Lake Region Conference of Seventh-Day Adventists v. Ward

• Decision Date: 17 May 1988
• Docket Number: SEVENTH-DAY,No. 87-1960,87-1960
• Parties: , 120 Ill.Dec. 822 LAKE REGION CONFERENCE OFADVENTISTS, Plaintiff-Appellee, v. Sally A. WARD, Director of Employment Security, State of Illinois, Department of Labor, Illinois Bureau of Employment Security, Defendant-Appellant.
• Court: United States Appellate Court of Illinois

Page 1004

524 N.E.2d 1004

170 Ill.App.3d 999, 120 Ill.Dec. 822

LAKE REGION CONFERENCE OF SEVENTH-DAY ADVENTISTS, Plaintiff-Appellee, v. Sally A. WARD, Director of Employment Security, State of

Illinois, Department of Labor, Illinois Bureau of

Employment Security, Defendant-Appellant.

No. 87-1960.

Appellate Court of Illinois,

First District, Second Division.

May 17, 1988.

Rehearing Denied June 17, 1988.

Neil F. Hartigan, Atty. Gen., Shawn W. Denney, Sol. Gen. (Rosalyn B. Kaplan, Asst. Atty. Gen., of counsel), for defendant-appellant.

William M. Getzoff, Getzoff & Getzoff, Chicago, for plaintiff-appellee.

Presiding Justice HARTMAN delivered the opinion of the court:

The Illinois Director of Employment Security ("director") appeals the reversal of her decision assessing unemployment insurance payments in lieu of contributions against the Lake Region Conference Association of Seventh-Day Adventists ("Lake Region"). The circuit court found Lake Region's employees exempt from unemployment insurance coverage.

We are asked to review whether Lake Region is estopped from denying its liability by its failure to respond to notices sent to it by the State when its former employees requested unemployment benefits and failure to respond to statements of amounts due, under section 705 of the Unemployment Insurance Act ("Act") (Ill.Rev.Stat.1977, ch. 48, par. 455); and whether the director lacked subject matter jurisdiction because Lake Region's employees were exempt from coverage under section 211.3(A) of the Act. Ill.Rev.Stat.1979, ch. 48, par. 321.3(A).

Lake Region, a nonprofit Illinois corporation organized for religious purposes serving Seventh-Day Adventist Church members, operates churches and schools in Michigan, Indiana, Illinois and Wisconsin. Its Board of Trustees hires and supervises all school personnel and determines their compensation. No school has a separate corporate charter or legal organization.

As in other states, Illinois' unemployment insurance legislation implements mandatory federal minimum standards of coverage established by the Federal Unemployment Tax Act ("FUTA"). (26 U.S.C. secs. 3301 et seq. (1982).) Although previously exempt, in 1970 a FUTA amendment required state coverage of employees of nonprofit organizations; however, employees of churches and of organizations operated primarily for religious purposes and controlled, supervised, operated or mainly supported by a church or convention or association of churches were again exempted. (St. Martin Evangelical Lutheran Church v. South Dakota (1981), 451 U.S. 772, 775-77, 101 S.Ct. 2142, 68 L.Ed.2d 612; 26 U.S.C. sec. 3309(b)(1) (1982).) FUTA was again amended in 1976 to eliminate an exemption for employees of schools which were not institutions of higher education. In 1978 the Secretary of Labor announced that this change meant that church-related schools would be covered and notified the states, which began collecting unemployment taxes from such schools. The Supreme Court, however, held that the 1976 amendments did not alter the exemption for church-operated schools that had no separate legal existence from a church or association of churches. St. Martin Evangelical Lutheran Church v. South Dakota, 451 U.S. at 777-78, 784-85, 101 S.Ct. at 2149-50; 26 U.S.C. sec. 3309(b)(1)(A) (1982). Accord Alabama v. Marshall (5th Cir.1980), 626 F.2d 366, 368-69, cert. denied (1981), 452 U.S. 905; Community Renewal Society v. Department of Labor (1982), 108 Ill.App.3d 773, 780, 64 Ill.Dec. 310, 439 N.E.2d 975; Lutheran Church-Missouri Synod v. Bowling (1980), 89 Ill.App.3d 100, 101-02, 44 Ill.Dec. 404, 411 N.E.2d 526; Ill.Rev.Stat.1979, ch. 48, par. 321.3(A).

Section 211.3(A) of the Act, in effect throughout the entire period, exempted employment services performed by those (Ill.Rev.Stat.1979, ch. 48, par. 321.3(A)):

"In the employ of (1) a church or convention or association of churches, or (2) an organization or school which is not an institution of higher education, 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."

Section 302 of the Act (Ill.Rev.Stat.1977, ch. 48, par. 382) permits employing units not otherwise subject to the Act to obtain coverage by filing a written election after written approval of the election by the Director. Section 1404 of the Act (Ill.Rev.Stat.1977, ch. 48, par. 554), allows nonprofit organizations as defined in section 211.2 to elect to pay in lieu of contributions amounts equal to the full amount of regular benefits and half the amount of extended benefits actually paid to their employees, upon filing written notice with the director, who then serves notice of his approval or disapproval on the organization. Except as provided by section 211.3, employment includes service after December 31, 1971 by persons working for nonprofit organizations. Ill.Rev.Stat.1977, ch. 48, par. 321.2.

Lake Region's treasurer testified that a Department of Labor auditor in 1978 or 1980 informed him that although Lake Region did not contribute to unemployment insurance payments, it had to file reports. Lake Region's executive secretary testified that its executive committee had approved an election of unemployment insurance coverage, but such action could not be found in the minutes and no document was found indicating that Lake Region had ever given its written consent or that the director had approved such a request.

An affidavit notice form, stamped August 11, 1978, applying to a Lake Region employee, contains a handwritten notation reading: "asked to be placed in reimbursable account." On May 13, 1980, the treasurer, then listing his title as accountant, filled out a form letter indicating that an employee received wages for each quarter of 1978 from Lake Region that were covered under the Act. Employer's contribution reports were filled out by the treasurer from October 1979 through December 1982, all showing an entry for total wages paid for covered employment but "0" for contribution due and total payment due. Department of Labor records indicate that forms BEN-305, notices of findings to base period employers, were sent to Lake Region on July 7, 1979, May 3, 1981, June 6, 1981, and June 13, 1981 for four different employees, followed by statements of amounts due for benefits paid, mailed between October 30, 1979 and March 1, 1982. Lake Region filed no protests to any of the forms submitted.

On May 18, 1982, the director sent Lake Region a notice of determination and assessment that requested a remittance of $14,629 for unpaid contributions of $11,849.96, penalties of $192 and the remainder for interest starting on August 31, 1981, to which were attached copies of the relevant statements of amounts due for benefits paid. Lake Region objected to the notice in a letter of June 3, 1982, declaring it was exempt under the supreme court decision and on June 18, 1982, Lake Region submitted the following: an affidavit of D.C. Keith, Sr., one of its officers, who averred that Lake Region was the legal organization of the Seventh-Day Adventist Church, that it operated and controlled its elementary and secondary schools in Illinois and had done so since 1976; a July 21, 1981 letter from the Bureau of Employment Security indicating that the Illinois Association of Seventh-Day Adventists operated primarily for religious purposes and that only separately organized activity might be subject to unemployment insurance coverage; and Lake Region's articles of incorporation.

Lake Region's protest was stricken by the director on the ground that the statements of amounts due for benefits paid became final and conclusive when Lake Region had failed to request their review within 20 days of their mailing, according to section 1404(B) of the Act amended in 1981. (Ill.Rev.Stat.1981, ch. 48, par. 554(B).) Lake Region protested the striking order and petitioned for a hearing. At an administrative hearing held on September 11, 1984, Lake Region's attorney testified as to the religious nature of the organization, its exempt status, and suggested that Lake Region did not protest earlier because its status was not determined until court decisions in 1981.

On September 26, 1984, the hearing officer issued a report in which he stated that agency records indicated the following: effective January 1, 1978, Lake Region elected to become a reimbursable employer; it failed to file wage reports for the last quarter of 1978, the first two quarters of 1979 and the first quarter of 1981; and also failed to object to notices sent concerning claims for benefits and benefits paid. The hearing officer concluded that: the issue of whether Lake Region was an exempt employer under section 211.3(A) was not relevant; Lake Region did not present evidence controverting the agency's records that it had elected coverage; and Lake Region's failure to object to notices it received allowed the determinations in those notices to become final under sections 2202 and 1404(B) of the Act. (Ill.Rev.Stat.1977, ch. 48, par. 682; Ill.Rev.Stat.1981, ch. 48, par. 554(B).) On November 27, 1984, the director issued her decision adopting and affirming the hearing officer's report and finding that Lake Region owed $11,849.96 for benefits paid, $192 as a penalty and interest beginning November 30, 1979.

On December 6, 1984, Lake Region assertedly filed a complaint for administrative review and declaratory judgment in the circuit court. After a hearing, the circuit court remanded the cause to the agency for further administrative hearings to determine whether Lake Region was tax exempt under the Act, to produce records indicating election of coverage and approval of such election under section 302 (Ill.Rev.Stat.1977, ch. 48, par. 382) and to produce any records concerning Lake Region's reimbursable employer status. The circuit court also dismissed both counts of...