Salem College & Academy, Inc. v. Employment Div.

• Citation: 298 Or. 471,695 P.2d 25
• Decision Date: 02 April 1985
• Docket Number: T-56
• Parties: , 53 USLW 2388, 23 Ed. Law Rep. 287 SALEM COLLEGE & ACADEMY, INC., Respondent on Review, v. EMPLOYMENT DIVISION, Raymond P. Thorne, Assistant Director For Employment, Petitioner on Review. SC 29528; CA A20465; ED 80-
• Court: Supreme Court of Oregon

Page 25

695 P.2d 25

298 Or. 471, 53 USLW 2388, 23 Ed. Law

Rep. 287

SALEM COLLEGE & ACADEMY, INC., Respondent on Review, v. EMPLOYMENT DIVISION, Raymond P. Thorne, Assistant Director For Employment, Petitioner on Review.

SC 29528; CA A20465; ED 80-T-56.

Supreme Court of Oregon,

In Banc.

Argued and Submitted Oct. 6, 1983.

Decided Jan. 15, 1985.

Reconsideration Denied April 2, 1985.

James E. Mountain, Jr., Sol. Gen., Salem, argued the cause and filed a brief for petitioner on review. With him on the petition were Dave Frohnmayer, Atty. Gen., Stanton F. Long, William F. Gary, Deputy Attys. Gen., and Jan Peter Londahl, Asst. Atty. Gen., Salem.

Paul M. Fletcher, Salem, argued the cause and filed a brief for respondent on review.

Leslie M. Roberts, Portland, filed an amicus curiae brief for American Civil Liberties Union Foundation of Oregon, Inc. With her on the brief were Rex Armstrong and Charles F. Hinkle, Portland.

LINDE, Justice.

Oregon's unemployment compensation law, ORS chapter 657, excludes from covered "employment" services performed for certain religious organizations, thus exempting such organizations from taxation to support unemployment benefits. The statutory formula for the exclusion, ORS 657.072(1), deliberately mirrors the corresponding formula of the Federal Unemployment Tax Act, 26 U.S.C. § 3309(b)(1) (1982), so as to maintain the coverage required to protect the federal tax credits and federal grants on which the national unemployment compensation system is built. On petition by Salem College & Academy to review defendant's assessment of unemployment taxes against it, the Court of Appeals held the state and federal formula unconstitutional as an establishment of religion forbidden by the First Amendment insofar as the formula discriminates between a religious school affiliated with and one independent of a church or association of churches. Salem College & Academy, Inc. v. Emp. Div., 61 Or.App. 616, 659 P.2d 415 (1983). We allowed review to examine whether this constitutional holding was necessary and correct. We reverse the Court of Appeals.

I. THE DISPUTED EXEMPTION

Both the statutory scheme and the administrative proceedings and findings in this case are comprehensively set out in the opinion of the Court of Appeals. In summary, Congress originally exempted charitable, educational, and other tax-exempt organizations from federal unemployment compensation taxes and from obligatory coverage under state unemployment compensation laws. Coverage later was expanded until the present version, enacted in 1976, excludes (apart from ministers and members of religious orders) only employment by a church or convention or association of churches, or by "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). Accordingly, the Legislative Assembly in 1977 amended ORS 657.072, the exemption for nonprofit employers. Previously this section had expressly excluded from coverage services performed "(c) In the employ of a school which is not an institution of higher education." After the amendments to conform to changes in FUTA, ORS 657.072(1)(a) provides:

"(1) 'Employment' does not include service performed:

"(a) In the employ of:

"(A) A church or convention or association of churches;

"(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 * * *."

Or.Laws 1977, ch. 446, § 4. The intended significance of repealing the previous express exclusion of schools is important in interpreting the present law.

In resisting the imposition of liability for unemployment compensation paid to four of its former employees, petitioner Salem College & Academy, Inc., (hereafter the Academy) claimed that it qualified either as a church or as "principally supported" by churches within ORS 657.072(1)(a), and that otherwise the imposition of coverage on it would violate a number of state and federal constitutional guarantees. After a hearing, the Employment Division rejected these contentions and affirmed the tax assessment.

The Court of Appeals described the Academy as follows:

"Petitioner is an interdenominational Christian primary and secondary school founded in Salem in 1945 by the pastor and laymen of a local church. It is organized as a nonprofit corporation, registered with the Oregon Department of Education, exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code and governed by a 16-member Board of Trustees. It enrolls 750 students and employs approximately 50 teachers, in addition to administrative and staff personnel. Its expenses average approximately $1400 per student per year, revenues are derived from tuition and donations, and the average student tuition is $1,200 per year.

"One of the petitioner's principals summarized the purpose of the school:

" '[Its] purpose is to teach and train children and young people to a life of service to God. It makes no difference if that service is as a lawyer or a doctor or a plumber: the whole focus of living is to please God. And that is why we exist, to train every single child that they'll function in society, in their church, in their home in a way that honors God.'

"Specific religious training includes daily Bible study, prayer and twice-weekly chapel services. Moreover, petitioner's Parent and Student Handbook provides:

" 'The place of Christ is paramount in education, and should permeate every phase of the school-academics, athletics, activities, the lunchroom, playground, etc. Jesus Christ is not appendage to education, He is the center of it.'

"All staff, including maintenance personnel, school administrators, school store operator and teachers are presented to students as examples of faith-in-action and are expected to proclaim the teachings of Jesus Christ to the students. Teachers are selected on the basis of their ability to teach from 'God's perspective' and are expected to exert a spiritual influence on the lives of their students. All teaching must accord with petitioner's doctrinal statement of faith, and the teaching of doctrine peculiar to any denomination is forbidden. Each teacher must be an active member of a local church. Each teacher is evaluated annually and is subject to dismissal if his or her performance does not meet petitioner's standards. In addition, all staff are subject to dismissal for failure to comply with petitioner's code of ethics. Among other things, the code requires that each staff member be a 'regenerated person, who is confident of the leading of the Holy Spirit to the work here as his opportunity to make Christ known by life and word.'

"Petitioner is not affiliated with any specific church or denomination and is open to students of all denominations. Approximately 60 to 80 local churches participate in petitioner's activities. In selecting board members, petitioner attempts to have a fair representation of the churches that send it students. Petitioner's personnel serve as substitute pastors, and the local clergy serve as substitute teachers and speak at chapel services. The local churches encourage enrollment in the school and contribute funds or encourage their members to do so. Petitioner could not survive if it lost the support of the major churches in Salem's evangelical community."

61 Or.App. at 618, 659 P.2d at 417.

The referee concluded that the Academy is not itself a "church" nor principally supported by a "church or convention or association of churches" as those terms are used in the law. The Court of Appeals held that these administrative determinations were not erroneous, and that it therefore had to consider the constitutionality of the distinction between religious schools like the Academy and otherwise identical religious schools like the Academy and otherwise identical regligious schools closely affiliated with one or more churches. Id. at 625, 659 P.2d at 420.

II. RELATION OF STATE AND FEDERAL LAW

We begin by outlining the complex structure of the problem before us. The complexity arises from the relation between state and federal law before reaching a question of the relation between church and state.

Seen from the national perspective, the Federal Unemployment Tax Act (FUTA), 26 U.S.C. §§ 3301 to 3311 (1982), is a tax law, as its name indicates. The Congress that enacted it in 1935 did not undertake to create a nationally administered unemployment compensation system. Whether by reason of constitutional misgivings, ¹ tradition, or policy, the choice was to leave unemployment insurance programs to the states, but to impel them to adopt adequate programs whose costs individual states were reluctant to impose on their domestic enterprises for fear of placing them at a competitive disadvantage. The chosen device was a federal payroll tax on employers, 90 percent of which could be offset by any payments a state might exact for a state unemployment compensation program that met prescribed federal standards.

FUTA did not and does not purport to command states to maintain unemployment compensation programs; it relies on the incentive not to expose the state's employers to a federal payroll tax without the credit allowed for a state tax. Nor does FUTA prevent a state from extending the coverage of its unemployment insurance laws beyond federal requirements. Compliance of a state's program with the standards stated in FUTA and interpreted and administered by the United States Department of Labor therefore is not commanded by the Supremacy Clause; ² constitutionally, compliance is voluntary on the part of the state, though not practically or politically so. FUTA addresses taxpayers, not state legislatures. This view of the scheme was sustained in Steward Machine Co....