• 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.
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]
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