Landmark Supreme Court Ruling Favors Arbitration of Employment Disputes

What church leaders need to know.

By a 5-4 vote, the United States Supreme Court ruled that a clause in an employment application requiring disputes to be settled through binding arbitration was legally enforceable. As a result, the Court threw out a lawsuit brought by an employee for alleged violations of a state nondiscrimination law and ordered the dispute to be resolved through arbitration. The Court did not address whether arbitration clauses in employment applications and contracts can preempt the EEOC of jurisdiction to process discrimination claims under federal laws. That issue will be addressed by the Supreme Court in another case later this year. However, the Court's conclusion that employers can compel employees to resolve their disputes under state law through binding arbitration is a significant victory for employers. Unlike federal law, most state nondiscrimination laws contain no limit on money damages and so the biggest exposure to liability is for state law violations. This article reviews the Court's historic ruling, describes the many advantages of arbitration, and provides church leaders with information that will help them evaluate whether or not they should implement an arbitration policy for employees.

Key point Negligence as a Basis for Liability Churches have various defenses available to them if they are sued as a result of a personal injury. One such defense is an arbitration policy. By adopting an arbitration policy, a church can compel members to arbitrate specified disputes with their church rather than pursue their claim in the civil courts.

The arbitration of disputes has many advantages over litigation in the civil courts. Consider the following:

(1) a much faster resolution of disputes

(2) lower attorneys' fees

(3) arbitration awards are often less than civil court judgments

(4) little if any risk of punitive damages, or astronomical verdicts out of proportion to the alleged wrong

(5) disputes are resolved privately, with little or no media attention

(6) the spectacle of plaintiffs' attorneys appealing to the emotions of juries through courtroom theatrics is eliminated

(7) arbitration can reconcile the parties to a dispute unlike civil litigation in which the parties almost always enter and leave court as enemies

(8) no threatening letters from attorneys demanding exorbitant payoffs in order to avoid litigation

(9) parties to a dispute can select one or more arbitrators having specialized knowledge concerning the issues involved (unlike civil court judges who often have limited familiarity with applicable law)

(10) arbitration awards are final (no time-consuming appeals)

With these numerous advantages, arbitration is becoming an increasingly common way of resolving disputes. A recent decision by the United States Supreme Court will make arbitration of disputes even more common, especially for employment disputes. This article will review the facts of the Supreme Court's landmark ruling, summarize the court's ruling, and assess the significance of the case to churches.

Facts

In 1995 a man ("Brian") applied for a job at a local Circuit City store in California. Brian signed an employment application which included the following provision:

I agree that I will settle any and all previously unasserted claims, disputes or controversies arising out of or relating to my application or candidacy for employment, employment and/or cessation of employment with Circuit City, exclusively by final and binding arbitration before a neutral Arbitrator. By way of example only, such claims include claims under federal, state, and local statutory or common law, such as the Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, as amended, including the amendments of the Civil Rights Act of 1991, the Americans with Disabilities Act, the law of contract and the law of tort.

Brian was hired as a sales counselor by the store. Two years later, Brian filed an employment discrimination lawsuit against Circuit City in state court, asserting claims under California's Fair Employment Act and other claims under California law. Circuit City asked a federal court to throw out Brian's lawsuit and compel arbitration of his claims pursuant to the arbitration provision in the employment application. The court granted Circuit City's requests. It concluded that Brian was obligated by the arbitration agreement to submit his claims against his employer to binding arbitration. Brian appealed. A federal appeals court ruled that the Federal Arbitration Act excluded all employment contracts from mandatory arbitration, and on that basis ruled that the arbitration provision in the Circuit City employment application was unenforceable. Circuit City appealed to the Supreme Court.

The Court's Ruling

Congress enacted the Federal Arbitration Act ("FAA") in 1925 as a response to the hostility of American courts to the enforcement of arbitration agreements. To give effect to this purpose, the FAA compels judicial enforcement of a wide range of written arbitration agreements. The FAA specifies that

[a] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.

The FAA excludes from coverage "contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." As a result, arbitration cannot be mandated in employment contracts for these workers. But, does this exemption apply only to employment contracts of seamen, railroad employees, and other "transportation" employees, or does it apply to the employment contracts of all employees regardless of their occupation? Prior to the Supreme Court's ruling, most courts had interpreted this exemption to extend to employment contracts of transportation workers only, but not other employment contracts. The Supreme Court agreed with this interpretation. Since Brian was not engaged in the transportation industry, the arbitration provision in his employment application was enforceable pursuant to the FAA. The Court observed,

The exemption clause provides the Act shall not apply "to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce." Most Courts of Appeals conclude the exclusion provision is limited to transportation workers, defined, for instance, as those workers "actually engaged in the movement of goods in interstate commerce" …. [The federal appeals court in this case] takes a different view and interprets the exception to exclude all contracts of employment from the reach of the FAA …. [T]he words "any other class of workers engaged in … commerce" constitute a residual phrase, following, in the same sentence, explicit reference to "seamen" and "railroad employees." Construing the residual phrase to exclude all employment contracts fails to give independent effect to the statute's enumeration of the specific categories of workers which precedes it; there would be no need for Congress to use the phrases "seamen" and "railroad employees" if those same classes of workers were subsumed within the meaning of the "engaged in … commerce" residual clause. The wording calls for the application of the maxim ejusdem generis, the statutory canon that "[w]here general words follow specific words in a statutory enumeration, the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words." Under this rule of construction the residual clause should be read to give effect to the terms "seamen" and "railroad employees," and should itself be controlled and defined by reference to the enumerated categories of workers which are recited just before it; the interpretation of the clause pressed by respondent fails to produce these results …. [T]he FAA [exempts] only contracts of employment of transportation workers.

The Court noted that attorneys general of 22 states had filed briefs supporting the exemption of all employment contracts from mandatory arbitration under the FAA. They argued that, by requiring arbitration agreements in most employment contracts to be covered by the FAA, the Act in effect "pre-empts" those state employment laws which restrict or limit the ability of employees and employers to enter into arbitration agreements. They claimed that states should be permitted, pursuant to their traditional role in regulating employment relationships, to prohibit employees like Brian from contracting away their right to pursue state law discrimination claims in court. The Supreme Court simply noted that it had ruled in a previous case that Congress intended the FAA to apply in state courts, and to pre-empt state "anti-arbitration" laws to the contrary. Southland Corp. v. Keating, 465 U.S. 1 (1984).

The Court stressed the advantages of arbitration agreements:

There are real benefits to the enforcement of arbitration provisions. We have been clear in rejecting the supposition that the advantages of the arbitration process somehow disappear when transferred to the employment context. Arbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves smaller sums of money than disputes concerning commercial contracts. These litigation costs to parties (and the accompanying burden to the courts) would be compounded by the difficult choice-of-law questions that are often presented in disputes arising from the employment relationship and the necessity of bifurcation of proceedings in those cases where state law precludes arbitration of certain types of employment claims but not others.

The Court noted that expanding the FAA's exemption provision to include all employment contracts, as Brian urged, "would call into doubt the efficacy of alternative dispute resolution procedures adopted by many of the nation's employers, in the process undermining the FAA's pro-arbitration purposes and 'breeding litigation from a statute that seeks to avoid it.'"

The Court also noted that in prior rulings it had been "quite specific in holding that arbitration agreements can be enforced under the FAA without contravening the policies of congressional enactments giving employees specific protection against discrimination prohibited by federal law … [and that] by agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum."

Relevance To Church Leaders

Our research reveals that churches are increasingly being sued for employment-related claims. To illustrate, in 1999 (the most recent year we have examined) employment-related claims were the number one cause of church litigation. Employment-related claims include wrongful dismissal, unemployment benefits, workers compensation, the selection of ministers, and various kinds of discrimination claims (including race, national origin, sex, religion, age, and disability).

Key point. According to Forbes magazine, employment disputes now represent one-third of all cases pending in federal court, and one-fifth of all cases pending in state court.

Employment-related claims are significant not only because of their number, but also because they represent an uninsured risk for most churches. Most church general liability insurance policies contain no coverage for such claims. This means that a church that is sued for such a claim will be compelled to hire and pay its own attorney, and pay any settlement or court judgment. The costs associated with even a single claim can be substantial, and this can force a church to divert funds budgeted for ministry to the payment of attorneys and possibly a settlement or judgment.

Further, if a discrimination complaint is filed by a current or former employee with the Equal Employment Opportunity Commission (EEOC) or its state or local counterparts, this can lead time-consuming and often unpleasant interaction with government investigators that many church leaders have found to be condescending if not hostile toward religion.

Clearly, it is in the best interests of every church to consider alternatives to civil litigation. The Supreme Court case addressed in this article demonstrates that arbitration is a legally valid alternative.

Here are some points for church leaders to consider:

1. the arbitration of employment claims under state law

In the past, some courts and state legislatures attempted to impose limits on the enforceability of arbitration provisions in employment contracts under state law. The Supreme Court's decision in the Circuit City case addressed the enforceability of arbitration provisions in the context of state employment or civil rights claims. The Court concluded that (1) arbitration provisions are enforceable, and are not barred by the Federal Arbitration Act (for employees not directly engaged in transportation); and (2) the FAA preempts states laws that seek to impose limits on the enforceability of arbitration provisions in employment contracts. It is now clear that employers can compel employees to arbitrate wrongful dismissal and discrimination claims under state law by inserting valid arbitration provisions in employment contracts and applications.

2. the arbitration of employment claims under federal law

Can a clause in an employment application or contract calling for binding arbitration of employment disputes pre-empt the jurisdiction of the EEOC under federal employment and civil rights laws? Consider the following example.

Example. A church employs Barb as an office secretary. After working for the church for two years, Barb is dismissed because of extramarital sexual relations in violation of the church's religious and moral teachings. Barb files a complaint with the EEOC claiming that her dismissal constituted unlawful sex discrimination in violation of Title VII of the federal Civil Rights Act of 1964 since the church had not dismissed a male youth pastor who was guilty of the same kind of misconduct a year earlier. The church insists that the EEOC must drop its investigation since Barb signed an employment application prior to being hired in which she agreed to resolve all legal disputes with the church, including discrimination claims under Title VII, through binding arbitration.

Is the EEOC deprived of jurisdiction over this claim by virtue of the arbitration clause in the church's employment application? This issue was not addressed directly by the Supreme Court in the Circuit City case. The Court's decision contains language suggesting that arbitration clauses can compel employees to resolve disputes alleging violations of federal employment laws through arbitration. The Court has agreed to resolve this important issue, and a ruling is expected by the end of the year in the "Waffle House" case. EEOC v. Waffle House, Inc., 193 F.3d 805 (4th Cir. 1999). In the Waffle House case an applicant for employment (Eric) signed an employment application with a local Waffle House restaurant that required him to submit to binding arbitration "any dispute or claim concerning [his] employment with Waffle House, Inc., or any subsidiary or Franchisee of Waffle House, Inc., or the terms, conditions or benefits of such employment." Eric was hired, and a few weeks later he suffered a seizure while at work. Waffle House dismissed Eric, stating in the separation notice that "We decided that for [his] benefit and safety, and Waffle House, it would be best he not work here any more." Chris filed a charge of discrimination with the EEOC, complaining that his discharge violated the federal Americans With Disabilities Act of 1990 ("ADA"). The EEOC later sued Waffle House and sought (1) a court order prohibiting Waffle House from discriminating on the basis of disability in any employment decision; and (2) a court order requiring Waffle House to institute an anti-discrimination policy; (3) backpay for Chris and reinstatement in his job; and (4) compensatory and punitive damages for Chris. Waffle House insisted that the arbitration provision in the employment contract required the court to dismiss the ADA suit and refer the matter to arbitration.

A federal appeals court ruled that the arbitration provision was valid and enforceable, and was binding not only on Chris but also on the EEOC with respect to claims it brought on Chris's behalf. This meant that the claims for backpay, reinstatement, and compensatory and punitive damages had to be dismissed and referred to arbitration. On the other hand, the EEOC's requests for court orders compelling Waffle House to cease any further discrimination on the basis of disability, and to implement an anti-discrimination policy, could be resolved by the court because these claims were brought by the EEOC in its own right rather than as a representative of Chris. The court concluded,

[T]he EEOC, acting in its public role, is not bound by private arbitration agreements. Although a private arbitration agreement does bar an individual claimant from asserting claims in court, it does not prevent him from filing a charge with the EEOC. This rule demonstrates … that the EEOC's suit can accomplish aims-namely, combating discrimination on a societal level-that an individual's suit is not equipped, nor perhaps intended, to accomplish …. While we have thus observed that the important role of the EEOC in vindicating the public interest in preventing and eradicating workplace discrimination is not to be restricted by arbitration agreements to which it is not a party, its role in vindicating in federal court the individual interests of the charging party implicates the competing federal policy favoring the enforcement of arbitration agreements. When an individual and an employer agree to submit employment disputes to arbitration, it is the federal policy to give that contract effect in order to favor the arbitration mechanism for dispute resolution. To permit the EEOC to prosecute in court [Eric's] individual claim-the resolution of which he had earlier committed by contract to the arbitral forum-would significantly trample this strong policy favoring arbitration. Because [Eric's] own suit in court to enforce his ADA claim would be barred by his contract and by the federal policy embodied in the FAA, only a stronger, competing policy could justify allowing the EEOC to do for Eric what he could not have done himself. The EEOC's public mission to eradicate and to prevent discrimination may be such a policy in certain contexts, but, as we conclude herein, it cannot outweigh the policy favoring arbitration when the EEOC seeks relief specific to the charging party who assented to arbitrate his claims.

In summary, while the EEOC "may seek injunctive relief in the federal forum for employees even when those employees have entered into binding arbitration agreements," it may not pursue relief in court [such as money damages] specific to individuals who have waived their right to a judicial forum by signing an arbitration agreement." When the EEOC seeks reinstatement and monetary damages for an employee who claims to have been the victim of unlawful employment discrimination under federal law, "the federal policy favoring enforcement of private arbitration agreements outweighs the EEOC's right to proceed in federal court because in that circumstance, the EEOC's public interest is minimal, as the EEOC seeks primarily to vindicate private, rather than public, interests. On the other hand, when the EEOC is pursuing large-scale injunctive relief, the balance tips in favor of EEOC enforcement efforts in federal court because the public interest dominates the EEOC's action."

Key point. If the Supreme Court affirms the federal appeals court's decision in the Waffle House case, this will be good news for employers since it will mean that they can compel employees to resolve their demands for money damages resulting from alleged violations of federal employment laws through binding arbitration. All of the advantages associated with arbitration (summarized at the beginning of this article) will be realized.

Key point. If the Supreme Court reverses the federal appeals court's decision in the Waffle House case, this will mean that arbitration clauses in employment applications and contracts do not deprive the EEOC of jurisdiction to process discrimination complaints under federal law (including both injunctive relief and money damages for individual victims of discrimination). However, note that if the Supreme Court overturns the Waffle House case there is still a significant advantage to using arbitration clauses in employment applications and contracts. The Supreme Court concluded in the Circuit City case that arbitration clauses prevent employees from pursuing discrimination or wrongful dismissal claims under state law. And, it is these state law claims that expose employers to the greatest amount of money damages since there are limits on employer liability under Title VII of the federal Civil Rights Act of 1964. The Civil Rights Act of 1991 limits the amount of compensatory and punitive damages that are available to most discrimination victims. For example, employers with fewer than 101 employees (the vast majority of churches) cannot be liable for more than $50,000 to any one person. Because of these limits, plaintiffs' attorneys who represent current and former employees routinely file claims under state law. It is these state law claims that expose employers to substantial jury verdicts, and it is these that the Supreme Court has said may be pre-empted by arbitration provisions.

3. should our church compel employees to arbitrate employment claims?

This is a question that every church should consider. In answering this question, there are a number of points that should be considered:

(1) The advantages to arbitration, listed at the beginning of this article, should be reviewed.

(2) Remember that employment claims currently represent the most likely basis for lawsuits involving churches.

(3) Is your church subject to state or federal civil rights laws protecting employees against various forms of discrimination? What about other kinds of employment claims, such as wrongful dismissal?

(4) Employment lawsuits generally are not covered under church general liability insurance policies. This means that if your church is sued for such a claim, you may be required to hire and pay your own attorney, and pay any settlement or court judgment. The costs associated with a single claim can be substantial.

(5) Check with your insurance agent to see if your church has insurance to cover employment claims. Remember that such coverage may be available under a directors and officers insurance policy, if you have one, even if it is not provided under your general liability policy.

Key point. If you don't have coverage for employment claims, then arbitration may help your church limit the costs associated with such claims. But remember, the costs associated with a single claim may be substantial. As a result, church leaders should discuss with their insurance agent or broker the availability of employment practices insurance coverage. And, they should take steps to minimize or manage the risk of employment-related legal claims. We publish three resources that can help: (1) Pastor, Church & Law (3rd ed. 2000) by Richard Hammar; (2) The Church Guide to Employment Law by Julie Bloss; and (3) Risk Management For Churches and Schools by Richard Hammar and James Cobble. All of these resources can be obtained by calling Christian Ministry Resources (1-800-222-1840), or by visiting the bookstore on our web site, www.iclonline.com.

(6) If you have insurance to cover employment claims, then check with your insurance company to be sure that an arbitration award would be honored under your insurance policy up to your coverage limits.

(7) Be sure to consult with an attorney concerning the advantages and disadvantages of an arbitration policy. You may want to have an attorney meet with your board or congregation concerning this issue. If possible, use an attorney who specializes in employment law.

(8) Many cite 1 Corinthians 6:1-8 as scriptural support for the arbitration of internal church disputes. This passage is quoted below:

if any of you has a dispute with another, dare he take it before the ungodly for judgment instead of before the saints? Do you not know that the saints will judge the world? And if you are to judge the world, are you not competent to judge trivial cases? Do you not know that we will judge angels? How much more the things of this life! Therefore, if you have disputes about such matters, appoint as judges even men of little account in the church! I say this to shame you. Is it possible that there is nobody among you wise enough to judge a dispute between believers? But instead, one brother goes to law against another-and this in front of unbelievers! The very fact that you have lawsuits among you means you have been completely defeated already. Why not rather be wronged? Why not rather be cheated? Instead, you yourselves cheat and do wrong, and you do this to your brothers.

4. how do we implement a policy for the arbitration of employment disputes?

If your church decides to implement an arbitration policy for the resolution of disputes with employees, how do you do so? Given the importance of having a policy that complies with local law, we recommend that any church wanting to adopt an arbitration policy retain the services of a local attorney who specializes in employment law. The last thing you want is a false sense of security based on a home-made and unenforceable arbitration policy. Here are some recommendations you may want to share with your attorney:

(1) Check with other churches in your state and find some that have adopted arbitration policies. Ask if you can see their policies.

(2) Ask your insurance company if it has sample arbitration policies for churches.

(3) Be sure that the arbitration policy covers claims under federal, state, and local civil rights and employment laws. Ideally, you will want to refer to applicable laws by name. If you don't, then employees may be able to avoid arbitration by saying that they did not understand what they were agreeing to arbitrate because the arbitration clause was not specific enough.

(4) Be sure the arbitration policy contains a "severability" clause. Such a clause states that if any provision of the policy is determined to be invalid by a court of law, the remaining provisions will remain valid. To illustrate, if the Supreme Court reverses the Waffle House case, then employees cannot be compelled to arbitrate claims under federal civil rights laws. A church arbitration clause that covers both federal and state claims will likely remain valid as to state claims, and this conclusion will be reinforced by the presence of a savings clause.

Your attorney will assist you in deciding whether to place the arbitration policy in your employment application, in an employee handbook, or both.

A sample arbitration agreement drafted by the National Arbitration Forum is reproduced in this article. NAF is a nationwide network of retired judges, litigators, and law professors who share the Forum principle that disputes should be decided according to established legal principles. NAF is the only national arbitration provider whose arbitrators take an oath promising to render legal decisions according to the law, rather than undefined "equity." To meet NAF standards, each arbitrator has more than 15 years legal experience and has arbitrated commercial, financial, and business disputes. Each is qualified under local rules in their community and jurisdiction. As arbitrators, each understands that judgment must be made on the basis of applicable law rather than what "seems fair" to one person. Forum arbitrators and mediators are located in the federal judicial district of every state in the nation. Service is nationwide, no matter where the dispute arises. NAF can be reached at www.arb-forum.com, or by mail at P.O. Box 50191, Minneapolis, MN 55405, or by calling 1-800-474-2371.

Key point. The NAF sample arbitration policy should not be used by churches without appropriate modifications and the assistance of a local attorney to ensure compliance with local law.

5. what about employment disputes regarding ministers?

There is no reason to exclude ministers from a church's arbitration policy. However, note the following unique rules:

(1) Most courts have ruled that ministers are not protected by federal and state civil rights laws since the first amendment religious clauses prevent the civil courts from deciding "who will preach from the pulpit." Therefore, you may want to exclude ministers, or those serving in positions that would be deemed "ministerial," from your arbitration policy. In other words, why submit claims to arbitration that the civil courts would not accept? On the other hand, some churches may prefer to arbitrate all employee claims, including those brought by ministers.

(2) Many churches have governing documents (such as bylaws) that prescribe how ministers are selected and removed. If a congregation acts to remove a minister in accordance with its governing document and the minister threatens to challenge the church's decision, you need to decide if this is the kind of claim you want to submit to arbitration. That is, if the church acts consistently with its bylaws in removing the pastor, should the pastor be able to use the church's arbitration policy to challenge the church's decision? Once again, the courts generally have not been willing to resolve such claims.

(3) In some churches, ministers are selected and removed only through action of a parent denominational agency. Employment claims involving ministers may be resolved within the denomination using existing procedures. Arbitrating such claims may conflict with denominational rules. This issue must be clarified with denominational officers before adopting an arbitration policy.

6. what about the arbitration of other claims?

This article is addressing only the arbitration of disputes involving employees. Church leaders may want to consider adopting a separate policy to resolve disputes involving members and the church, or disputes between members.

7. civil court review of arbitration awards

Note that the Federal Arbitration Act cautions that "an agreement in writing to submit to arbitration an existing controversy … shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." In other words, an agreement to arbitrate is a contract, and like any contract, is subject to challenge on the basis of a number of legal theories. This is why it is so important for churches to have arbitration policies drafted by an attorney who specializes in employment law.

8. what about current employees who have not signed an arbitration agreement?

Let's say that your church has 7 employees, and that you decide to adopt an arbitration policy this year. Will your policy be binding on existing employees, or only on new employees hired after implementation of the policy? The courts have reached conflicting answers to this question. Ask your attorney how to best ensure that your policy covers both current and future employees. The basic idea here is that new employment conditions, such as the arbitration of disputes, are not legally enforceable unless employees receive something of value (other then compensation or benefits to which they are already entitled). For example, some courts have ruled that an agreement to arbitrate future employment claims is enforceable if incorporated into current employees' annual performance reviews. Miller v. Public Storage Management, Inc., 121 F.3d 215 (5th Cir. 1997). Other courts have allowed an arbitration policy to apply to current employees so long as they agree in writing to be bound by the policy at the time they receive a pay raise.

Sample Agreement to Arbitrate Claims

[This document should not be construed as legal advice. If you need legal advice, consult an attorney in your area.]

In recognition of the fact that differences may arise between the Company, as defined below, and the undersigned ("Employee") during or after Employee's employment which may or may not be related to Employee's employment, and in recognition of the fact that resolution of any differences in the courts is rarely time or cost effective for either party, the Company and the Employee have entered into this Mutual Agreement to Arbitrate Claims ("Agreement") in order to establish and gain the benefits of a speedy, impartial and cost-effective dispute resolution procedure.

1. Agreement to Arbitrate; Designated Claims. The parties agree that all references to the "Company" in this Agreement shall include all of its subsidiary and affiliated entities, including all former, current and future officers, directors and employees of all such entities, in their capacity as such or otherwise; all benefit plans and their sponsors, fiduciaries, administrators, affiliates and agents, in their capacity as such and otherwise; and all successors and assigns of any of them. Except as otherwise provided in this Agreement, the Company and the Employee hereby consent to the resolution by arbitration of all claims or controversies for which a federal or state court or other dispute resolution body otherwise would be authorized to grant relief, whether or not arising out of, relating to or associated with the Employee's employment with the Company, or its termination, including, but not limited to, any claims or controversies arising out of, relating to or associated with the Employee's application for employment and the Company's hiring of the Employee, that the Employee may have against the Company or that the Company may have against the Employee. The Claims covered by this Agreement include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant, express or implied; tort claims; claims for discrimination or harassment on bases which include but are not limited to race, sex, sexual orientation, religion, national origin, age, marital status, disability or medical condition; claims for benefits, except as excluded in paragraph 4; and claims for violation of any federal, state or other governmental constitution, statute, ordinance, regulation, or public policy. The purpose and effect of this Agreement is to substitute arbitration as the forum for resolution of the Claims; all responsibilities of the parties under the statutes applicable to the Claims shall be enforced.

2. Governing Law. The parties agree that the Company is engaged in transactions involving interstate commerce. Except as provided in this Agreement, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this Agreement; and all arbitrations covered by this Agreement shall be adjudicated in accordance with the state or federal law which would be applied by a United States District Court sitting at the place of the hearing, including applicable statutes of limitations.

3. Waiver of Right to Jury. By entering into this Agreement, the Company and Employee each knowingly and voluntarily waive any and all rights they have under law to a trial before a jury.

4. Claims Not Covered by This Agreement. This Agreement does not apply to or cover claims for workers' compensation or unemployment compensation benefits; claims resulting from the default of any obligation of the Company or the Employee under a mortgage loan which was granted and/or serviced by the Company; claims for injunctive and/or other equitable relief for intellectual property violations, unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information; or claims based upon an employee pension or benefit plan that either (1) contains an arbitration or other non-judicial resolution procedure, in which case the provisions of such plan shall apply, or (2) is underwritten by a commercial insurer which decides claims. If either the Company or the Employee has more than one claim against the other, one or more of which is not covered by this Agreement, such claims shall be determined separately in the appropriate forum for resolution of those claims. Nothing in this Agreement shall preclude the parties from agreeing to resolve claims other than Claims covered by this Agreement pursuant to the provisions of this Agreement.

5. Initiation of the Arbitration Process. To initiate the arbitration process, the aggrieved party must file a written Claim. Claims can be filed with any office of the National Arbitration Forum ("NAF"), electronically at www. arb-forum.com. or by mail at Post Office Box 50191, Minneapolis, MN 55405. Service of the Claim upon the responding party shall be made in accordance with the NAF Code of Procedure ("Code"). Copies of the Code are available upon request from the Human Resources Department in each of the Company's major facilities and from each of the Regional Offices, as well as from the NAF at each of its offices, its web site or by calling (800)474-2371.

6. Arbitration Procedures. Arbitrations pursuant to this Agreement shall be conducted by the NAF in accordance with the procedures set forth in the Code, except where the Code conflicts with this Agreement, in which case the terms of this Agreement shall govern. Arbitration hearings covered by this Agreement are to be held within the Federal Judicial District in which Employee was last employed with the Company. In the event NAF is unable or unwilling to administer the arbitration, then JAMS/Endispute, Inc. will administer any arbitration required under the Agreement pursuant to its Arbitration Rules and Procedures for Employment Disputes, as modified by this Agreement.

7. Representation. Each party may be represented by an attorney at any arbitration covered by this Agreement.

8. Fees and Costs. The party requesting the arbitration shall pay to NAF its filing fee up to a minimum of $125. 00 when the Claim is filed. The Company shall pay for the remainder of the NAF filing fee. The Company shall pay for the first hearing day. All other arbitration costs shall be shared equally by the Company and the Employee. Each party shall pay for each party's own costs and attorneys' fees, if any. However, the arbitrator may, in his or her discretion, permit the prevailing party to recover fees and cost only to the extent permitted by applicable law.

9. Discovery. The parties shall be entitled to engage in discovery in the form of requests for documents, interrogatories, requests for admission, physical and/or mental examinations and depositions; however, each side shall be limited to three depositions and an aggregate of 30 discovery requests of any kind, including sub-parts, except as mutually agreed to by the parties. Physical and/or mental examinations must be justified under the standards set forth by the Federal Rules of Civil Procedure. A deposition of a corporate representative shall be limited to no more than four designated subjects. At a mutually agreeable date, the parties will exchange lists of experts who will testify at arbitration. Each side may depose the other side's experts, and obtain the documents they reviewed and relied upon, and these depositions will not be charged to the parties' aggregate limit on discovery requests or the three deposition limit. Any disputes concerning discovery shall be resolved by the arbitrator, with a presumption against increasing the aggregate limit of requests; additional discovery requests shall be granted only upon a showing of good cause.

10. Motions. The arbitrator will have the authority to grant motions dispositive of all or part of any Claim.

11. Exclusive Remedy. For Claims covered by this Agreement, arbitration is the parties' exclusive remedy. The arbitrator has exclusive authority to resolve any dispute relating to the applicability or enforceability of this Agreement. The decision of an arbitrator on any Claims submitted to arbitration as provided by this Agreement shall be in writing setting forth the findings of fact and law and the reasons supporting the decision and shall be final and binding upon the parties, except that both parties shall have the right to appeal to the appropriate court any errors of law in the decision rendered by the arbitrator.

12. Consideration. In addition to any other consideration, each party's promise to resolve Claims by arbitration in accordance with the provisions of this Agreement, rather than through the courts or other bodies, is consideration for the other party's like promise.

13. Not an Employment Agreement. This Agreement is not, and shall not be construed to create, any contract of employment, express or implied, nor shall this Agreement be construed in any way to change the status of the Employee from at-will.

14. Term, Modification, and Revocation. This Agreement shall survive the employer-employee relationship between the Company and the Employee and shall apply to any covered Claim whether it arises or is asserted during or after termination of the Employee's employment with the Company or the expiration of any benefit plan. This Agreement can be modified or revoked only by a writing signed by the Employee and an executive officer of the Company that references this Agreement and specifically states an intent to modify or revoke this Agreement.

15. Severability. If any provision of this Agreement or the Code is adjudged to be void or otherwise unenforceable, in whole or in part, such adjudication shall not affect the validity of the remainder of the Agreement or the Code.

16. Sole and Entire Agreement. This is the complete agreement of the parties on the subject of arbitration of disputes, except for any arbitration provision contained in any pension or benefit plan. This Agreement supersedes any prior or contemporaneous oral or written agreement or understanding on the subject. In executing this Agreement, neither party is relying on any representation, oral or written, on the subject of the effect, enforceability or meaning of this Agreement except as specifically set forth in this Agreement.

Each party to this agreement acknowledges carefully reading this agreement, understanding its terms, and entering into this agreement voluntarily and not in reliance on any promises or representations other than those contained in this agreement itself.

Each party further acknowledges having the opportunity to discuss this agreement with personal legal counsel and has used that opportunity to the extent desired.

Circuit City Stores, Inc. v. Adams,___ U.S. ___ (2001)

Paying Insurance and Retirement Benefits to a Former Spouse

Supreme Court weighs in on this issue.

Many churches have adopted life insurance and retirement plans requiring employees to designate beneficiaries in the event of their death. What if an employee is divorced, and the insurance or retirement plan still lists a former spouse as beneficiary at the time of the employee's death?

Must the insurance proceeds or retirement benefits be paid to the former spouse instead of the deceased employee's children or heirs?

The United States Supreme Court addressed this issue in a recent case, ruling that a divorced wife was entitled to all of the benefits payable under a life insurance policy and pension plan maintained by her former husband's employer because she was still listed as the beneficiary at the time of his death.

What this means for churches

This case illustrates an important point. Churches that maintain life insurance or retirement plans should ask employees to periodically review their beneficiary designations to be sure that benefits are paid to the desired person or persons.

Egelhoff v. Egelhoff, ___ U.S. ___ (2001)

Sexual Misconduct by Clergy and Church Workers

A federal appeals court ruled that the statute of limitations prevented an adult male from suing a priest and Catholic archdiocese for injuries he suffered as a result of being sexually molested as a minor by the priest.

Ayon v. Gourley, 185 F.3d 873 (10th Cir. 1999)

Key point 10-16.4. The statute of limitations specifies the deadline for filing a civil lawsuit. Lawsuits cannot be brought after this deadline has passed. There are a few exceptions that have been recognized by some courts: (1) The statute of limitations for injuries suffered by a minor begins to run on the minor's 18th birthday. (2) The statute of limitations does not begin to run until an adult survivor of child sexual molestation "discovers" that he or she has experienced physical or emotional suffering as a result of the molestation. (3) The statute of limitations does not begin to run until an adult with whom a minister or church counselor has had sexual contact "discovers" that his or her psychological damages were caused by the inappropriate contact. (4) The statute of limitations is suspended due to fraud or concealment of a cause of action. Negligence as a Basis for Liability

A federal appeals court ruled that the statute of limitations prevented an adult male from suing a priest and Catholic archdiocese for injuries he suffered as a result of being sexually molested as a minor by the priest.

In 1997 an adult male ("John") sued a Catholic priest and archdiocese for injuries he allegedly suffered as a result of being molested as a child by the priest. John alleged that the molestation occurred on numerous occasions from 1981 through 1984. John sued the offending priest for "outrageous conduct" and the archdiocese for negligent hiring and supervision, breach of fiduciary duty, and conspiracy.

The archdiocese claimed that the case was barred by the statute of limitations and the first amendment guarantees of religious freedom and nonestablishment of religion. A federal district court dismissed the case against the archdiocese on the ground that any inquiry into church hiring or employment of priests would interfere with the archdiocese's right to free exercise of religion and excessively entangle the courts in church operations. The court also ruled that the statute of limitations barred John's claims. John appealed.

A statute of limitations specifies the deadline for filing a lawsuit. There were several statutes of limitation that potentially applied to John's claims, but the court concluded that all of them had expired by the time John filed his lawsuit in 1997. The court ruled that the statute of limitations on John's claims began to run when the claims "accrued," and that the claims accrued when John had "knowledge of facts which would put a reasonable person on notice of the nature and extent of an injury and that the injury was caused by the wrongful conduct of another." John insisted that his "injury" was emotional distress, and that he did not "connect" the injury to its cause until counseling therapy in 1997. The court disagreed:

[John] knew or should have known the alleged sexual abuse was wrong and "had sufficient knowledge concerning the existence of resulting psychological harm," at least in 1984, if not earlier. [John] was sixteen when the alleged abuse began in 1981 and almost twenty at the time of the last incident in 1984. In his affidavit, he admits being "embarrassed, humiliated, ashamed and fearful about what happened" and claims to have blamed himself. He also claims [the priest] threatened to kill him or his mother if he ever told anyone about the abuse.

Additionally, the original complaint alleges: "From the dates of the abuse to the present, and largely because of his abuse, the plaintiff has been continually subject to coercion, duress, religious duress, mental infirmity, disability and unsound mind as to the facts, conditions and circumstances surrounding his sexual abuse." The alleged threat by [the priest, plus John's] recognition that he was embarrassed and fearful, and his acknowledgment that he blamed himself show [that he] knew the wrongfulness of the alleged abuse. Moreover, to the extent [he] claims repression of the wrongfulness of the alleged encounters with [the priest], we conclude … that he should have known the wrongfulness of the acts.

A reasonable plaintiff of nineteen who felt fear and embarrassment and who allegedly received death threats stemming from the actions in question should have reasonably known of the wrongfulness of the actions. As for the injury, plaintiff admits that he suffered emotional distress at the time of the alleged incidents of abuse.

Thus [he] knew or should have known the wrongful nature of the act, the resulting injury, and the causal connection between the two. We therefore find that [John's] causes of action accrued in 1984 and the applicable statute of limitations periods expired, at the latest, in 1990. [His] causes of actions against the defendants are barred.


Application.
This is an important development. Many adult survivors of child sexual molestation have brought lawsuits many years (and in some cases decades) after their 18th birthdays, claiming that they had not "discovered" the nature and extent of their psychological harm until they sought professional counseling. The court in this case concluded that the statute of limitations on John's claims began to run when the claims "accrued," and that the claims accrued when he became aware of the nature of his emotional injuries and connected them to the actions of the priest and archdiocese.

The court rejected John's contention that his claims did not accrue until he received counseling in 1997 when he was nearly 35 years old. Most courts have reached a similar conclusion, and have refused to allow adults to sue for acts of child molestation—especially if they were adolescents at the time of the molestation. It is very difficult for such persons to convince a court that they were previously unaware of the wrongful acts or of their own injuries.

Substantiating Business Use of a Car

A Tax Court ruling addresses unreimbursed expenses.

Aldea v. Commissioner, T.C. Memo. 2000-136 (2000)

Background. A taxpayer claimed a deduction for the business use of her car in the amount of $4,300, which she computed by multiplying the standard mileage rate times the number of miles she drove her car for business during the year. The IRS denied any deduction because of a lack of substantiation, and the taxpayer appealed.

The Tax Court's ruling. The court began its opinion by noting that the tax code imposes "stringent substantiation requirements for claimed deductions relating to the use of a [car]." The information that must be substantiated to claim a deduction for the business use of a car includes the following:

(1) The amount of the expenditure; (2) the mileage for each business use of the automobile and the total mileage for all use of the automobile during the taxable period; (3) the date of the business use; and (4) the business purpose of the use of the automobile.

The taxpayer testified that she carried a calendar with her in her car and filled it out each day, recording any business activity she conducted. She further testified that she carried a "business miles log" on all of her business trips and made notes about these trips shortly after completing each trip. The court conceded that the entries in the log and the notations on the calendar generally indicated the miles that were driven for business purposes. However, the court concluded that the taxpayer had failed to meet the substantiation requirements quoted above, and it agreed with the IRS that she was not entitled to a deduction. It noted that she "had not substantiated all the required elements of her automobile use, her records are not reliable, and her testimony lacks credibility."

The court observed:

Although [the taxpayer's] records purport to provide the dates of business use of her automobile, miles driven for each business use, and evidence of business purpose, she has not provided the total mileage for all use of her automobile during the year. Thus, she has not substantiated all the elements required by the regulations … When questioned about the pristine condition of the log and the fact that all entries in the log appear to have been made with the same pen, the taxpayer explained that she carried the log in a case with a pen.

We also question the reliability of the information recorded in the taxpayer's records. Despite her testimony, we find it unlikely that the records were made contemporaneously with the activities recorded given the condition of the mileage log, the appearance of the entries in the log, and the mistakes in the log.

What this means for churches

Consider the following points:

1. Unreimbursed staff expenses. Does your church have any staff members who use their car for church business and are not reimbursed for their expenses by the church? Or, does your church reimburse business expenses only up to a certain amount each year, or at a mileage rate less than the IRS-approved rate (currently 32.5 cents per mile)? In any of these situations, your staff members will have unreimbursed business expenses. You may want to share this issue of Church Treasurer Alert with such persons so that they are aware of the substantiation requirements that apply to a deduction for the business use of their car.

2. Are sloppy records required? It is hard to believe that the court rejected the reliability of the taxpayer's trip log because it was too neat and appeared to have been written with the same pen. To the court, this evidence suggested that the log had been hastily put together long after the alleged trips and only after the taxpayer was audited. But the taxpayer's explanation was just as convincing—she carried the log in a case in her car that contained a pen! In any event, church treasurers should note that the court rejected the reliability of the taxpayer's records because (1) they were in "pristine condition"; (2) all entries had been made with the same pen; and (3) the log contained several discrepancies (for example, listing a business trip on the wrong date).


Key point. The court's skepticism about the reliability of the taxpayer's records may seem unreasonable, but it illustrates the importance of the court's observation that "stringent substantiation requirements" apply to any deduction for the business use of a car. This is a point that church treasurers should note well. When it comes to deciding whether or not staff members have substantiated the business use of a car sufficiently to be reimbursed under an accountable plan, church treasurers should understand that the requirements are both real and strict.


Key point. The court's analysis of the "reliability" of the taxpayer's records will be relevant to church treasurers in evaluating the adequacy of records submitted by church staff to substantiate a reimbursement of their business expenses by the church under an accountable plan.

Clergy—Income Taxes

The Tax Court ruled that a minister was not exempt from Social Security because his exemption application was filed too late.

Key point. Ministers may exempt themselves from paying self-employment taxes on their ministerial earnings by filing a timely exemption application with the IRS. The application must be filed by the due date of the federal tax return for the second year in which the minister has net earnings from self-employment of $400 or more, any portion of which comes from the performance of ministerial services. The performance of ministerial services may include services performed by licensed or commissioned ministers prior to their ordination.

Brannon v. Commissioner, T.C. Memo. 1999-370 (1999).

The Tax Court ruled that a minister was not exempt from social security because his exemption application was filed too late.

In order to be exempt from social security (self-employment) taxes, a minister must meet several requirements. One of these requirements is the submission of a timely exemption application (Form 4361) to the IRS. In order to be timely, the application must be filed by the due date of the federal tax return (Form 1040) for the second year in which the minister had net self-employment earnings of $400 or more, any portion of which derived from ministerial services.

The facts of the Tax Court case are easily stated. While enrolled in college, a student (John) was licensed as a "student local pastor" for the United Methodist Church (the Church) and served in a local church in 1983 and 1984. His earnings exceeded $400 each year. John thereafter attended seminary, and during this time he was licensed and served as the local pastor of a church from 1985 to 1987. In 1987, he was ordained a deacon in the Church. In 1990 he was ordained an elder. The ordained ministry of the Church consists of deacons and elders. An individual can be licensed as a local pastor even though the individual has not been ordained a deacon or elder.

In 1989, John filed an application for exemption from social security (self-employment) taxes by filing a Form 4361 with the IRS. Form 4361 asks the applicant to list the date he or she was "ordained, licensed, etc." John answered this question by inserting May 25, 1987, the date that he was ordained a deacon. Form 4361 also asks the applicant to list the first 2 years after becoming a minister that he or she had net self-employment earnings of $400 or more, any part of which came from services as a minister. John reported that 1988 and 1989 were the first 2 years after the date of his ordination in which he had "net self-employment earnings of $400 or more, any part of which came from services as a minister." Relying upon the information reported on the form, the IRS granted John's application for exemption from self-employment tax in 1990.

The IRS later audited John and determined that he was not eligible for exemption from self-employment taxes. The IRS claimed that the services John performed as a local pastor in 1983 and 1984 constituted the performance of services as a "licensed" minister, even though he was not yet an "ordained" minister. And, because he earned more than $400 from the performance of such services in those years, the IRS insisted that the application was not timely because it was not filed by the due date of petitioner's 1984 federal income tax return. John appealed the case to the Tax Court.

On appeal, John argued that his exemption application was timely because he did not perform services as a minister until he was ordained a deacon in 1987. John claimed that providing services as a licensed local pastor in previous years did not constitute the performance of services as a minister for tax purposes because the authority of a local pastor is not as extensive as the authority of an ordained deacon.

The Tax Court began its opinion with the observation that "the income earned by an individual in the performance of services as a minister of a church is subject to the tax on self-employment income unless the individual files a timely application for exemption. To be effective, the application must be timely, and the time limitations set forth in the statute are mandatory and strictly enforced." The court noted that "an application for exemption is timely only if the duly ordained, commissioned, or licensed minister files the application before the due date of the return for the second taxable year for which the minister has net earnings from self-employment of $400 or more, any part of which was derived from the performance of services in the minister's ministry."

The court concluded that John's exemption application was not filed on time, and it rejected his argument that he did not begin to perform the services of a minister until he was ordained as a deacon in 1987:

[John's] argument that the period for filing the application for exemption did not begin to run until the date of his ordination, is incorrect. The phrase "duly ordained, commissioned, or licensed minister", as used in the relevant statutory scheme, is a disjunctive phrase. The statute applies if the individual is either an ordained minister, a commissioned minister, or a licensed minister. Whether an individual performs services as an ordained, commissioned, or licensed minister depends upon the type of services performed, not just on the official title of the person performing those services. Consequently, we focus upon the services that [John] performed as a licensed local pastor during 1983 and 1984 in order to determine whether such services constituted the performance of services as a licensed minister ….

An individual acting pursuant to authority derived from his or her status as a duly ordained, commissioned, or licensed minister of a church, who in the exercise of his or her ministry: (1) Presides over the ministration of sacerdotal functions; (2) conducts religious worship; and (3) participates in the control, conduct, and maintenance of religious organizations (including the religious boards, societies, and other integral agencies of such organizations), under the authority of a religious body constituting a church or church denomination, performs services as a minister within the meaning of [the tax code].

The court then applied these criteria to John's services as a licensed local pastor, and pointed out that he was authorized by the Church to preside over the ministration of sacerdotal functions, such as baptism, communion, and marriage. John himself acknowledged that he performed these services during 1983 and 1984, but he insisted that as a local pastor he was authorized to do so only as long as his license was in effect, and only within the boundaries of his charge. The court conceded that John's authority as a licensed local pastor "was limited by the duration of his license and the designated charge to which it applied." Nevertheless, subject to those limitations, during 1983 and 1984 he conducted religious worship and presided over the ministration of sacerdotal functions and therefore "for those years acted in a manner consistent with the performance of service by a duly ordained, commissioned, or licensed minister within the meaning of [the tax code]."

John argued that a licensed local pastor is considered to be a lay person with no "voice or vote" on official matters of the Church. Consequently, during 1983 and 1984, he could not and did not "serve in the control, conduct and maintenance" of the Church. The court rejected this argument, noting that "to perform services in the control, conduct, and maintenance of the church or organizations within the church, the minister need only have some participation in the conduct, control, and maintenance of the local church or denomination." It concluded that during 1983 and 1984, as a licensed local pastor, John served "in the control, conduct, and maintenance" of his local church even though as a licensed local pastor he might not have done so with respect to the Church as the governing, national organization.

The court concluded that in 1983 and 1984, as a licensed local pastor, John performed services as a minister within the meaning of the tax code. Therefore, because for each of those years he had net earnings of at least $400 derived for the performance of services as a minister, his application for exemption from self-employment tax should have been filed prior to the due date of his 1984 federal income tax return. Because it was not, the IRS was correct in ruling that his earnings as a minister were not exempt from the self-employment tax.


Application.
This case illustrates the important point that many ministers are engaged in the performance of ministerial services, for tax purposes, prior to ordination. If they are licensed or commissioned, and perform substantially all the services of an ordained minister, they generally will be deemed to be ministers for federal tax purposes.

This has several consequences, including the following: (1) they are eligible for a housing allowance; (2) they are regarded as self-employed for social security, even though they report their income taxes as an employee; (3) their services constitute the exercise of ministry for purposes of computing the deadline for filing an application for exemption from self-employment taxes; (4) their wages are exempt from federal income tax withholding (they pay their taxes using the estimated quarterly tax procedure, unless they elect voluntary withholding). Ministers who wait until they are ordained to file an application for exemption from self-employment taxes may have waited too long. As has often been noted, such ministers may later be thankful that they were unable to obtain the exemption.

Tax Court Case Regarding Clergy Income Taxes

The Tax Court ruled that miles driven by a minister from his home to a pastoral call are commuting miles that cannot be deducted or reimbursed as a business expense.

Key point. Expenses incurred in commuting to and from work are a nondeductible personal expense. This includes expenses incurred by ministers between their home and a pastoral assignment.

The Tax Court ruled that miles driven by a minister from his home to a pastoral call are commuting miles that cannot be deducted or reimbursed as a business expense. A taxpayer performed services as a minister for approximately 6 months each year, during the winter and spring. He was not affiliated with a particular church. His ministerial activity consisted of serving as a chaplain to a mobile home community located approximately 35 miles from his home in Florida. That community consisted of people the minister referred to as "snowbirds," which he defined as people from the northern United States who came to Florida each year for the winter and spring months. The minister conducted services there twice weekly. He also taught a weekly class at a local church and occasionally preached at various churches. On his federal income tax returns for 1993 and 1994, the minister claimed deductions for the business use of his car. The IRS audited the minister, and reduced the minister's car expense deduction. The IRS claimed that the minister improperly treated miles driven from his home to pastoral responsibilities as business miles rather than as nondeductible commuting miles. The minister appealed to the Tax Court.

The Tax Court began its opinion by noting that "as a general rule, the expenses of traveling between one's home and his place of business or employment constitute commuting expenses which are nondeductible, personal expenses." The court acknowledged that a taxpayer's cost of transportation "between his residence and local job sites may be deductible if his residence serves as his principal place of business and the travel is in the nature of normal and deductible business travel." In other words, if the minister's principal place of business had been his home office, then all miles that he drove from home to any pastoral assignment would qualify as a deductible business expense. However, the court concluded that the minister did not qualify for this rule since his home office was not his principal place of business. Therefore, miles driven from his home to pastoral assignments and meetings were nondeductible personal expenses rather than deductible business expenses.


Application.
The vast majority of ministers do not qualify for a home office deduction. This case demonstrates that these ministers cannot deduct the miles they drive from their home to a pastoral call, assignment, or meeting. This includes trips from home to the hospital, an evening meeting at church, or to visit a church member. Since these trips are personal commuting rather than business-related, it is important to understand that ministers cannot claim a deduction for these miles on their tax return, and churches must not reimburse such trips under an accountable expense reimbursement arrangement.

Some ministers do have a home office that qualifies for a home office deduction. This is more likely now than in the past because of a liberalization in the law that took effect this year. Such ministers can treat any trip from their home to a pastoral call, assignment, or meeting as a business trip. But note that not every home office qualifies. It must be used regularly and exclusively as a minister's principal place of business. And, in the case of an employee, it must be "for the convenience of the employer." In general, this means that the minister does not have an office that is available at the church. Walter R. Strohmaier v. Commissioner, 113 TC 250 (1999).

Recent Developments in Federal Courts Regarding Insurance

A federal appeals court ruled that an insurance policy covered two denominational agencies that were sued as a result of the sexual misconduct of an affiliated pastor, despite the fact that the policy excluded sexual misconduct claims.

Church Law and Tax1999-07-01

Insurance

Key point. Church liability insurance policies generally cover sexual misconduct claims despite the exclusion of intentional acts, since churches ordinarily are sued in such cases as a result of their alleged negligence rather than their intentional acts.

A federal appeals court ruled that an insurance policy covered two denominational agencies that were sued as a result of the sexual misconduct of an affiliated pastor, despite the fact that the policy excluded sexual misconduct claims. This case will have a direct impact on the interpretation of church insurance policies, since it is a ruling by the second highest level of court in America. The facts of the case can be quickly stated. A learning disabled woman claimed that she had been sexual assaulted by an ordained minister on several occasions at a state school for the mentally handicapped. The minister served as a chaplain at the school. The woman sued the minister for injuries she allegedly suffered as a result of these assaults. She also sued the national denomination (the “national church”) with which the minister was affiliated, and a regional denominational agency (the “regional church”). She claimed that the national and regional churches had been negligent in training, supervising, placing, and monitoring the chaplain, who eventually was indicted for alleged sexual contact with three mentally handicapped individuals. The chaplain was never an agent or employee of the national or regional churches, but graduated from a seminary affiliated with the national church and was listed in the national church’s “clergy roster” as a retired pastor.

The national church had an insurance policy containing both comprehensive general liability and “umbrella” liability provisions. The comprehensive general liability provision provided nationwide coverage for the national church. The umbrella liability provision covered the national church and about 40 regional churches. Both the comprehensive general liability and umbrella liability provisions obligated the insurance company to pay “damages because of bodily injury or property damage to which this insurance applies,” but the policies explicitly require that “the bodily injury or property damage must be caused by an occurrence.” An “occurrence” is defined as “an accident, including continuous or repeated exposure to substantially the same general conditions.” Both policies excluded “bodily injury or property damage expected or intended from the standpoint of the insured.”

The insurance company asked a federal district court to dismiss the case on the ground that the chaplain’s conduct had been “intended” and therefore was excluded from any coverage under the terms of the policy. The district court declined to do so, and ruled that the policies did provide coverage for the national and regional churches. The insurance company appealed.

The federal appeals court began its opinion by noting that the policy provisions quoted above did not arise by accident:

[I]t was confusion about what is an accident that spurred the definitional changes leading to the current form of the exclusions. Before 1966, comprehensive general liability policies generally referred simply to an accident, but continued litigation and uncertainty over this term led to the substitution of the word occurrence. In 1972, after complaints that this definition was too restrictive, the definition of occurrence was changed to an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured. The policies here essentially track this definition ….

The court observed that “the language of the exclusions … is still vague enough to allow for generous amounts of litigation.” However, it concluded that under Illinois law (that law applicable to this case) it was clear that the victim’s allegations of negligent hiring fell within the definition of “occurrence.” It added that “if a complaint potentially supports a ground for recovery, the insurer must defend the entire complaint.” The court, in rejecting the insurance company’s argument that the exclusion of intentional acts precluded coverage, observed: “Here, negligent training was not an intentional tort, and [the chaplain’s] acts are not the insureds’ intentional acts. Thus, the insurance policy did not exclude the acts, and [the insurer] has a duty to defend.”

The insurance company also pointed out that the policies in question provided for coverage attributable to “any negligent act, error and omission of the insured arising out of the performance of professional services for others in the insured’s capacity as a pastoral counselor.” This coverage, however, did not apply to “licentious, immoral or sexual behavior intended to lead to or culminating in any sexual act.” The insurance company insisted that this exclusion applied in this case. Once again, the court disagreed, noting that even if the chaplain had been acting as a pastoral counselor “the insureds were not, since [he] was not working for them at the time.”

Application. This case is significant for a number of reasons, including the following:

(1) The case represents an opinion by a federal appeals court, and so it will be given great deference by other courts.

(2) The court concluded that sexual assaults committed by clergy represent a covered “occurrence” under a general liability insurance policy.

(3) The court concluded that the “intentional misconduct” exclusion under a church’s insurance policy does not apply to lawsuits brought against the church as a result of a minister’s acts of sexual misconduct. While the minister behaved intentionally, the church did not, and so the exclusion was not triggered. This is great news for churches. Churches generally cannot engage in “intentional” acts, and so the exclusion for such acts should not apply. The court specifically ruled that negligent training is not an intentional tort, and that a minister’s acts “are not the insureds’ intentional acts.”

(4) The court ruled that the policies in question covered the national and regional churches despite an exclusion for “licentious, immoral or sexual behavior intended to lead to or culminating in any sexual act” in the course of pastoral counseling. The court correctly pointed out that even if the chaplain had been acting as a pastoral counselor “the insureds were not.”

(5) Even if your insurance policy covers claims of negligent selection or supervision brought against the church as a result of the sexual misconduct of a church worker, you need to remember that the coverage may be limited. Read your policy carefully to determine any coverage limits. If you have any questions, discuss them with your insurance agent. Evangelical Lutheran Church in America v. Atlantic Mutual Insurance Company, 169 F.3d 947 (5th Cir. 1999). [Negligence as a Basis for Liability, Denominational Liability]

Recent Developments Regarding an IRS Ruling on Clergy Income Tax

The IRS ruled that three “ordained deacons” in a Methodist church, who served as the ministers of education, music, and stewardship, were “ministers” for federal tax purposes.

Key point. Persons who (1) are ordained, commissioned or licensed; (2) perform sacerdotal functions; (3) conduct worship; (4) are engaged in the "control, conduct, and maintenance of religious organizations"; and (5) who are considered to be religious leaders by their church, qualify as ministers for federal tax purposes.

The IRS ruled that three "ordained deacons" in a Methodist church, who served as the ministers of education, music, and stewardship, were "ministers" for federal tax purposes. After twenty years of study, the Church voted to establish the status of ordained deacon. Prior to this decision, elders were the only ordained members of the clergy. The Church defines ordination as the act of conferring ministerial orders. In accordance with Church traditions, an ordained minister is a baptized person who is called by God, authorized by the Church and ordained by a bishop to a lifetime ministry. To qualify for ordination as either a deacon or an elder, an individual must meet the requirements set by the Church that are specified in its governing document. In addition, to be ordained, the individual must be recommended by the regional Conference and receive the affirmative vote of the ministerial members of the Conference. Through ordination the ordained individual is given the approval of the Church to serve as an ordained minister and the authority to carry out those acts reserved to members of the clergy. As a result, following ordination, an ordained elder or deacon has the authority to exercise the responsibilities and duties of an ordained minister.

Duties of Ordained Deacons

According to the Church's governing document, an ordained deacon is permitted to give leadership in teaching and proclaiming the gospel, forming and nurturing disciples, performing marriages and funerals, and assisting the ordained elder in administering the sacraments. An ordained deacon has full right of voice and vote in the regional Conference where membership is held, may serve or hold office as a member of the clergy on the boards, commissions or committees of the Conference, may be elected as a clergy delegate to the national Conference, must attend all sessions of the regional Conference, and with the elder is responsible for all matters of ordination, character and Conference relations with members of the clergy. An ordained deacon is accountable to his or her regional Conference and bishop for the fulfillment of his or her call. An ordained elder is appointed to a position by a bishop. However, unlike an elder, an ordained deacon does not itinerate, nor does the Church guarantee an ordained deacon a position, salary, or place of employment. Ordained deacons are permitted to participate in the Church retirement plan for members of the clergy.

Diaconal Ministers

When it established the status of ordained deacons, the national Conference amended its governing document to include transitional rules that would allow certain "diaconal ministers" to become ordained deacons. A diaconal minister is a lay person who was consecrated by a bishop, but who the Church does not treat or consider as a member of the clergy. The Church expects that some, but not all of its diaconal ministers will become ordained deacons. The transitional rules are available for a limited period and provide that a diaconal minister in good standing with his or her regional Conference who has completed a minimum of three years in an approved service appointment may be ordained as a deacon provided he or she meets the following requirements: (1) apply in writing to the regional Conference for transfer of credentials to ordained deacon in full connection; (2) complete a prescribed education program; (3) demonstrate an understanding of the call to the order of deacon and a ministry that fulfills and exemplifies the definition and description of deacon found in the Church's governing document; and (4) receive a two-thirds positive vote of the clergy session of the regional Conference.

The Ruling Request

A Methodist church employs more than fifty employees, including three ordained deacons. The church asked the IRS whether these three ordained deacons are ministers of the gospel performing services in the exercise of their ministry for purposes of eligibility for a housing allowance, self-employed status for social security, and exemption from income tax withholding. The ordained deacons served in the following three positions in the church:

(1) Minister of education. This person plans and supervises youth, adult, and family activities, including Sunday education classes, Bible study, and various educational programs sponsored by the church; selects the educational curriculum; schedules activities; and, when needed, coordinates lay volunteers. One of the ordained deacons is the church's minister of music.

(2) Minister of music. This person coordinates all choir and music activities of the church.

(3) Minister of stewardship. This person performs financial and managerial functions. His primary function is to encourage members of the congregation to give their time, talent, and money to the church and community.

As integral members of the church's pastoral team, the three ordained deacons meet with the church's elder to plan the worship services, assist with the sacraments, and officiate at weddings and funerals. Each is required to preach at Sunday worship service. They participate with the elder in the weekly worship service. They also perform various other duties at the church, including confirmation preparation and membership reception.

Each of the three ordained deacons had been in good standing as a diaconal minister and had completed at least three years in a service appointment approved by the bishop since consecration as a diaconal minister. Each completed the continuing education program sponsored by the Conference and satisfied the applicable educational requirements. The ministers of education and music have bachelors degrees and have completed graduate theological courses as required by the Conference. The minister of stewardship has a masters degree in theology studies. Each demonstrated an understanding of the call to the order of deacon and received the full support of the regional Conference's ordained clergy.

The IRS Ruling

The IRS ruling is summarized below:

(1) Ministers of the gospel. The IRS ruled that the three ordained deacons were ministers of the gospel performing services in the exercise of their ministries. It observed:

As ordained members of the clergy in the Church [they] conduct worship and assist with the sacraments. In addition, as ordained members of the clergy in full connection they perform services in the control, conduct and maintenance of the Church. Further, [the local church and national church] consider [them] to be religious leaders who can perform substantially all of the religious functions within the scope of the Church's tenets and practices …. Accordingly [they] are performing services as "ministers of the gospel" within the meaning of section 107 of the Code. Thus, [they] are eligible to have a portion of their salary designated as a parsonage allowance. Any parsonage allowance will be excluded from gross income, provided the allowance is designated and paid in accordance with section 107. We further conclude that the services [they] perform are in the exercise of their ministry within the meaning of section 3121(b)(8) of the Code [which treats ministers as self-employed for social security purposes].

(2) The Wingo case applied. Unfortunately, the IRS applied the Tax Court's discredited ruling in Wingo v. Commissioner, 89 T.C. 922 (1989) in support of its conclusions. In the Wingo case the Tax Court defined the term minister as follows:

In determining whether [one] is a minister, we must look at whether he performed the duties and functions of a minister within the three types of services set out in the regulations [performance of sacerdotal functions and religious worship, and the "control, conduct, and maintenance of religious organizations" under the authority of a church or church denomination]. In making that determination, we will also consider the additional factors as to whether he was ordained, or commissioned, or licensed, and whether [his church] considered him to be a religious leader.

This language, along with other statements in the court's opinion, clearly indicates that to be a minister for tax purposes one must satisfy all three types of religious services mentioned in the regulations. To illustrate, the court noted that "the regulations … describe three types of services that a minister in the exercise of his ministry performs," and that "when a person performs all three types of services set forth in the regulations, and is recognized as a minister or religious leader by his denomination, that person is a minister …."

The Wingo case was disturbing for two reasons. First, it was contrary to the specific wording of the regulations, which provide that "if a minister is performing service in the conduct of religious worship or the ministration of sacerdotal functions, such service is in the exercise of his ministry whether or not it is performed for a religious organization." This language certainly recognizes that not all three types of services are essential. The Wingo case was also disturbing because it implied that only those clergy who work for churches or church-controlled organizations were eligible for the housing allowance and other special tax provisions since only such clergy satisfied the third type of service mentioned in the regulations (the control, conduct, and maintenance of a religious organization "under the authority of a religious body constituting a church or church denomination"). This was clearly contrary to the regulations, which specifically recognize that "if a minister is performing service in the conduct of religious worship or the ministration of sacerdotal functions, such service is in the exercise of his ministry whether or not it is performed for a religious organization."

The overly strict analysis in the Wingo case was rejected a few years later by the Tax Court in Knight v. Commissioner, 92 T.C. 199 (1989). In the Knight case, the court concluded that a person need not satisfy all three requirements of the regulations to qualify as a minister for federal income tax purposes. At a minimum, one must be ordained, commissioned or licensed. But then a "balancing" of the other elements noted in the Wingo case is performed. This more flexible approach was adopted by the IRS in its audit guidelines for ministers, which were released in 1995. It is unfortunate that the IRS relied on the discredited Wingo case in reaching its conclusion regarding the status of the ordained deacons.

(3) The Haimowitz case distinguished. In Haimowitz v. Commissioner, T.C.M. 1997-40, the Tax Court concluded that a synagogue administrator was not a minister of the gospel for purposes of qualifying for a housing allowance. He had been employed by a temple for 30 years and was recognized as a Fellow in Synagogue Administration. He performed various services for the temple, including assisting students with Bar and Bat Mitzvah preparation, serving as marriage ceremony director, and conducting services for mourners. On his income tax return he specified that he was a religious functionary and asserted that as a religious functionary he was a minister of the gospel. The Tax Court concluded that the duties he performed, although related to the Jewish religion, were organizational in nature and did not require performance from one with ministerial credentials. The court then noted the religious rites and ceremonies he did not perform. He never fulfilled the role of rabbi or cantor, and the services he did perform were secular in nature. For example, he never officiated at a wedding or a funeral, and he merely assisted the rabbi at religious services. As a result, the court concluded he did not perform regularly those duties that the ministers of the Jewish faith customarily perform. In addition, the court found taxpayer's recognition as a Fellow in Synagogue Administration was irrelevant, as that designation is not a recognized religious official of the Jewish religion. The court also noted that taxpayer did not present any evidence that the temple considered him to be a religious leader. Accordingly, the court concluded that taxpayer failed to demonstrate that he was a minister of the gospel.

The IRS noted that the ordained deacon who served as a minister of stewardship was distinguishable from the synagogue administrator in Haimowitz, since he "is an ordained member of the clergy in full connection … officiates at weddings and funerals and will regularly perform the duties that members of the clergy of the Church customarily perform."

(4) Ministers of music and education holding no ministerial credentials. The IRS cautioned that "nor does this ruling suggest that the Service has departed from its position in Revenue Ruling 59-270." In Revenue Ruling 59-270 (1959), the IRS ruled that a church's minister of music and minister of education who performed some of the duties of a minister of the gospel could not be treated as ministers for federal tax purposes since neither was ordained, commissioned, or licensed as a minister of the gospel. In other words, ministers of music and education who hold no ministerial credentials should not assume, based on the recent IRS ruling, that they now qualify for a housing allowance.

(5) Legal value of a private ruling. The IRS ruling was a private letter ruling. Such a ruling applies only to the individuals involved. In fact, the IRS declined the church's request that it rule that all ordained deacons employed by the church in the future can be treated as ministers for federal tax purposes. The IRS advised the church that it would not issue a ruling that all of its ordained deacons were ministers "without examining the facts relating to each individual minister." As a result, ordained deacons serving in Methodist churches should not assume that they qualify as ministers for federal tax purposes as a result of this ruling. IRS Letter Ruling 199910055. [Who is a minister for Tax Purposes]

Rental of Church Property

Are churches’ tax exemptions affected by lessees’ debts on rented property?

Background

Many churches rent a portion of their property to outside groups. Is rental income generated by such arrangements subject to the unrelated business income tax (UBIT)? We have addressed this question in a number of articles in this newsletter. In general, rental income received by a church is not subject to UBIT so long as the property that is rented is not subject to any indebtedness. A recent IRS ruling addresses a unique question—what if a charity rents property that it owns debt-free to another organization that incurs debt in developing the property? Does the debt incurred by the lessee affect the charity's exemption from UBIT?

Facts of the case

A charity acquired property consisting of land and a building, and later acquired additional land adjacent to the building. All the property was acquired for cash and none of the property was ever subject to debt. The charity decided to "develop" the property through a lease arrangement to protect its investment, maximize its rate of return, and ensure that office space on the property would be up to market standards. In 1996, it entered into negotiations with another organization for a 97-year lease that would allow the lessee to develop the property, constructing a multi-story office tower and cinema. The charity and lessee proposed to sign a lease agreement calling for the lessee to pay the charity "base monthly rent" plus "additional" rent payments based on the greater of a fixed amount or a percentage of gross receipts received by the lessee.

The charity owns the property, and the property is not currently subject to debt. Further, the charity has no plans to incur indebtedness in connection with the construction of the improvements by the lessee. On the contrary, all financing for the project will be secured by the building to be constructed by the lessee. In the event that the lessee defaults on the construction or permanent loan, the lease provides that the charity has certain rights and remedies to preserve its interest in the land, and that among these rights is the right to be indemnified against loss of the land through foreclosure.

The charity asked the IRS if rental income generated by the lease would generate taxable unrelated business income.

What the IRS said

The IRS began its ruling by noting that the tax code excludes "rents" from the definition of unrelated business taxable income. This exemption does not apply, however, "if the determination of the amount of rent depends in whole or in part on the income or profits derived by any person from the property leased (other than an amount based on a fixed percentage or percentages of receipts or sales)." Further, the exemption of rental income for the definition of unrelated business taxable income does not apply to rental income derived from debt-financed property.

The IRS noted that rental income payable under the lease in question are fixed amounts "and will not be related to income or profits derived from the property." All of the payments "will be therefore classified as rents from real property within the meaning of the regulations." The IRS continued:

Because none of the property was subject to debt, and because [the charity] has taken all steps to ensure that it is not obligated in any manner on the debt incurred by [the lessee], the subsequent financing by [the lessee] of improvements to the property do not cause property owned by [the charity] to be debt-financed …."

Relevance to church treasurers

This ruling illustrates a number of important points:

  • General rule. Rental income received by a church is exempt from the tax on unrelated business income.
  • Rents based on lessee's profits. The tax code specifies that the exemption of rental income from the unrelated business income tax does not apply if the rental income is determined in whole or in part based upon the income or profits derived by the lessee from the leased property—other than an amount based upon a fixed percentage of the gross receipts or sales. If you rent property, and rental income is based on the lessee's income or profits, have your lease agreement reviewed by a tax attorney or CPA to be sure that you do not inadvertently trigger the unrelated business income tax.
  • Debt-financed property. The exemption of rental income from the definition of unrelated business taxable income does not apply to the extent that the leased property is subject to an "acquisition indebtedness." However, this ruling illustrates that a church that rents debt-free property to another organization will not lose the exemption of rental income from UBIT because the lessee incurs debt in developing the property. However, the IRS stressed that the charity took steps, in the lease agreement, "to ensure that it is not obligated in any manner on the debt incurred by [the lessee]." This is an important point. If your church leases property to another organization that will develop the property, and it will incur debt doing so, then you should have a tax attorney draft your lease to be sure that you will not be obligated in any way for the lessee's debts. IRS Letter Ruling 9845020.


Tip. Even if the property your church rents is debt-financed, the rental income may be exempt from UBIT on the basis of other exceptions.

Recent Developments by a Federal Appeals Court Regarding Confidential and Privileged Communications

A federal appeals court ruled that a prosecutor violated the legal rights of a priest by secretly tape recording a penitential conversation between the priest and an inmate at a county jail.

Church Law and Tax1999-05-01

Confidential and Privileged Communications

Key point. Confidential communications made by a person to a minister, while acting in a professional capacity as a spiritual adviser, are protected from disclosure in court by the clergy-penitent privilege.

Key point. Persons or organizations that are adversely affected by government actions that violate a civil right protected by the Constitution or a federal statute are entitled to recover money damages from the government under Title 42, section 1983, of the United States Code.

A federal appeals court ruled that a prosecutor violated the legal rights of a priest by secretly tape recording a penitential conversation between the priest and an inmate at a county jail. A Catholic priest occasionally administered the sacrament of penance to inmates of a local county jail. On one occasion, he met with an inmate who was a suspect in the murder of three young persons. Unknown to the priest, his conversation with the inmate was being secretly recorded by the prosecuting attorney’s office. The tape recording soon became known to the press and public. Representatives of the archdiocese met with the prosecutor to request the tape’s destruction and a guarantee of no further taping of sacramental confession in the jail. The prosecutor asked a court to retain and seal the tape and to prohibit anyone who knew its contents from divulging them without further order of the court. The priest, and an archbishop, filed a petition in a local court seeking the destruction of the tape and an order as to the secrecy of the tape’s contents. They asserted that the taping and its preservation violated both the federal and the state constitutions and federal and state statutes. They supported their claim with an affidavit as to the sacrament of penance in Catholic belief, and by the priest’s own affidavit, in which he stated that as long as the tape remained in existence he would “feel uncomfortable in administering the sacrament of penance” in the jail. The court rejected this petition, and the priest and archbishop immediately brought a lawsuit in federal court claiming that the secret recording (and retention of the tape) violated the first amendment guaranty of religious freedom, the fourth amendment protection against unreasonable searches and seizures, the Religious Freedom Restoration Act (RFRA), and the federal Wiretapping Act. They sought an order destroying the tape and transcript, and prohibiting publication of its contents; and an injunction prohibiting the prosecutor from future interception and taping of the sacrament of penance “and similar religious communications” at the jail. The prosecutor rejected the claims of the priest and archbishop, and asserted that “law enforcement officers in the ordinary course of their duties intercepted the conversation between [the priest] and defendant.” The inmate objected to the proposed destruction of the tape as impairing his defense to the capital charge of murder. The court acknowledged that the priest and archbishop were “justifiably outraged” by the prosecutor’s actions. It added that “there are some things which are legal and ethical but are simply not right. I have concluded that tape recording confidential clergy-penitent communications falls within the zone of societally unacceptable conduct.” Nonetheless, the court refused to order the tape and transcript destroyed. The priest and archbishop appealed.

A federal appeals court ruled that the prosecutor’s act of secretly taping a confidential communication between the inmate and priest violated the federal Religious Freedom Restoration Act and the fourth amendment prohibition against unreasonable searches and seizures. The court observed:

[The priest] had two bases for a reasonable expectation of privacy in his encounter with [the inmate]: First, [the state clergy-penitent privilege] provides that “[a] member of the clergy shall not, without the consent of the person making the communication, be examined as to any confidential communication made to the member of the clergy in the member’s professional character.” As [the priest] could not be examined directly in court on a confession it was reasonable for him to suppose that the prohibition of [the privilege] could not be easily circumvented by the prosecutor taping a confession made to him. Secondly, the history of the nation has shown a uniform respect for the character of sacramental confession as inviolable by government agents interested in securing evidence of crime from the lips of criminal …. All fifty states have enacted statutes granting some form of testimonial privilege to clergy-communicant communications. Neither scholars nor courts question the legitimacy of the privilege, and attorneys rarely litigate the issue. It would be strange if a privilege so generally recognized could be readily subverted by the governmental recording of the privileged communication and the introduction of the recording into evidence.

If the inviolability of religious confession to the clergy were not the law of the land, the expectation of every repentant sinner, and the assured confidence of every minister of God’s grace, a prosecutor would have a cheap and sometimes helpful way of uncovering evidence of crime by obtaining a court order … to wire a church known to be frequented, say, by families or other persons believed to be associated with a criminal organization. On [the prosecutor’s] reasoning such bugging would be lawful because authorized by a judge in accordance with statute and not unlawful because contrary to the reasonable expectations of the participants. Such a fear does not exist because no one expects any prosecutor to engage in such a strategy. The prosecutor has cited no case in the United States in which a court has given approval to the invasion of the Catholic rite of confession by an agency of government. Our own research has discovered none …. Hard as a negative is to prove, it must be concluded that no evidence has been offered that would have led a priest … to expect that his participation in the sacrament of penance would be bugged. He was reasonable in relying on the [state clergy-penitent privilege] and the nation’s history of respect for religion in general and respect for the sanctity of the secrets of confession in particular, and so had a reasonable expectation of privacy.

The court acknowledged that the inmate knew that his meetings with visitors were recorded and he often would make gestures to visitors to warn them not to speak about matters that he did not want disclosed. In fact, the substance of his conversation with the priest was highly suggestive that he knew he was being recorded. He admitted to burglaries that he had already confessed to the police, and he insisted that he had not committed the murders. The court concluded that the inmate was “using” his conversation with the priest as a means of communicating false information that he knew was being recorded. But, the fact that the inmate had no reasonable expectation of confidentiality did not diminish the priest’s expectation: “It is neither logically nor factually impossible for one party to a communication to have an expectation of privacy and the other not to have one. [The inmate’s] expectation does not destroy [the priest’s]. But it does affect the remedy. There is no reason to protect [the inmate’s] confession from publication when he desires it. There is reason to protect [the priest’s] expectation of privacy in hearing confessions.”

The court concluded that the priest and archbishop were entitled to money damages as a result of the prosecutor’s violation of their rights under the Religious Freedom Restoration Act and the fourth amendment. Title 42, section 1983 of the United States Code provides redress for the deprivation of any right “secured by the Constitution and laws” of the United States. The court also ordered the district court to issue an injunction prohibiting the prosecutor “from further violation of RFRA and the fourth amendment by assisting, participating in or using any recording of a confidential communications from inmates of the [county jail] to any member of the clergy in the member’s professional character.”

Application. This case is important for two reasons. First, it illustrates that clergy who counsel with inmates in jails are entitled to an expectation of privacy. Any attempt by the government to tape record such conversations violates the clergy-penitent privilege, the fourth amendment, and possibly the Religious Freedom Restoration Act. Clergy who are aggrieved by such a practice may have the right to recover money damages (including, at a minimum, legal fees incurred in defending their rights). Many clergy engage in counseling in jails. This may be part of a regular prison ministry, or because a member of the church is charged with a crime and wants to talk with his or her pastor. This case will provide helpful insights to such ministers if they should learn that one of their prison conversations has been secretly tape recorded. Second, the case demonstrates that the clergy-penitent privilege is not affected by the fact that an inmate knows or suspects that a conversation with a minister is being tape recorded. The minister still has a legitimate expectation of confidentiality. Mockaitis v. Harcleroad, 104 F.3d 1522 (9th Cir. 1997). [The Clergy-Penitent Privilege ]

Recent Developments by a Federal Appeals Court Regarding Insurance for Termination-Related Lawsuits

A federal appeals court ruled that a church’s insurance policy did not cover lawsuits arising from the employment relationship.

Church Law and Tax1999-05-01

Insurance

Key point. Church insurance policies often exclude employment-related claims. This represents a significant risk exposure. It means that churches must retain and compensate their own attorney if sued because of an employment-related claim, and they are responsible for paying any jury verdict or settlement. Employment-related claims include wrongful dismissal and various forms of discrimination under federal and state law.

A federal appeals court ruled that a church’s insurance policy did not cover lawsuits arising from the employment relationship. A pastor dismissed his church’s music director. The music director sued the pastor, church, and state denominational agency, claiming that she had been dismissed because she suffered from post-traumatic stress disorder and multiple personality disorder. She insisted that her dismissal amounted to unlawful discrimination based on disability. She also claimed that the pastor had defamed her, and invaded her privacy. The lawsuit alleged that the pastor made several defamatory statements, including the following: (1) she “is very sick and disturbed and needs to be under intense medical treatment”; (2) he had consulted with a psychiatrist who advised him that children should be protected from the music director; (3) after consulting with the psychiatrist he no longer could trust the music director and was afraid to leave her alone with the children; (4) if others learned more about multiple personality disorder they would understand why he had to fire her. The church’s insurance carrier insisted that the church’s insurance policy did not cover the woman’s claims, and it refused to provide the church with a legal defense or to pay any portion of a jury verdict or settlement. A federal district court agreed with the insurance company, and the church appealed.

A federal appeals court agreed that the insurance policy did not cover the woman’s claims. It noted that the policy indemnifies the church for damages resulting from “personal injury,” including injury from defamation. The policy further obligates the company to defend the church in any suit seeking damages covered by the policy. However, the policy excludes from coverage “personal injury sustained by any person as a result of an offense directly or indirectly related to the employment of such person by the named insured.” The court noted that the key question was whether the woman’s lawsuit was for “personal injury” sustained “as a result of an offense directly or indirectly related to her employment” by the church. If it was, then the exclusion applied, and the company had no duty to defend the church against the lawsuit. The court concluded that

defamatory statements providing an explanation for termination or directed to performance are related to employment. Alleged offenses occurring as part and parcel of an allegedly wrongful termination are plainly related to employment. Post-employment defamations can be directly or indirectly related to employment, and thus can fall within an exclusion of the sort at issue here. The statements to which [the lawsuit] refers are comments as to [the woman’s] abilities and job performance. They are explanations as to why [the pastor] terminated [her] employment.

To illustrate, the lawsuit asserted that the woman’s duties included leading the children’s choir, and that the pastor stated that it was not safe for her to be around children. Further, the lawsuit claimed that this was a basis for the decision to dismiss her. The court also found that the alleged statement referring to her as “very sick and disturbed” and “in need of intense medical treatment” also “related to the woman’s ability to perform her job and provides an explanation for the termination of her employment.” The court concluded: “Because the allegations in the complaint contain statements directed to [the music director’s] abilities and job performance and are explanations as to why her employment was terminated, we conclude the offenses are, at the least, indirectly related to [her] employment, if not directly related. In either case, the exclusion applies, and the company has no duty to defend.”

Application. This case illustrates a very important point with which every church leader should be familiar-church insurance policies often contain an exclusion for employment related claims, even if those claims allege personal injuries. With employment-related legal claims becoming more and more common, such an exclusion constitutes a significant risk exposure. If your church has employees, then you should take the following steps: (1) Check your general liability policy to see if employment-related claims are excluded. (2) It they are excluded, talk with your insurance agent about the availability of a separate endorsement covering such claims. (3) Do not take any adverse employment action against an employee or job applicant without first consulting with an attorney. The Parish of Christ Church v. The Church Insurance Company, 166 F.3d 419 (1st Cir. 1999). [Termination of Employees, Negligence as a Basis for Liability].

Related Topics:

Recent Developments by a Federal Appeals Court Regarding Insurance

A federal appeals court ruled that a church insurance policy provided coverage for alleged acts of child molestation.

Church Law and Tax1999-05-01

Insurance

Key point. Church liability policies often deny coverage for intentional or criminal acts. However, such an exclusion generally will not affect the church’s coverage when it is sued on the basis of negligence by a victim of an intentional or criminal act by a church worker.

A federal appeals court ruled that a church insurance policy provided coverage for alleged acts of child molestation. An adult male (the “victim”) sued a Catholic diocese, claiming that he had been “regularly and repeatedly sexually molested” by a priest. The acts of molestation allegedly began in 1976 when the victim was six years old, and ended in 1989 shortly before the priest’s death. The victim asserted that the diocese “knew or should reasonably have known of the priest’s dangerous and exploitive propensities as a child sexual abuser.” Despite such knowledge, the diocese negligently employed and failed to supervise the priest properly, and failed to provide adequate warning to the victim and his family. The church had a number of insurance policies in effect from 1976 to 1989. The victim eventually entered into an out-of-court settlement with the diocese and two insurance companies. One insurer, that provided insurance from 1980 through 1984, did not participate in the settlement. A question arose as to the victim’s legal right to seek recovery for his damages under this insurer’s policy. The policy in question was a comprehensive general liability insurance policy. It contained a “bodily injury liability” section specifying that the insurance company would “pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies, caused by an occurrence.”

In the definitions section of the policy, “occurrence” was defined as “an accident, including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured.” In addition, the policy provided that “[t]he insurance afforded applies separately to each insured against whom claim is made or suit is brought, except with respect to the limits of the company’s liability.”

The insurance company insisted that this policy did not provide coverage, because the victim’s alleged injuries were not caused by an “occurrence,” as that term was defined in the policy. A federal district court agreed. It acknowledged that the victim’s injuries constituted “bodily injury” under the terms of the policy, but it concluded that under Minnesota law “the intentional acts of [the priest], not the negligence of the diocese,” resulted in the victim’s injuries, and so an “accident” had not caused the victim’s injuries as required by the policy’s definition of “occurrence.”

The victim appealed, and a federal appeals court reversed the district court’s ruling. The appeals court relied on an earlier decision by a Minnesota appeals court. Mork Clinic v. Fireman’s Fund Ins. Co., 575 N.W.2d 598 (Minn.App.1998). In the Mork case, a physician was accused of having sexually abused several patients during medical examinations. The patients sued the physician, his clinic, and the clinic’s insurer. The insurer participated in settlement agreements with two of the patients, and then refused to defend or indemnify the clinic. The clinic, which had been sued for negligent hiring and supervision, asked a trial court to determine the insurer’s responsibility to pay claims relating to the physician’s misconduct under the terms of the policy. The court ruled that the policy did cover the physician’s acts, and the insurer appealed. It noted that the policy provided coverage for claims of bodily injuries “caused by” an “occurrence,” which was defined as “an accident, including continuous or harmful repeated exposure to substantially the same harmful condition.” The insurer insisted that the injuries sustained by the patients were caused by the physician’s intentional sexual abuse, which, it claimed, was not a covered “accident” or “occurrence.” In rejecting this position, the court concluded that “the immediate cause of the victims’ injuries is not the only cause, and that the victims had a legitimate cause of action against the employer if they could establish, as they claimed, that [the clinic] was negligent in the hiring, supervision, or retention of their employee.” The court also pointed out that “[t]he injuries would not have occurred if [the clinic] had not hired the employee and offered him as its agent to provide professional medical services to the victims.”

The federal appeals court agreed with this analysis, and concluded that under Minnesota law the diocese was entitled to indemnification under the insurance policy in question.

Application. This case provides church leaders with important information regarding church liability insurance policies. Consider the following: (1) Church liability insurance policies generally cover bodily injury claims, subject to policy limits and exclusions. (2) Only those bodily injury claims caused by an “occurrence” are covered under the typical church liability insurance policy. An occurrence generally is defined to exclude intentional or criminal acts. Even if there is no specific exclusion, this type of coverage may be legally precluded on the ground that it would violate public policy. (3) Since acts of sexual misconduct are by nature intentional, and often criminal, the offender often is not covered by a church’s liability insurance policy. There are exceptions to this rule. Some policies cover the alleged offender under certain conditions (for example, if he or she is found innocent of criminal wrongdoing). (4) As the court pointed out in this case, the “immediate cause” of a sexual misconduct victim’s injuries is the misconduct of the perpetrator. However, this is not the only cause. The church often is sued on the basis of its own negligence in the selection, supervision, or retention of the offender. These theories of liability generally do not involve intentional misconduct, and so they will constitute an “occurrence” under the church’s liability insurance policy. This means that the insurer will be obligated under the policy to provide the church with a legal defense and pay any judgment against the church up to the policy limits. (5) The diocese was able to produce insurance policies for many of the years from 1976 though 1989. It is absolutely essential for church leaders to retain their liability insurance contracts, since these are the documents that will demonstrate an insurer’s obligation to defend and indemnify the church. Insurance contracts should be retained permanently, since victims of sexual (and other) misconduct or negligence may be able to sue the church many years after their alleged injuries. American Employers Insurance Co. v. Doe 38, 165 F.3d 1209 (8th Cir. 1999). [Seduction of Counselees and Church Members, Negligence as a Basis for Liability]

Recent Developments in Federal Appeals Court Regarding Insurance

A federal appeals court ruled that a church insurance policy did not provide for a legal defense of a minister who engaged in sexual relations with two members of his congregation.

Church Law and Tax1998-11-01

Insurance

Key point. Church insurance policies may not provide coverage for clergy or laypersons who engage in sexual misconduct

A federal appeals court ruled that a church insurance policy did not provide for a legal defense of a minister who engaged in sexual relations with two members of his congregation. The minister served a congregation in Missouri from 1986 to 1994. Two women sued the minister, claiming that he engaged in sexual misconduct with them over a span of years. The women alleged that the minister used his position as a minister and pastoral counselor to induce them into having sexual relations with him. They asserted that such behavior violated a “fiduciary duty” he owed them, and caused them emotional distress. The minister sued the church’s insurance company after it refused to pay for his legal defense.

The church’s comprehensive general liability policy provides for the following coverage:

The company will pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of personal injury or property damage to which this insurance applies, caused by an occurrence, and the company shall have the right and duty to defend any suit against the insured seeking damages on account of such personal injury or property damage, even if any of the allegations of the suit are groundless, false or fraudulent ….

“Insured” is defined in the policy as “any person or organization named as an insured, also the following additional insureds … any clergyman, employee, vestryman, warden, member of the board of governors, executive officer, director or trustee of the organization while acting within the scope of his duties as such.”

The policy also provides additional coverage for pastoral counseling liability under a provision defining “personal injury” to include “acts, errors or omissions of ordained clergy, acting within the scope of their duties as employees of the named insured and arising out of the pastoral counseling activities of these individuals.”

A federal district court concluded that the minister was not an insured under the policy because the allegations in the underlying action involved acts committed outside the scope of his employment. The minister appealed, arguing that he was entitled to a defense under the policy since the women’s allegations arose out of his duties as a pastoral counselor. He pointed out that allegations of sexual contact that arise from such counseling are not unforeseeable and are therefore covered by the pastoral counseling liability provision. A federal appeals court disagreed, and ruled that the church’s insurance policy did not cover the minister’s actions. It observed:

In this case, the policy provides coverage for “acts, errors or omissions of ordained clergy, acting within the scope of their duties as employees of the named insured and arising out of the pastoral counseling activities of these individuals.” Thus, to determine whether [the minister] is an insured under the policy, we must find not only that the allegations arise out of pastoral counseling but that [he] was also acting within his duties as an employee of the [church] when he engaged in the sexual misconduct alleged in the complaint. If we were to accept [his] interpretation of the pastoral counseling liability provision, that we need only determine whether the allegations arise out of pastoral counseling, the clause “acting within the scope of their duties as employees of the named insured” would be rendered meaningless. On the other hand, construing the pastoral counseling liability provision to require the determination of whether [he] was acting within the scope of his duties when he allegedly engaged in sexual misconduct with the plaintiffs in the underlying action gives the provision meaning.

The critical question, the court concluded, was whether or not the minister was acting within the scope of his employment when he engaged in sexual relations with the two women. The court concluded that “in applying the tests for agency/respondeat superior liability, the Missouri courts have held that a priest does not act in furtherance of the business or interests of his employer when he engages in sexual misconduct with parishioners.” Further, the court noted that Missouri courts have ruled that “sexual relations arising out of a counseling relationship do not fall with the scope and course of the counselor’s employment,” and so the minister’s “alleged sexual misconduct falls neither within the scope of his duties as a priest nor as a pastoral counselor.” As a result, the minister was not entitled to a defense under the policy “as the alleged acts of sexual misconduct do not fall within the scope of his employment.”

Application. This case addresses an important concern. Unfortunately, a number of clergy and lay workers have engaged in sexual contact with adults and minors. In some cases, the “victim” will sue the offender, as well as the church. Offenders usually assume that the church’s insurance company will provide them with a legal defense, and pay any portion of a judgment or settlement attributable to their misconduct. This case demonstrates that this assumption will not always be true, and that persons who engage in sexual misconduct may be responsible for retaining and compensating their own attorney and paying a judgment or settlement. Newyear v. The Church Insurance Company,1998 WL 640914 (8th Cir. 1998). Seduction of Counselees and Church Members

Recent Developments in Federal Court Regarding Employment Practices

A federal court ruled that a church-affiliated private school could be sued by a former employee who had been dismissed for extramarital sexual relations.

Church Law and Tax1998-11-01

Employment practices

Key point. Federal law exempts churches from the ban on “religious discrimination” in employment. However, church leaders must articulate clearly the religious basis for adverse employment decisions in order to qualify for the exemption.

A federal court ruled that a church—affiliated private school could be sued by a former employee who had been dismissed for extramarital sexual relations. In 1995, the school hired an unmarried woman as a math teacher. When she was hired, the woman signed a statement expressing her agreement with the school’s “statement of belief” and agreed that her “lifestyle” would be “in accordance with the will of God and the Holy Scripture.” A year later the school learned that the teacher (who was still unmarried) was pregnant. Because sexual activity outside of marriage violated the religious beliefs of the school, the teacher was dismissed. She rejected the school’s offer to rehire her after giving birth. Shortly after being dismissed, the woman sued the school, claiming that the school had discriminated against her on the basis of pregnancy in violation of Title VII of the Civil Rights Act of 1964. She insisted that she was never informed, before her pregnancy, of any school policy against extramarital sexual relations, and she further claimed that she was told “I was terminated due to the fact that I was pregnant and unmarried and therefore a bad role model.” The school denied that pregnancy rather than sexual activity was the basis for the teacher’s dismissal. It conceded that this was the first case in which it had dismissed an employee for extramarital sex, but it insisted that it would treat male employees no differently if a case arose. The school asked the court to dismiss the lawsuit on the ground that Title VII permits religious employers to discriminate against employees on the basis of religion. The court declined to do so.

The court acknowledged that “Title VII explicitly provides exceptions for religious entities by allowing them to hire only employees of a given religion” and “permits employment of teachers based on religion if a school is controlled by a particular religion and qualification for employment is a religious requirement.” This includes the right to “employ only teachers who adhere to the school’s moral code”. However, the court cautioned that “these exceptions to Title VII do not sanction gender discrimination” and that “religious codes of morality must be applied equally to male and female teachers.” But if religious requirements “are applied equally to both males and females, the court will not evaluate the underlying dogma.” The court then drew an important distinction between employment decisions based no pregnancy and those based on sexual activity. A rule that singles out pregnant employees for adverse treatment is not permitted because it is limited to females and therefore is discriminatory by definition. On the other hand, “restrictions on sexual activity, applied equally to males and females, are not discriminatory.”

The court was unwilling to dismiss the lawsuit because the evidence submitted by the school “does not indicate whether anyone else – male or female – has ever been fired as a teacher by the [school] for sexual intercourse outside of marriage.”

Application. This case is important for three reasons:

Religious discrimination permitted. The court strongly affirmed the right of religious schools to discriminate on the basis of religion in their employment decisions. And, this right not only includes the right to employ only persons of the school’s religious faith, but also to require employees to comply with its “moral code” and religious tenets.

Sex or pregnancy discrimination not allowed. The court cautioned that religious schools cannot discriminate on the basis of sex or pregnancy. To illustrate, a religious school that adopts a rule requiring the dismissal of “any unmarried employee who is pregnant” would violate Title VII because it can only apply to women. The fact that the school is attempting to enforce its religious beliefs is not a defense. On the other hand, a rule requiring the dismissal of any school employee who engages in extramarital sex would be valid since it does not discriminate against employees on the basis of their gender.

Consistency. A policy that requires the dismissal of any employee, regardless of gender, on account of extramarital sex may still be discriminatory if it is not applied equally to both men and women. The school in this case failed to provide the court with enough evidence to demonstrate that it applied its policy equally to men and women, and so the court refused to dismiss the lawsuit. This is a very important observation. Before dismissing an employee on account of extramarital sex, a church or religious school should review all other known cases of extramarital sex involving employees in the past. Did the church or school apply its policy equally to men and women? That is, was every employee guilty of such behavior treated in the same way? Or, were only women disciplined or dismissed, while men were only reprimanded? If a female employee is dismissed for extramarital sex, and the church or school has treated male employees less severely who were guilty of the same conduct, the woman may have a viable discrimination claim. Or course, the opposite is also true. Male employees who are dismissed on account of extramarital sex may be able to sue a church or school if female employees are treated more favorably. Ganzy v. Allen Christian School, 995 F. Supp. 340 (E.D.N.Y. 1998). Termination of Employees, The Civil Rights Act of 1964, The Free Exercise Clause

Recent Developments in Federal Court Regarding Copyright

A federal court ruled that publishers can place the contents of magazines and other periodicals in online electronic databases and on CD-ROMs without obtaining the permission of writers whose articles were included in those periodicals.

Church Law and Tax 1998-07-01

Copyright

Key point. Publishers of journals and magazines may have the right to republish their materials in online electronic databases and on CD—ROMs without the need to obtain the permission of writers who contributed articles.

A federal court ruled that publishers can place the contents of magazines and other periodicals in online electronic databases and on CD—ROMs without obtaining the permission of writers whose articles were included in those periodicals. This case will be relevant to all ministers and lay church workers who contribute articles for publication in magazines and journals. The case involved writers who contributed articles to several prominent periodicals, including the New York Times, Newsday, and Sports Illustrated. The publishers sold the contents of their periodicals (including all of the individual articles) to “LEXIS/NEXIS” for inclusion in online electronic databases and on CD—ROMs. Several authors sued the publishers, claiming that the inclusion of their articles in the online electronic databases and on CD—ROMs violated their copyright interests. The publishers disagreed, claiming that the writers had authorized the publication of their articles in an online electronic format, and that the republication of articles in “collective works” is permitted by the Copyright Act. These two defenses will be considered separately below.

Transfer of rights

Did the writers transfer to the publishers the right to republish their articles in an electronic format? The publishers claimed that they did. Some publishers relied solely on “oral agreements” with writers. One publisher pointed to a written contract that all writers signed which transferred to the publisher “the right to first publish” the article in the same periodical. Another publisher relied on a special endorsement printed above the signature line on checks issued to writers in payment for their articles. The endorsement read: “Signature required. Check void if this endorsement altered. This check accepted as full payment for first—time publication rights to material described on face of check in all editions published by [the publisher] and for the right to include such material in electronic library archives.”

The court concluded that none of the writers had legally transferred any rights to their publishers to republish the articles in an electronic format. It acknowledged that writers can assign all or any portion of the copyright in their works to a publisher. If they choose, they can transfer the right to republish their articles in an electronic format. The Copyright Act specifies that “a transfer of copyright ownership … is not valid unless an instrument of conveyance, or a note or memorandum of the transfer, is in writing and signed by the owner of the rights conveyed.” The court concluded that this requirement certainly had not been accomplished by those writers who did not enter into any written agreement with their publisher. But what about the written contract by which writers assigned “the right to first publish” their articles to their publisher? The publisher argued that this transfer included not only the right to “first publish” the work in printed form but also the right to “first publish” the work in electronic form. The court disagreed, noting that “the right to publish an article first cannot reasonably be stretched into a right to be the first to publish an article in any and all mediums.” The court next addressed the endorsement language printed on the back of checks issued to writers, and concluded that this did not amount to a valid assignment of online electronic rights by the writers. The court conceded that “a writing memorializing the assignment of copyright interests doesn’t have to be the Magna Carta; a one—line … statement will do.” But even this minimal requirement had not been met in this case because the language was unclear. It referred to the right to republish articles in “electronic library archives,” and the court concluded that this language did not contemplate commercially sold CD—ROMs or online electronic databases. Further, the court pointed out that before the writers even signed their checks the articles had been republished in the online electronic databases.

Collective works

Section 201(c) of the Copyright Act specifies that “[c]opyright in each separate contribution to a collective work is distinct from copyright in the collective work as a whole, and vests initially in the author of the contribution. In the absence of an express transfer of the copyright or of any rights under it, the owner of copyright in the collective work is presumed to have acquired only the privilege of reproducing and distributing the contributions as part of that particular collective work, any revision of that collective work, and any later collective work in the same series.” Magazines, journals, and other periodicals containing articles written by several authors are “collective works.” According to section 201(c), persons who contribute articles to collective works retain the copyright in their articles unless they have assigned them to the publisher. If they have not assigned the copyright in their articles to the publisher, then the publisher has the limited privilege of “reproducing and distributing the contributions as part of that particular collective work, any revision of that collective work, and any later collective work in the same series.”

Since the writers had not assigned any rights to the publishers other than the right to “first publish” their articles, the remaining question was whether the republication of the collective works in an electronic format was a “reproduction” or “revision” of the collective work. If so, then it was permissible according to section 201(c). The court concluded that the republication of the collective works (magazines and journals) on CD—ROMs and in online electronic databases met this test. It rejected the writers’ argument that the individual magazines and periodicals lost their status as collective works when they were placed online and on CD—ROMs.

Application. Let’s review the key points of this important ruling: (1) If you contribute an article to a magazine or journal, and you are not asked to sign a document assigning your rights to the publisher, you retain the copyright in your article and the publisher has only the minimal right to publish the article in its collective work and in any revision of that collective work or any later collective work in the same series. This includes the republication of your article in an online electronic database or on a CD—ROM. Note that the publisher has no legal right to alter or modify your article in any way. (2) If you contribute an article to a magazine or journal, and you are asked to sign a document that assigns all or some of your rights in your article to the publisher, then your rights will be determined by what you signed. In some cases you will be assigning all of your rights in your article to the publisher. If so, the publisher has the right to republish your work in any medium at any time, and can even sell it to another publisher, without asking for your permission. You may not even have the right to authorize the republication of your article in other publications. Such requests would need to be referred to the publisher. Obviously, these are all matters that should be frankly discussed with a publisher so that the written agreement will accurately express your desires. Tasini v. New York Times Co., 972 F. Supp. 804 (S.D.N.Y. 1997). [PCL11D]

Recent Developments in Federal Court Regarding Freedom of Religion – Part 2

A federal appeals court ruled that a church’s constitutional rights were not violated by a public school district rule prohibiting it from conducting religious worship on public school property.

Church Law and Tax1998-07-01

Freedom of Religion

Key point. Public school officials can designate school property as a “limited public forum” by allowing use of the property only for specified purposes. A policy prohibiting use of school property for religious worship is permissible so long as such an exclusion is reasonable and viewpoint neutral.

A federal appeals court ruled that a church’s constitutional rights were not violated by a public school district rule prohibiting it from conducting religious worship on public school property. The church had asked school officials for permission to use a middle school auditorium for weekly religious services after it outgrew its own facilities. School officials denied this request. School policy allowed school property to be used for a wide variety of outside groups for civic, social, and recreational purposes. However, school property could not be used for religious services. The relevant policy specifies:

No outside organization or group may be allowed to conduct religious services or religious instruction on school premises after school. However, the use of school premises by outside organizations or groups after school for the purposes of discussing religious material or material which contains a religious viewpoint or for distributing such material is permissible.

The church challenged the school’s denial of its request to use school property for religious services. A federal appeals court upheld the policy. It noted that “freedom to speak on government property is largely dependent on the nature of the forum in which the speech is delivered.” It referred to three types of “forums” that have been recognized by the Supreme Court:

(1) Traditional (or “open”) public forums. These include streets, parks, and places that “by long tradition have been devoted to assembly and debate.” Restrictions in speech on such property are “subject to the highest scrutiny” and survive only if they “are narrowly drawn to achieve a compelling state interest.”

(2) Limited public forums. These are “created by government designation” for use “by certain speakers or for the discussion of certain subjects.” Restrictions on access to such forums based on speaker identity and subject matter “are permissible only if the distinctions drawn are reasonable in light of the purpose served by the forum and are viewpoint neutral.”

(3) Nonpublic forums. Government property that has not been opened for public speech either by tradition or by designation. The government deny access based on either subject matter or speaker identity.

The court concluded that the public school in question was a limited public forum since school officials allowed only some groups to use school property for designated purposes. As a result, the exclusion of religious worship from this forum was legitimate only if it was “reasonable in light of the purpose served by the forum” and was “viewpoint neutral.” The court concluded that both of these requirements were met, and therefore the school policy was legally permissible. The court noted that religious groups are free to use school property after hours for purposes of discussing religious material or material with a religious viewpoint. It was only the use of school property for religious worship that was excluded. Bronx Household of Faith v. Community School District, 127 F.3d 207 (2nd Cir. 1997).
[Use of Public Property for Religious Purposes]

Recent Developments in Federal Appeals Court Regarding Unemployment Taxes

A federal appeals court ruled that the exemption of churches from unemployment taxes does not violate the first amendment’s nonestablishment of religion clause.

Church Law and Tax1998-07-01

Unemployment Taxes

Key point. Churches are exempt from unemployment tax in most states.

A federal appeals court ruled that the exemption of churches from unemployment taxes does not violate the first amendment’s nonestablishment of religion clause. The Salvation Army dismissed an employee for budgetary reasons. The employee applied for unemployment benefits, and was informed that she was not eligible since her former employer was a religious organization that was exempt from unemployment tax. The employee filed a lawsuit claiming that the exemption of religious organizations from the unemployment law violated the first amendment. A federal court disagreed in an important decision that reaffirms the historic exemption of churches from unemployment taxes.

Background

Congress enacted the Federal Unemployment Tax Act (FUTA) in 1935 in response to the widespread unemployment that accompanied the Great Depression. The Act called for a cooperative federal—state program of benefits to unemployed workers. It is financed by a federal excise tax on wages paid by employers in covered employment. An employer, however, is allowed a credit for “contributions” paid to a state fund established under a federally approved state unemployment compensation law. All fifty states have employment security laws implementing the federal mandatory minimum standards of coverage. States are free to expand their coverage beyond the federal minimum.

Prior to 1970 the Act exempted most nonprofit organizations, including churches, from coverage. This meant that charities were exempt from paying both federal and state unemployment taxes. A 1970 amendment narrowed this broad exemption of nonprofit organizations by conditioning federal approval of state compensation plans on the coverage of all nonprofit organizations except those specifically exempted. The Act was then amended to exempt service performed in the employ of (1) a church or convention or association of churches, or (2) an organization 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.

Rhode Island law exempts from unemployment tax service performed for the same religious organizations exempted under the federal law quoted above. The employee who had been dismissed by the Salvation Army claimed that the exemption of churches was unconstitutional since it singled them out for preferential treatment.

The court’s decision

The court applied the United States Supreme Court’s so—called Lemon test in determining whether the exemption of churches from the Rhode Island unemployment law constituted an impermissible establishment of religion. Under this test, first announced in a 1971 decision (Lemon v. Kurtzman), a law challenged as an establishment of religion will be valid only if it satisfies the following three conditions-a secular purpose, a primary effect that neither advances nor inhibits religion, and no excessive entanglement between church and state. The court concluded that all of these tests were met. First, the Rhode Island law had a “clearly secular purpose” which the court described as “facilitating the administration of the federal—state unemployment insurance program by excluding from coverage a variety of workers whose employment patterns are irregular or whose wages are not easily accountable.” The court noted that the exemption of religious workers “eliminates the need for the government to review employment decisions made on the basis of religious rationales.” It pointed out that there were several other categories of exempt employees, and so religious workers were not singled out for special treatment.

Next, the court concluded that the Rhode Island unemployment law’s exemption of churches and certain other charities had a “primary effect” that did not advance religion. It conceded that the exemption provided a benefit to religious organizations. However, it insisted that this benefit was incidental: “An incidental benefit to religion does not … render invalid a statutory scheme with a valid secular purpose.”

Finally, the court concluded that the Rhode Island unemployment law’s exemption of churches did not create an excessive entanglement with religion. Quite to the contrary, “entanglement concerns are in fact reduced through the adoption of the exemption in this case.”

Application. This case will be helpful precedent in other states if the exemption of churches from unemployment law is challenged. Also note that unemployment law and workers compensation are often confused. Churches are exempt from unemployment taxes in almost all states, but they are covered by workers compensation in many states. Workers compensation is a state program that provides benefits to workers who are injured (or become ill) in the course of their employment. Rojas v. Fitch, 127 F.3d 184 (1st Cir. 1997).
[Unemployment Taxes and Churches]

Recent Developments in Federal Appeals Court Regarding Copyright

A federal appeals court ruled that Andrew Lloyd Webber may have engaged in copyright infringement of a religious song composed by Ray Repp, a composer of liturgical music.

Church Law and Tax1998-07-01

Copyright

Key point. If two musical works are so strikingly similar as to preclude the possibility of independent creation, unauthorized copying may be proven without showing that the infringer had “access” to the original work.

A federal appeals court ruled that Andrew Lloyd Webber may have engaged in copyright infringement of a religious song composed by Ray Repp, a composer of liturgical music. Ray Repp has written religious music for more than thirty years, and is a leading composer and performer of liturgical folk music. His music is included in many hymnals and songbooks, and has been published by the Lutheran, Episcopal, Presbyterian, and Catholic churches as well as by the Church of the Brethren. In 1978 he wrote the song “Till You.” The song is liturgical in nature, and is based on passages from the Book of Luke commonly known as the “Magnificat.” It has been distributed on albums and cassettes, as well as 25,000 copies of sheet music. Repp claimed that Andrew Lloyd Webber had access to this song and unlawfully copied it in writing the “Phantom Song” in his musical “The Phantom of the Opera.” A federal district court dismissed the lawsuit largely on the basis of Webber’s own testimony that he never heard the song, that he disliked “pop church music,” and that his interest in church music was limited to the “English choral tradition.” Repp appealed, and a federal appeals court reversed the district court’s ruling and ordered the case to proceed to trial.

The federal appeals court began its opinion by observing:

Copyright infringement is established when the owner of a valid copyright demonstrates unauthorized copying. Actual copying must first be shown, either by direct evidence or by indirect evidence. The latter type of evidence includes access to the copyrighted work, similarities that [demonstrate] copying between the works, and expert testimony.

The court noted that “if the two works are so strikingly similar as to preclude the possibility of independent creation, copying may be proved without a showing of access.” The court continued: “While there was little, if any, evidence demonstrating access, there was considerable evidence that Phantom Song is so strikingly similar to Till You as to preclude the possibility of independent creation and to allow access to be inferred without direct proof.” In support of its conclusion the court referred to two expert musicologists who had testified that there was “no doubt” that Webber’s “Phantom Song” was strikingly similar to and based upon “Till You”. Repp v. Webber, 132 F.3d 862 (2nd Cir. 1997).
[Copyright Law]

Recent Developments in Federal Court Regarding Freedom of Religion – Part 1

A federal appeals court ruled that the constitution was not violated when a public high school choir performed religious songs and conducted a few of its concerts in churches.

Church Law and Tax1998-07-01

Freedom of Religion

Key point. Not every government activity that confers an incidental or indirect benefit upon religion violates the constitution.

A federal appeals court ruled that the constitution was not violated when a public high school choir performed religious songs and conducted a few of its concerts in churches. A non—Christian student who was a member of the choir asked a federal court to issue an order banning the choir from singing religious songs and performing concerts in churches. A federal district court refused to do so, and the student appealed. A federal appeals court concluded that the choir’s practices were permissible and violated neither the first amendment’s nonestablishment of religion or free exercise of religion clauses.

Establishment of religion

The court applied the Supreme Court’s so—called Lemon test in determining whether the choir’s practices constituted an impermissible establishment of religion. Under this test, first announced in a 1971 decision (Lemon v. Kurtzman), a government practice challenged as an establishment of religion will be valid only if it satisfies the following three conditions-a secular purpose, a primary effect that neither advances nor inhibits religion, and no excessive entanglement between church and state. The court concluded that all of these tests were met. First, the court ruled that the choir’s performance of religious music and the use of churches for some concerts had a clearly secular purpose:

Here, we discern a number of plausible secular purposes for the defendants’ conduct. For example, it is recognized that a significant percentage of serious choral music is based on religious themes or text. Any choral curriculum designed to expose students to the full array of vocal music culture therefore can be expected to reflect a significant number of religious songs. Moreover, a vocal music instructor would be expected to select any particular piece of sacred choral music, like any particular piece of secular choral music, in part for its unique qualities useful to teach a variety of vocal music skills (i.e., sight reading, intonation, harmonization, expression). Plausible secular reasons also exist for performing school choir concerts in churches and other venues associated with religious institutions. Such venues often are acoustically superior to high school auditoriums or gymnasiums, yet still provide adequate seating capacity. Moreover, by performing in such venues, an instructor can showcase his choir to the general public in an atmosphere conducive to the performance of serious choral music …. We see no reason to conclude that defendants’ selection of religious songs and religious performance venues serves an impermissible purpose simply because some of those songs and venues, which undisputedly represent only part of the choir’s repertoire and performance venues, may coincide with religious beliefs different from those of [the plaintiff].

Next, the court concluded that the “primary effect” of the choir’s performance of religious music and the use of churches for some concerts did not advance religion:

We believe a reasonable observer aware of the purpose, context and history of public education in Salt Lake City, including the historical tension between the government and the Mormon Church, and the traditional and ubiquitous presence of religious themes in vocal music, would perceive the following with respect to [the plaintiff’s] factual allegations concerning the choir curriculum and performance venues: the choir represents one of Salt Lake City’s public high schools and is comprised of a diverse group of students; many of the choir’s songs have religious content-content predominately representative of Judeo—Christian beliefs; in contrast to a church choir, this choir also performs a variety of secular songs; the choir’s talent is displayed in the diverse array of songs performed and in a number of different public (religious and nonreligious) settings, all of which reflect the community’s culture and heritage. Certainly, any given observer will give more or less meaning to the lyrics of a particular song sung in a particular venue based on that observer’s individual experiences and spiritual beliefs. However, the natural consequences of the choir’s alleged activities, viewed in context and in their entirety by a reasonable observer, would not be the advancement or endorsement of religion.

The court concluded that the choir’s practices did not result in an impermissible “entanglement” between church and state: “[W]e believe a reasonable observer would conclude the selection of religious songs from a body of choral music predominated by songs with religious themes and text, and the selection of public performance venues affiliated with religious institutions, without more, amount to religiously neutral educational choices. Consequently, we perceive no state involvement with recognized religious activity.”

Free exercise of religion

The court also rejected the student’s claim that the choir’s practices violated her first amendment right to freely exercise her religion. It noted that to state a claim for relief under the first amendment’s free exercise of religion clause a plaintiff “must allege something more than the fact the song lyrics and performance sites offended her personal religious beliefs. She must allege facts demonstrating the challenged action created a burden on the exercise of her religion.” The court pointed out that the student was given the option of not participating in choir activities if such participation conflicted with her religious beliefs. And, she was assured that her choir grade would not be affected by any limited participation. The court concluded that “the fact [that the student] had a choice whether or not to sing songs she believed infringed upon her exercise of religious freedom, with no adverse impact on her academic record, negates the element of coercion and therefore defeats her free exercise claim.” Bauchman v. West High School, 132 F.3d 542 (10th Cir. 1997).
[Use of Public Property for Religious Purposes]

Recent Developments in Federal Court Regarding Freedom of Religion – Part 3

A federal appeals court ruled that a city could not refuse to allow an evangelistic film on the life of Christ to be shown at a city-owned “senior citizen center.”

Church Law and Tax1998-07-01

Freedom of Religion

Key point. Government cannot forbid religious groups from using public property because of the religious “viewpoint” of their speech.

A federal appeals court ruled that a city could not refuse to allow an evangelistic film on the life of Christ to be shown at a city—owned “senior citizen center.” The city of Albuquerque owns and operates six senior centers. The centers are multipurpose facilities that provide forums for lectures, classes, movies, crafts, bingo, dancing, physical exercise, and other activities. People who use the senior centers do not reside there, and all of the programs are voluntary. Many of the programs at the senior centers are organized and sponsored by private individuals or organizations. Senior center policies permit non—member groups to use the centers for classes and other activities if the subject matter is “of interest to senior citizens.” Alternatively, groups may use the centers without regard to this subject matter requirement if they are composed of seventy—five percent or more senior citizens. Nonmembers or persons under fifty—five years of age may conduct classes, and people who deliver lectures or teach classes are also permitted to distribute literature. The range of subjects that qualify as being “of interest to senior citizens” is quite broad. The senior centers’ activities catalogs list many of the programs that meet this requirement, including a number of classes and presentations in which religion or religious matters are the primary focus, such as Bible as Literature, Myths and Stories About the Millennium, Theosophy, and A Passover Commemoration (an oratorio). The catalogs encourage “ideas for new classes and programs” as well. In 1994 a pastor (over the age of fifty—five) requested permission from the supervisor of one of the centers to show a two—hour film entitled Jesus. The film recounts the life of Jesus Christ as described in the Gospel of Luke. At the conclusion of the story, a voice—over narrator makes affirming statements such as, “Jesus is exactly who he claimed to be-the Son of the Lord, the Savior of all mankind.” The narrator then invites viewers to adopt the Christian religion and to join him in a short prayer. The pastor also requested permission to give away giant—print New Testaments to persons attending the film. A city official denied the pastor’s request, stating that city policy prohibited the use of senior centers “for sectarian instruction or as a place for religious worship.” The city adopted this policy to conform with the terms of the Older Americans Act. The Older Americans Act provides federal funding to the states for multipurpose senior centers, but requires, as a condition for receiving such funding, that the “facility will not be used and is not intended to be used for sectarian instruction or as a place for religious worship.” 42 U.S.C.A. ⊥ 3027(a)(14)(A)(iv). In keeping with this directive, city personnel screen programs for sectarian instruction or religious worship before allowing them at the senior centers. Senior center employees also monitor presentations for religious content by sitting in on classes and entertaining objections from senior center members who call attention to presentations falling into one of these forbidden categories. When senior center employees determine that presentations are too religious in nature, they intervene to stop the presentations. There are no official criteria or written standards to assist them in deciding whether or not expression constitutes “sectarian instruction” or “religious worship.”

A federal appeals court ruled that the city acted improperly in denying the pastor’s request to show the religious film. The court began its opinion by noting that “the government’s ability to restrict protected speech by private persons on government property depends, in part, on the nature of the forum.” It referred to three kinds of forums that have been recognized by the Supreme Court (these are described in the previous recent development). The court concluded that the senior centers were limited public forums because the city limited access to these centers in two ways. First, it imposes an age requirement for participation; and second, it limits the subject matter of presentations to topics “of interest to senior citizens.” Restrictions on access to such forums based on speaker identity and subject matter “are permissible only if the distinctions drawn are reasonable in light of the purpose served by the forum and are viewpoint neutral.” The city claimed that its policy denying religious instruction is a restriction based upon “content,” not viewpoint, because it disallows all religious instruction and worship in its senior centers regardless of the particular religion involved. The court disagreed, referring to a Supreme Court decision suggesting that the mere fact that a regulation categorically treats all religions alike does not answer the critical question of whether viewpoint discrimination exists between religious and nonreligious expression. Lamb’s Chapel v. Center Moriches Union Free School District, 113 S. Ct. 2141 (1993).

The court pointed out that the city had already “opened the doors” of its senior centers to presentations about religion. The city allowed speakers to discuss the Bible from a “strictly historical” perspective and to address religion as long as such presentations could be characterized as “a literature discussion or a philosophical discussion.” The court continued:

The film Jesus dealt with subject matter similar to that which would be included in a class on the Bible as literature. The film ran afoul of city policy, however, by advocating the adoption of the Christian faith. In contrast, a film about Jesus’s life that ended on a skeptical note and urged agnosticism or atheism would not have contravened the city’s policy. Because “[t]he prohibited perspective, not the general subject matter” triggered the decision to bar the private expression, the city’s policy is properly analyzed as a viewpoint—based restriction on speech.

Moreover, even if the city had not previously opened the senior centers to presentations on religious subjects, its policy would still amount to viewpoint discrimination. Any prohibition of sectarian instruction where other instruction is permitted is inherently non—neutral with respect to viewpoint. Instruction becomes “sectarian” when it manifests a preference for a set of religious beliefs. Because there is no nonreligious sectarian instruction (and indeed the concept is a contradiction in terms), a restriction prohibiting sectarian instruction intrinsically favors secularism at the expense of religion. Therefore, we conclude that the city’s policy constitutes viewpoint discrimination.

The court noted that “government bears a particularly heavy burden in justifying viewpoint—based restrictions in designated public forums” since viewpoint discrimination is “an egregious form of content discrimination.” At a minimum, to survive strict scrutiny the city’s policy must be “narrowly drawn to effectuate a compelling state interest.” The court concluded that this test was not met. As a result, the city violated the first amendment guaranty of free speech by refusing to allow the film Jesus to be shown. The court rejected as “insulting to senior citizens” the city’s argument that older citizens are “vulnerable” to “religious proselytizing and coercion.” People in this age group “are not in need of special insulation from invitations to adopt a religious faith; nor are they, as a class, more likely than other citizens to be intimidated by such invitations. Moreover, the showing of the Jesus film and the distribution of giant—print New Testaments can hardly be construed as intimidating or coercive.” Church on the Rock v. City of Albuquerque, 84 F.3d 1273 (10th Cir. 1996).
[Use of Public Property for Religious Purposes]

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