Pastor, Church & Law


§ 8.27

Key Point 8-27. 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) often, lower attorneys’ fees;

(3) monetary awards often are less than civil court judgments;

(4) there is little if any risk of punitive damages, or astronomical verdicts out of proportion to the alleged wrong due to “runaway juries”;

(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 involved in 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 in church disputes);

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

There are additional reasons for churches to consider the mediation or arbitration of disputes. First, most lawsuits against churches are brought by “insiders” (i.e., members and employees). Arbitration is ideal for such disputes. Second, there is scriptural support for arbitration of internal church disputes. In 1 Corinthians 6:1-8 (NIV), the apostle Paul observed:

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.

With these numerous advantages, arbitration is becoming an increasingly common way of resolving disputes.

Key point. 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 decisions of the United States Supreme Court in the Gilmer, Circuit City, and Waffle House cases (see Three Supreme Court Rulings sidebar) demonstrate 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 (see Three Supreme Court Rulings sidebar) 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 state 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.

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. Because of these limits, plaintiffs’ attorneys who represent current and former employees often 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.

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 un-lawful 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 addressed by the Supreme Court in the Waffle House case (see Three Supreme Court Rulings sidebar). The Court ruled that arbitration agreements do not divest the EEOC of suing employers for violating federal employment discrimination laws, since the EEOC is not a party to such agreements. However, note that there is still a significant advantage to using arbitration clauses in employment applications and contracts, even with respect to claims under federal law. As the Court noted:

When speculating about the impact this decision might have on the behavior of employees and employers, we think it is worth recognizing that the EEOC files suit in less than one percent of the charges filed each year.

3. should a 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, summarized above, should be reviewed.

(2) Employment claims represent one of the most common grounds for lawsuits against 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. Note that such coverage may be available under a directors and officers insurance policy even if it is not provided under your general liability policy.

Key point. If you don’t have insurance 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.

Key point. Some attorneys consider the inability to appeal arbitration awards to the civil courts to be a disadvantage since there is no recourse from improvident and unjust awards by arbitrators of dubious competence.

(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.

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

In drafting an arbitration policy, keep the following considerations in mind:

  • How will the policy be implemented? There are a number of options, including an amendment to the church’s bylaws, or a board-adopted policy that is referenced on each new member’s membership card. The most effective means of adopting an arbitration policy is for the church membership to adopt one as an amendment to the church bylaws. Since members are bound by the church bylaws (including any amendments), this approach will have the best chance of binding all members. In this regard, the United States Supreme Court has observed that “all who unite themselves to such a body do so with an implied consent to its government, and are bound to submit to it”. Watson v. Jones, 80 U.S. 679, 729 (1871).
  • What disputes will be referred to arbitration? Only those disputes relating to church affairs? Disputes between members? What about disputes between a minister and other members, or between a minister and either the church board or the church itself? What about disputes between employees and the church? These are very important questions to resolve.

Key point. While this article only addresses the arbitration of employment disputes, church leaders should consider expanding any policy to address other disputes as well.

  • How will the arbitration process be conducted? Often, each side in a dispute selects an arbitrator, and the two persons so selected choose a third arbitrator. Of course, the third arbitrator must be completely unbiased. Arbitration procedure often is informal, and attorneys may or may not be allowed to participate.
  • It is essential to consult with the church’s liability insurer before implementing any arbitration policy to ensure that it is in agreement with the process and will honor arbitrators’ judgments up to the policy limits. Churches should not change insurers without obtaining the same assurances. The arbitration policy may even contain language conditioning its use on acceptance by the church’s liability insurer.
  • Given the importance of having a policy that complies with applicable state and federal laws, we recommend that any church wanting to adopt an arbitration policy retain the services of an 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, an employee handbook, or the church’s governing documents.

Caution. Be wary of “form” agreements that you find online or in a bookstore since they seldom will be adequate and often will create problems and ambiguities. This is illustrated by the ruling of a federal court in Tennessee.206 Hayward v. Trinity Church, 2015 WL 1924552 (M.D. Tenn. 2015).The court ruled that an agreement between a church and a church employee to arbitrate all employment disputes was enforceable, and therefore a dismissed church employee’s lawsuit seeking unpaid overtime compensation had to be arbitrated. The parties were in Tennessee, but the arbitration agreement (obviously a form agreement) required arbitration to occur in Orange County, California. The court also noted that the arbitration agreement inexplicably contained several California-specific provisions, including certain remedies that the employee retains under California law, including the right to file and pursue proceedings before the California Department of Fair Employment and Housing and a variety of California statutory claims, including claims arising under the California Workers’ Compensation Act, Employment Development Department, and the California Fair Employment and Housing Act. Clearly, the church was using a template that was intended for use in California, and neglected to make it Tennessee-specific.

5. what about employment disputes regarding ministers?

Should church arbitration policies apply to ministers as well as lay employees? Note the following unique rules:

(1) In 2012, a unanimous United States Supreme Court affirmed the so-called “ministerial exception” which bars the civil courts from resolving employment disputes between churches and ministers:

We agree that there is such a ministerial exception. The members of a religious group put their faith in the hands of their ministers. Requiring a church to accept or retain an unwanted minister, or punishing a church for failing to do so, intrudes upon more than a mere employment decision. Such action interferes with the internal governance of the church, depriving the church of control over the selection of those who will personify its beliefs. By imposing an unwanted minister, the state infringes the Free Exercise Clause, which protects a religious group’s right to shape its own faith and mission through its appointments. According the state the power to determine which individuals will minister to the faithful also violates the Establishment Clause, which prohibits government involvement in such ecclesiastical decisions. Hosanna–Tabor Evangelical Lutheran Church and School v. E.E.O.C., 132 S.Ct. 694 (2012).

What is the relevance of this ruling to church arbitration policies? Some have suggested that church arbitration polices not apply to ministers, and those serving in positions that would be deemed “ministerial.” The reasoning is why submit claims to arbitration that the civil courts would not accept? But note that churches and denominational agencies continue to be sued by current or former ministers who seek judicial recognition of exceptions to the ministerial exception. A few of these cases have been successful, and as a result church leaders should not assume that the ministerial exception renders clergy coverage under a church’s arbitration policy unnecessary.

(2) Many churches have bylaws or other governing documents that prescribe how ministers are selected and removed. If a congregation acts to remove a minister in accordance with its governing documents 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 are resolved within the denomination using existing procedures. An arbitration of such claims may be preempted by denominational rules. This issue must be clarified with denominational officers before adopting an arbitration policy that applies to ministers.

6. what about the arbitration of other claims?

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

7. what about the arbitration of other claims?

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 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 seven 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 key consideration is the legal doctrine of “consideration.” In order for a contract or contractual amendment or provision to be legally enforceable, the party to be bound by it must receive something of value (called “consideration”) in return for the obligation to be bound by it. As a result, any new employment conditions, such as the arbitration of disputes, are not legally enforceable unless employees receive something of value (other than 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. 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.

9. Are there disadvantages to arbitration that we should consider?

Some attorneys who specialize in employment law point to several potential disadvantages to the arbitration of church disputes that church leaders should consider in making informed decisions. These include the following:

First, and perhaps most importantly, the arbitration of a church employment dispute may leave the church with little if any recourse should arbitrators reach an adverse decision. To illustrate, assume that a church elects to arbitrate a dispute with a dismissed pastor who is alleging age discrimination. The civil courts would not adjudicate such a dispute due to the ministerial exception mentioned above. What if an arbitrator is a layperson who is unfamiliar with the ministerial exception and decides to award the pastor monetary damages? The church may have no appeal or other recourse. Or, what if an arbitrator awards a disgruntled church employee an excessive sum of money out of proportion to the alleged injury? Or, what if an arbitrator is a layperson unfamiliar with the legal issues involved in the arbitration of an employment dispute? An arbitration award may be final even if based on the arbitrator’s lack of knowledge of the relevant law.

Second, the integrity of arbitration depends entirely on the competence and objectivity of the arbitrators. But how can the objectivity of arbitrators be insured? In some cases, both parties to arbitration agree upon a single arbitrator, while in other cases each side selects an arbitrator and these two select a third. It is impossible to guaranty objectivity in all cases, and this can lead to unfair results with little if any recourse.

Third, the right of the parties in an arbitration to gather relevant evidence through depositions and requests for the production of documents may be limited, resulting in arbitration awards based on incomplete evidence.

Fourth, in any civil lawsuit, parties can “join” or add another defendant who is ultimately responsible for a plaintiff’s injuries. The important principle of joinder generally is unavailable in arbitration because the third party has not consented to it.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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