that a court “must respect an employer’s unfettered discretion to choose among qualified candidates” and “not act as a super personnel department that second guesses employers’ business judgments.”

Since the church defendants met their burden of proving a legitimate, nondiscriminatory basis for the decision not to hire the plaintiff, the burden shifted back to her to prove that this purported basis was a “pretext” for discrimination and that her age was the real reason she was not hired. The court concluded that the plaintiff failed to meet this burden, and it dismissed the lawsuit. It noted that her only evidence of discrimination was the age difference between her and the 21-year-old applicant who was hired. But this evidence, without more, “does not contradict the evidence of plaintiff’s poor interview performance or show that this lawful excuse concealed a hiring decision motivated by unlawful discrimination.” A plaintiff in an age discrimination case “may not rely on conclusory allegations or unsubstantiated speculation.”

Application. This case illustrates an important point—churches subject to the ADEA (or a state counterpart) do not necessarily commit age discrimination by failing to hire the oldest applicant for a position. They will avoid liability if they can prove a legitimate, nondiscriminatory reason for their decision that is not a “pretext” to conceal an actual discriminatory intent. Donahue v. Norwich Roman Catholic Diocesan Corporation, 2008 WL 821890 (D. Conn. 2008).

This Recent Development first appeared in Church Law & Tax Report, September/October 2009.

Legal Developments

Church Employee Sues for Overtime Wages

Have an attorney who is familiar with FLSA review your policy manual.

Richard R. Hammar, Attorney, CPA

Bio

State: Federal
Categories: Employment Practices, Overtime Pay

Church Law & Tax Report

Church Employee Sues for Overtime Wages

Have an attorney who is familiar with FLSA review your policy manual.

Richard R. Hammar, J.D., LL.M., CPA

Key Point 8-08.6. The Fair Labor Standards Act exempts employees employed in an executive, administrative, or professional capacity from the minimum wage and overtime pay provisions. To be covered by one of these exemptions, an employee must perform specified duties, and be paid a salary in excess of a specified amount.

A federal appeals court rejected a church employee’s claim that her employing church violated the federal Fair Labor Standards Act by failing to pay her overtime compensation for hours worked in excess of 40 per week. The former principal (the “plaintiff”) of a church school sued the church, claiming that it failed to (1) pay overtime wages pursuant to the FLSA; (2) notify her of her right to continuing health coverage under the Consolidated Omnibus Reconciliation Act (“COBRA”); and (3) adhere to the requirements of the Employment Retirement Income Security Act (“ERISA”) in administering the church’s pension plan. A federal district court concluded that the plaintiff was an “administrative employee” exempt from entitlement to overtime pay under the FLSA and that COBRA and ERISA requirements did not apply to “church plans” like the one the church had established. A federal appeals court affirmed the district court’s ruling.

FLSA—in general

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, the FLSA provides an exemption from both minimum wage and overtime pay for employees employed as bonafide executive, administrative, or professional employees. To qualify for exemption, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week. Job titles do not determine exempt status.

To qualify for the administrative employee exemption, all of the following tests must be met:

The employee must be compensated on a salary or fee basis at a rate not less than $455 per week;
The employee’s primary duty must be the 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.

The administrative exemption is also available to employees compensated on a salary or fee basis at a rate not less than $455 a week, or on a salary basis which is at least equal to the entrance salary for teachers in the same educational establishment, and whose primary duty is performing administrative functions directly related to academic instruction or training in an educational establishment. Academic administrative functions include operations directly in the field of education, and do not include jobs relating to areas outside the educational field.

Department of Labor regulations clarify that employees engaged in academic administrative functions include:

the superintendent or other head of an elementary or secondary school system, and any assistants responsible for administration of such matters as curriculum, quality and methods of instructing, measuring and testing the learning potential and achievement of students, establishing and maintaining academic and grading standards, and other aspects of the teaching program;
the principal and any vice-principals responsible for the operation of an elementary or secondary school;
department heads in institutions of higher education responsible for the various subject matter departments;
academic counselors and other employees with similar responsibilities.

Having a primary duty of performing administrative functions directly related to academic instruction or training in an educational establishment includes, by its very nature, exercising discretion and independent judgment with respect to matters of significance.

The duties requirement

The court agreed with the church that the plaintiff’s employment responsibilities met the “duties” requirement of an exempt academic administrative employee:

She exercised the discretion of a principal on a daily basis and made important decisions related to instruction. She spent a significant amount of time supervising the school’s teaching staff and providing teaching evaluations. She also called staff development meetings, chose to implement a different standardized testing system than had previously been used in the school, interviewed candidates for teaching positions and made hiring recommendations to the Senior Pastor, recruited new students, prepared proposed budgets, taught classes in the core subjects, and made decisions related to student discipline. That [the church’s senior pastor] possessed general supervisory authority over the school does not mean [that she] lacked discretion to make decisions in her own right and is instead consistent with the regulations’ recognition that decisions of exempt employees may be “reviewed at a higher level.”

The “salary” requirement

The plaintiff insisted that she was not exempt, and therefore entitled to overtime pay, because she did not satisfy the salary requirement. Her weekly pay exceeded $455, but she insisted that she nonetheless failed the salary test because her pay was “subject to reduction because of variations in the quality or quantity of the work performed.” She cited the following Department of Labor regulation:

An employee will be considered to be paid on a “salary basis” within the meaning of these regulations if the employee regularly receives each pay period on a weekly, or less frequent basis, a predetermined amount constituting all or part of the employee’s compensation, which amount is not subject to reduction because of variations in the quality or quantity of the work performed. (emphasis added)

The regulations clarify that a salary deduction of one or more full days in response to an employee’s absence for personal reasons will not affect his or her status as an exempt employee.

The plaintiff claimed that her pay was subject to reduction because of variations in the quality or quantity of the work she performed, and cited (1) an incident in which the church imposed a pay deduction after she missed a day of work for personal reasons; and (2) the pastor’s threat to dock school employees’ pay based on uniform infractions. The court ruled that neither of these incidents resulted in a violation of the salary test. With regard to the first incident, the court noted that this did not demonstrate an actual practice of compensating her on a non-salary-basis, especially since the FLSA regulations provide that a salary deduction of one or more full days in response to an employee’s absence for personal reasons will not affect his or her status as an exempt employee. Nor does a single deduction amount to a clear policy.

In rejecting the plaintiff’s second argument, the court noted that “there was no evidence that any salary deductions actually occurred on that ground, and [the pastor’s] isolated statements fall well short of establishing a clear and particularized policy” as required by the regulations.

COBRA and ERISA

The court rejected the plaintiff’s COBRA and ERISA claims: “It is not in dispute that [the church] established its health and pension plans and that it is a church that possesses 501(c)(3) tax exempt status. The plans are therefore church plans that are not subject to COBRA and ERISA requirements.”

Application. Many churches have adopted policies that permit employee salaries to be reduced based on variations in the quality or quantity of the work performed. Church leaders should recognize that such policies may result in the loss of exemption of church employees from the FLSA’s overtime pay requirements, and this leads to unexpected and unbudgeted liability for unpaid overtime compensation. This risk is especially acute if a church’s employee or policy manual was not reviewed by an attorney familiar with the FLSA.

Department of Labor regulations list several situations in which reductions in pay will not affect the exempt status of employees. One of these (deductions from pay when an exempt employee is absent from work for one or more full days for personal reasons, other than sickness or disability) was referred to by the court in this case. Other exemptions include

deductions from pay may be made for absences of one or more full days occasioned by sickness or disability (including work-related accidents) if the deduction is made in accordance with a bonafide plan, policy or practice of providing compensation for loss of salary occasioned by such sickness or disability;
while an employer cannot make deductions from pay for absences of an exempt employee occasioned by jury duty, attendance as a witness or temporary military leave, the employer can offset any amounts received by an employee as jury fees, witness fees or military pay for a particular week against the salary due for that particular week without loss of the exemption.
deductions from pay of exempt employees may be made for penalties imposed in good faith for infractions of safety rules of major significance.
deductions from pay of exempt employees may be made for unpaid disciplinary suspensions of one or more full days imposed in good faith for infractions of workplace conduct rules. Such suspensions must be imposed pursuant to a written policy applicable to all employees.
an employer is not required to pay the full salary in the initial or terminal week of employment;
an employer is not required to pay the full salary for weeks in which an exempt employee takes unpaid leave under the Family and Medical Leave Act.

This case illustrates the importance of having your employee or policy manual reviewed by an attorney who is familiar with the FLSA. 2009 WL 1298525 (2nd Cir. 2009).

This Recent Development first appeared in Church Law & Tax Report, September/October 2009.

Legal Developments

Interference with Contract

Student sues official who informed a potential employer of his arrest.

Richard R. Hammar, Attorney, CPA

Bio

State: Texas
Categories: Employment Practices, Overtime Pay

Church Law & Tax Report

Interference with Contract

Student sues official who informed a potential employer of his arrest.

Richard R. Hammar, J.D., LL.M., CPA

Key Point 8-24. A reference letter is a letter that evaluates the qualifications and suitability of a person for a particular position. Churches, like other employers, often use reference letters to screen new employees and volunteers. Churches often are asked to provide reference letters on current or former workers. The law generally provides employers with important protections when responding to a reference letter request. However, liability may still arise in some cases, such as if the employer acts with malice in drafting a reference letter.

A Texas court dismissed a lawsuit brought by a university student against a school official who informed a prospective employer of the student’s arrest for public lewdness. A university student (the “plaintiff”) was working toward a degree in elementary education. While on his way to a student teaching assignment at an elementary school, he stopped at a men’s restroom in a public park. Another man followed him into the restroom, the two had sex, and they were subsequently arrested and charged with public lewdness. The restroom in the park was under surveillance because of numerous complaints about drug use and lewdness around children. The plaintiff pleaded no contest to the offense and was placed on deferred adjudication.

School officials decided that the plaintiff could obtain his teacher certification if two requirements were met: (1) he must make “full disclosure” about his arrest to his prospective employer, and (2) the employer must confirm in writing to university officials that he had “fully disclosed” his arrest.

The plaintiff applied for a fourth grade teaching position at a public school. He informed the principal that he had been arrested for public lewdness, but provided no other details. He prepared a letter for the principal to sign that was addressed to the university, affirming that he had been “totally forthcoming about his arrest record and has provided all documentation related to his arrest.” Because the letter “raised flags” of concern, the principal Brown placed a reference-check call to the university concerning the plaintiff. A university official (the “defendant”) referred to the existence of a newspaper article discussing the arrest. The official later testified that she told the principal about the newspaper article so that she would have the information and not be “blindsided” if a parent were to inquire about the incident.

The elementary school conducted a routine criminal background check on the plaintiff, which showed that he had received deferred adjudication for public lewdness. The plaintiff, however, had answered “No” to a question on his application that asked if he had “ever been convicted of a felony or offenses involving moral turpitude and/ or received probation or deferred adjudication.” Although the plaintiff had already been assigned a classroom and placed in paid training, the school ultimately declined to allow him to teach.

The plaintiff sued the defendant for interference with contract. The court noted that interference with contract requires proof of (1) the existence of a contract subject to interference; (2) a willful and intentional act of interference; (3) the act was the cause of plaintiff’s damages; and (4) actual damage or loss. The court concluded that the defendant’s reference to a newspaper article concerning the plaintiff during his conversation with the school principal was not a “willful and intentional act of interference.” It noted:

A willful act involves more than simple participation in some act with a breaching party. The defendant must knowingly induce one of the contracting parties to breach its obligations. There must be some act interfering with a contract or act persuading a party to a contract to breach; for example, offering better terms or other incentives. Liability for intentional interference may not be based on a simple finding that the defendant performed certain acts; there must be a finding that the defendant performed certain acts with the knowledge or belief that interference with a contract would result from that contract.

The act at issue in this case is the telephone conversation between [the defendant and the school principal] during which the defendant mentioned the newspaper article. Plaintiff alleges in his petition that the defendant “made it clear that she believed that hiring or retaining plaintiff as a teacher would embarrass both the school and the university ….” The principal stated that the defendant did not read her the article or provide her a copy …. This is the entirety of the evidence on which the plaintiff relies to support his assertion that the defendant advised the school that hiring the plaintiff would create problems; he refers to no other evidence that the defendant expressed any opinion to the principal, the only school administrator with whom she had contact, concerning his employment, and our review of the record finds no other evidence. In the defendant’s deposition, she said that she responded to the principal’s question about the plaintiff because she thought that she should have the information to “avoid being blindsided” by a parent who might have seen the article. The defendant had no previous relationship with the principal. The record does not show any further contact with the principal or any other school administrator to whom she could have communicated a negative recommendation about the plaintiff.

The court concluded that no jury could conclude that the defendant “performed an act intended to knowingly induce the school to breach its contract with the plaintiff, or that the conversation with the principal was done with the knowledge or belief that it would interfere with the plaintiff’s TISD contract. Accordingly, the defendant conclusively negated the element of tortious interference that requires a willful and intentional act …. The plaintiff produced no countervailing evidence that the defendant offered the school some inducement to breach its contract with the plaintiff or that her reference to a newspaper article served as a negative inducement for the school to breach the contract.”

The court further noted that the plaintiff had “admitted that the defendant was not acting maliciously but in the best interests of the university and the teacher education program,” which precluded a finding of willful and intentional interference with contract.

Application. Note the following considerations:

1. According to the principle of “interference with contract,” a former employer may be liable if it intentionally interferes with an existing employment relationship. To illustrate, assume that a church dismisses an employee (Jill) because of embezzlement, and Jill is later hired by another church. The pastor of the former employer discovers that Jill is now working for another employer, and he calls the employer and shares details about Jill’s embezzlement. Based on this unsolicited communication Jill is dismissed by her new employer. She later sues her former church and pastor for “interference with contract.” To prove interference with contract, Jill must demonstrate the existence of a contract (an employment relationship), and some intentional act by her former church or pastor that interfered with that contract.

2. Interference with contract requires malicious intent. The defendant must have willfully and intentionally engaged in conduct that interfered with another’s employment contract. In this case, the court concluded that the defendant’s reference to a newspaper article in her conversation with the principal could not reasonably be construed an act “intended to knowingly induce the school to breach its contract with the plaintiff.” In support of this conclusion, the court referred to the following facts: (1) the defendant did not read the article to the principal or provide her a copy; (2) the defendant expressed no opinion to the principal concerning the plaintiff’s employment; (3) the defendant communicated with no other school employee; (4) the defendant did not initiate the contact with the principal; (5) the defendant’s sole purpose in referring to the newspaper article was to prevent the principal from “being blindsided” by a parent who might have seen the article; (6) the defendant had no previous relationship with the principal; (7) the defendant had no further contact with the principal or any other school administrator to whom she could have communicated a negative recommendation about the plaintiff.

3. Some courts have extended the principle of interference with contract to the pre-employment stage, referring to this as “interference with prospective contractual relations.” This requires proof of the following elements: (1) a “reasonable probability” that the plaintiff would have entered into the prospective relationship or contract; (2) a wrongful act by the defendant that prevented the relationship from occurring; (3) the defendant did such act with a conscious desire to prevent the relationship from occurring, or knew that the interference was certain or substantially certain to occur as a result of the defendant’s conduct; and (4) the plaintiff suffered actual harm or damage as a result of the defendant’s interference.

4. Some courts have ruled that the so-called “ministerial exception” prevents them from resolving interference with contract claims involving clergy. 2008 WL 5264886 (Tex. App. 2008).

This Recent Development first appeared in Church Law & Tax Report, September/October 2009.