Ascension Lutheran Church v. Employment Sec.

• Decision Date: 21 October 1980
• Docket Number: No. C-C-79-206.,C-C-79-206.
• Citation: 501 F. Supp. 843
• Court: U.S. District Court — Western District of North Carolina
• Parties: ASCENSION LUTHERAN CHURCH, St. Stephen's Lutheran Church, St. John's Evangelical Lutheran Church and Emmanuel Lutheran Church, Plaintiffs, v. EMPLOYMENT SECURITY COMMISSION OF NORTH CAROLINA, and F. Ray Marshall, United States Secretary of Labor, Defendants.

501 F. Supp. 843

ASCENSION LUTHERAN CHURCH, St. Stephen's Lutheran Church, St. John's Evangelical Lutheran Church and Emmanuel Lutheran Church, Plaintiffs, v. EMPLOYMENT SECURITY COMMISSION OF NORTH CAROLINA, and F. Ray Marshall, United States Secretary of Labor, Defendants.

No. C-C-79-206.

United States District Court, W. D. North Carolina, Charlotte Division.

October 21, 1980.

B. Irvin Boyle and Norman A. Smith, Boyle, Alexander & Hord, Charlotte, N. C., for plaintiffs.

Howard G. Doyle, Chief Counsel, and T. S. Whitaker, Staff Atty., Employment Sec. Commission, Raleigh, N. C., for the defendant Employment Security Commission of North Carolina.

Harold M. Edwards, U. S. Atty., Asheville, N. C., Alice Daniel, Acting Asst. Atty. Gen., and Jonathan Ginsburg, Dept. of Justice, Washington, D. C., for F. Ray Marshall, United States Secretary of Labor, defendant.

ORDER

McMILLAN, District Judge.

Plaintiffs, four Missouri Synod Lutheran churches which operate elementary schools, brought this action in Mecklenburg County Superior Court, protesting the inclusion of their schools' employees in the North Carolina unemployment compensation program. All plaintiffs seek a declaration that the Employment Security Law, Chapter 96 of the North Carolina General Statutes, does not apply to them. Three plaintiffs seek a refund of contributions they have made under the statute. (The fourth plaintiff, St. Stephen's Lutheran Church, has paid no contributions and thus seeks only declaratory relief.)

The North Carolina Employment Security Commission, the only defendant in the original complaint, removed the case to the United States District Court for the Western District of North Carolina on July 11, 1979, and added the United States Secretary of Labor, F. Ray Marshall, as a defendant. The matter is now before the court on plaintiffs' motion for summary judgment and several motions by defendants. Those motions include (1) the Secretary's motions (a) for dismissal, (b) for dismissal of the entire case, (c) for judgment on the pleadings, and (2) the Employment Security Commission's motions (a) for a stay and (b) for summary judgment. These motions were heard on August 28, 1980. As suggested by the court on that date, plaintiffs subsequently have filed a motion to remand the case to state court, pursuant to 28 U.S.C. § 1447(c).

I. Facts

North Carolina's Employment Security Law, N.C.G.S. § 96-1 et seq., was enacted in 1936 pursuant to Title IX of the Social Security Act of 1935, forerunner of the Federal Unemployment Tax Act, now codified at 26 U.S.C. § 3301 et seq. ("FUTA"), which was enacted during the depression of the 1930's to avert disastrous consequences of unemployment. FUTA establishes a system of financial incentives through which states are encouraged-but not required-to adopt unemployment compensation laws that parallel the FUTA system. Though participation in the federal program is entirely voluntary, Carmichael v. Southern Coal Co., 301 U.S. 495, 525-26, 57 S.Ct. 868, 880, 81 L.Ed. 1245 (1937), the states have found it necessary as a practical matter to participate in the federal program.

North Carolina has participated in the federal program for more than forty years by collecting a state unemployment tax and remitting the tax revenues to the federal government. The state in turn requests funds from the federal government to pay unemployment claims, and the federal government, through the Department of Labor, then returns the state revenues along with a federal subsidy. In order to remain eligible for the federal program, the state must comply with the standards set out in FUTA as enforced by the Department of Labor. See Affidavit of Warren G. Witmer, Secretary of N. C. Employment Security Commission. See also N. C. Employment Security Law, N.C.G.S. § 96-1 et seq.

Until 1970, FUTA and the North Carolina Employment Security Law excluded nonprofit employers from their coverage. In 1970, Congress amended the act to require inclusion of individuals employed by nonprofit organizations. The amendments, however, created several exceptions, including work performed in nonprofit elementary and secondary schools.

In 1976, Congress enacted the Unemployment Compensation Amendments of 1976, Pub.L.No.94-566, 90 Stat. 2667. Those amendments left intact an exclusion from FUTA's coverage for any services performed

"(1) in the employ of (A) a church or convention or association of churches, or (B) 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 ...."

26 U.S.C. § 3309(b)(1). Nevertheless, the amendments specifically eliminated the exclusion previously in effect for service performed "in the employ of a school which is not an institution of higher education." 84 Stat. 697-98, formerly codified at 26 U.S.C. § 3309(b)(3) (1970).

In response to the 1976 FUTA amendments, North Carolina changed its Employment Security Law, effective January 1, 1978, to mirror the federal amendments. That North Carolina law, N.C.G.S. § 96 8(6)k. 15, excludes from coverage

"services performed (i) in the employ of a church or convention or association of churches, or 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; or (ii) by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order ...." Emphasis added.

North Carolina discontinued its exemption of nonprofit elementary and secondary schools from its unemployment compensation program, N.C.G.S. §§ 96-8(5)q, 96-8(6)j. Representatives of the Employment Security Commission interpreted these amendments to require participation of all nonprofit elementary and secondary schools.

The congressional legislative history supports Secretary Marshall's interpretation that church-related schools were to be covered by the act. See, e. g., S.Rep.No.1265, 94th Cong., 2d Sess. 8 (1976), U.S.Code Cong. & Admin.News 1976, p. 5997. That Senate report estimates that repeal of the exception for nonprofit schools would permit the inclusion under FUTA of 242,000 new employees, a figure which approximates the total number of teachers in all nonprofit elementary and secondary schools.

Though no such legislative history is available for North Carolina, it is unlikely that the state intended to deviate from the application of the federal statute. Moreover, few nonprofit schools in the state are not church related.

Secretary Marshall in 1978 issued a letter and later the Department of Labor issued a directive which stated that "the exclusion in section 3309(b)(1)(A) relating to church employees has no other application to activities performed in elementary and secondary schools since the schools are not churches within the meaning of that section." The directive stated further that the exclusion in section 3309(b)(1)(B) does "not apply to institutions where the employees of the institution are primarily engaged in educational activities at the elementary and secondary school level." U. S. Department of Labor Directive to State Employment Security Agencies, May 30, 1978 (emphasis added). Marshall reasonably maintained that Congress, by enacting the amendments, intended that FUTA should apply to all nonprofit elementary and secondary schools, including the church-related schools which comprise most of the country's nonprofit schools.

Plaintiffs' schools were taxed under the revised act. All plaintiffs but one paid the tax under protest with a demand for a refund. See Affidavit of Warren G. Witmer, Secretary of Employment Security Commission. The Employment Security Commission denied the refund, and plaintiffs brought this action in state court pursuant to N.C.G.S. § 96-10(f).

II. Discussion

A. North Carolina's Employment Security Law does apply to church-related schools.-The above history makes it obvious that the North Carolina law does require employment security contributions from church-related schools, and that they are obligated to pay the appropriate taxes. In brief recap, this conclusion is supported by (1) testimony of both Secretary Marshall and North Carolina Employment Security Commission Secretary Witmer; (2) the text of the 1970 amendments; (3) by the 1976 amendment which removed the exclusion previously in effect for nonprofit elementary and secondary schools; (4) by the North Carolina amendment to its Employment Security Law to reflect the same change, see N.C.G.S. §§ 96-8(5)q, 96-8(6)j and 96-8(6)k. 15.

B. Application of the statute to church-related schools does not violate the free exercise and establishment clauses of the First Amendment to the United States Constitution.-Defendants in applying the statute have not attempted to impede the observance of a religion or discriminate among religions, results which are necessary if a violation of the free exercise clause is to be found. Braunfeld v. Brown, 366 U.S. 599, 607, 81 S.Ct. 1144, 1148, 6 L.Ed.2d 563 (1961). Plaintiffs have not shown that requiring them to participate in the unemployment compensation program unduly burdens their right freely to exercise their beliefs. The state requires only that church-related schools submit certain records to the state and that they pay taxes to the Employment Security Commission or reimburse eligible former employees on an individual basis. N.C.G.S. § 96-9(d). The First Amendment does not invalidate a law merely because it imposes a financial burden on a person's practice of his or her religious beliefs. Braunfeld v. Brown, supra, at 607, 81 S.Ct. at 1148. Plaintiffs here have made no showing that participation in the state's unemployment program would burden them any more than requiring their schools to make...