Former Pastor Sues Church for Breach of Compensation Agreement

Have all important documents reviewed by legal counsel.

Key Point 2-03. Clergy compensation consists of a number of items that often are not well understood. Clergy compensation that is unreasonable in amount may jeopardize a church's tax-exempt status or trigger "intermediate sanctions" in the form of excise taxes that can be assessed against a recipient of unreasonable compensation.

Key Point 8-22. In most states, employees who are hired for an indefinite period are considered "at will" employees. This means that the employment relationship may be terminated at will by either the employer or employee, with or without cause, and with or without notice. The courts and state legislatures have created a number of exceptions to the at will employment rule. These exceptions limit the right of an employer to terminate an at will employee. Employees who are hired for a specific term are not at will employees, and they may be terminated only if the employer has "good cause."

An Indiana court ruled that a "compensation agreement" between a church and its new senior pastor was in effect a contract of employment that was violated by the church board.

In 1994, a church hired a new pastor (the "plaintiff") to succeed a former pastor who died after 54 years of service. The plaintiff served as the pastor from 1994 through the end of 1996 without a written contract of compensation. At the end of 1996, the church board adopted an agreement governing "the full and complete terms and agreement for the employment compensation of [the plaintiff]."

In 2001, the church board terminated the plaintiff's employment after a no confidence vote by the church's membership. The plaintiff sued the church, claiming that the termination of his employment constituted a breach of the compensation agreement. A jury ruled in favor of the plaintiff and awarded him $205,000 in damages.

On appeal, the church made two arguments. First, the agreement between the board and plaintiff was a compensation agreement, not an agreement for employment, and therefore the church could not be liable for wrongful termination of employment. Second, the church argued that even if the compensation agreement was an employment agreement, it specified an indefinite term of employment and therefore should be interpreted as establishing an employment at will relationship. The church noted that an employee at will may be terminated for any reason or no reason at all.

Was the compensation agreement an employment contract?

In responding to the church's first argument the court noted that "the words or labels of a contract are not conclusive but should be considered in connection with the provisions of the contract." In this case, the agreement was entitled "Compensation for Pastoral Services" between the church and plaintiff. The agreement provided in Article I ("Introduction") that it contained the "full and complete terms and agreement for [the plaintiff's] employment compensation" and that his compensation could be "terminated … with a 60 day notice." The agreement also specified that "employment shall be in accordance with the bylaws of the church." The court concluded that "it is apparent from the language of the agreement that although it is primarily a compensation agreement, it also covers terms of employment by incorporation of the church's bylaws. Thus, we cannot agree with the church's initial contention."

Employment at will?

In responding to the church's second contention, the court noted that the church bylaws stated that "the pastor is called for life and removable only by death." The church asserted that this provision was so indefinite that the relationship between the parties should be characterized as at will employment. The court disagreed: "Here, the church's bylaws, which were drafted by the church and were incorporated into the agreement … clearly state that a pastor is removable only by death. This provision is unequivocal and it negates the presumption that the plaintiff was an at will employee who could be terminated without cause."

What this means for churches

This case is important for two reasons. First, it demonstrates that agreements may have legal significance that transcends the intention of church leaders. This is one reason why it is imperative for important documents to be reviewed by legal counsel. Second, the court concluded that a church bylaw provision defining the term of employment of a senior pastor as lasting until death made the relationship definite in length, which negated the employment at will doctrine. As a result, the church could not terminate the plaintiff's employment without cause.

Note that the church board based its decision to terminate the pastor's employment on the congregation's vote of confidence which revealed a lack of support for the pastor. Presumably, under the church's bylaws, such votes did not negate the "employment until death" provision. Such inconsistencies are common in church bylaws and are one reason why such documents should periodically be reviewed by an attorney with experience working with religious organizations. Trinity Baptist Church v. Howard, 869 N.E.2d 1225 (Ind. App. 2007).

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