Key point. State laws exempt churches and some other religious organizations from coverage under unemployment laws, but such an exemption may not apply to church-created schools and other institutions that are separately incorporated.

A Pennsylvania court ruled that a church-related school was not an exempt employer under the state’s unemployment law and therefore was required to pay benefits to an unemployed principal. A church school terminated an assistant principal (the “plaintiff”), and the plaintiff thereafter applied for unemployment benefits. A state agency acknowledged that the church had founded the school, but ruled that an exemption in the unemployment law for “a church or convention or association of churches or an organization that is operated primarily for religious purposes and that is operated, supervised, controlled or primarily supported by a church, or convention or association of churches” did not apply to the school since it was separately incorporated and therefore was “a separate entity operating independently from [the church]” that was operated primarily for educational purposes. The agency also noted that the school received no funding from the church, and had purchased it own facility.

A state appeals court agreed with the agency’s conclusion that the school was not a religious employer exempt from the state’s unemployment law. It based this conclusion on the school’s alleged failure to introduce evidence that it was a religious institution rather than a purely educational institution. The court concluded that the agency “did not err in determining that the plaintiff’s employment is not exempt from coverage … because the school does not operate primarily for religious purposes based on the agency’s findings.”

The court continued:

FN6. While we affirm the Board based on its findings of fact, we caution that this decision is not dispositive in a separate action against Employer pertaining to its exemption from contribution to the unemployment tax fund. We highlight Section 509 of the Law, as amended, 43 P.S. § 829, which provides the following:

[w]henever an appeal involves a question as to whether services were performed by a claimant in employment or for an employer or whether remuneration paid constituted wages, a decision thereon shall not be conclusive as to an employing entity’s liability for contributions unless the employing entity was given special notice of such issue and of the pendency of the appeal and was afforded a reasonable opportunity by the referee or the board to adduce evidence bearing on such question.

Here, while Employer had a reasonable opportunity to be heard at the hearing, there is no evidence that Employer was given any special notice concerning a determination of Employer’s status for purposes of unemployment tax. For this reason, and based upon representations made during argument by the Board’s counsel, our decision in this matter on Claimant’s eligibility does not, in any way, affect Employer’s exemption status for taxation purposes. Because our decision does not affect Employer’s exemption status for purposes of the unemployment tax law, we need not address Employer’s constitutional claim as our decision does not infringe on Employer’s constitutional rights.

A dissenting judge asserted that the exemption for religious employers “may apply when a religious school: offers actual religious instruction and prayer; emphasizes the religious principles in the presentation of secular subjects; and is controlled by school committees elected by monthly meetings of the affiliated congregation, by a principal appointed by a board of deacons of the affiliated church, or by a principal appointed by the board of elders of the affiliated church” (quoting Christian School Association of Greater Harrisburg v. Department of Labor and Industry, 423 A.2d 1340 (Pa. 1980).

The dissenting judge noted that the church “founded the school, has several members on the school’s board of directors, and many of the school’s employees are both members of the church and elders of the church.” The dissenting judge also noted that the agency and trial court both “utterly failed to address [the school’s] testimony regarding the control of the church over school operations due to the presence of church elders and members on the school’s board of directors and as school employees.”

What This Means For Churches:

This case illustrates an important point. While a decision to separately incorporate a church-created entity is almost always done to protect the church from liability for the obligations of the affiliate, the separate incorporation of a church-created entity may have unintended consequences. Complex legal and tax issues flow from such a decision, and these must be carefully evaluated before separate incorporation is pursued. The assistance of legal counsel is essential in this process. Academy v. Unemployment Compensation Board of Review, 42 A.3d 1171 (Pa. Common. 2012).

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