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

• Decision Date: 29 April 1983
• Docket Number: No. 80-T-56,80-T-56
• Citation: 659 P.2d 415,61 Or.App. 616
• Parties: , 9 Ed. Law Rep. 748 SALEM COLLEGE & ACADEMY, INC., Petitioner, v. EMPLOYMENT DIVISION and Raymond P. Thorne, Assistant Director for Employment, Respondents. ; CA A20465.
• Court: Oregon Court of Appeals

Page 415

659 P.2d 415

61 Or.App. 616, 9 Ed. Law Rep. 748

SALEM COLLEGE & ACADEMY, INC., Petitioner, v. EMPLOYMENT DIVISION and Raymond P. Thorne, Assistant Director for Employment, Respondents.

No. 80-T-56; CA A20465.

Court of Appeals of Oregon.

Argued and Submitted Sept. 28, 1981.

Decided Feb. 16, 1983.

Reconsideration Denied April 29, 1983.

Paul M. Fletcher, Salem, argued the cause and filed the brief for petitioner

Jan Peter Londahl, Asst. Atty. Gen., Salem, argued the cause for respondents. With him on the brief were Dave Frohnmayer, Atty. Gen., Stanton F. Long, Deputy Atty. Gen., and William F. Gary, Sol. Gen., Salem.

Before BUTTLER, P.J., and WARDEN and WARREN, JJ.

BUTTLER, Presiding Judge.

Petitioner seeks judicial review of the Employment Division referee's decision affirming the Division's tax assessment for reimbursement of unemployment compensation paid to four of its former employes. It contends that it is statutorily exempt from the Unemployment Compensation Act (ORS 657.005 to 657.990) or, if not exempt, that the application of the Act to it is forbidden by the First Amendment to the United States Constitution. ¹ We conclude 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.

that petitioner is not exempt by statute, but that applying it to petitioner and not to church-related schools violates the Establishment Clause of the First Amendment. Given that conclusion, we need not decide whether, or to what extent, the Act may be applied to religious schools in light of the Free Exercise Clause of the First Amendment, or whether the Act denies petitioner equal protection under the Fourteenth Amendment.

One of 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.

THE STATUTORY SCHEME

The Federal Unemployment Tax Act (FUTA), 26 U.S.C. §§ 3301-3311 (1976 ed. & Supp. IV), created a cooperative federal-state scheme to provide benefits to unemployed workers. It requires employers to Until 1970, section 3306(c)(8) of FUTA excluded from covered employment "service performed in the employ of a religious, charitable, educational, or other [tax exempt] organization." Pub.L. No. 86-778, § 533, 74 Stat. 984. In 1970, Congress amended FUTA to require state plans to cover employes of nonprofit organizations, state hospitals and state institutions of higher education, thus eliminating the broad exemption available to nonprofit organizations. 26 U.S.C. § 3309(a)(1). In its place, Congress enacted section 3309(b) to exempt from mandatory state coverage a more narrow class of religious and educational employes, under which "employment" did not include service performed:

pay an excise tax on wages paid to employes in covered employment but entitles employers to a credit of up to 90 percent of the tax for contributions they have paid into state unemployment programs that comply with federal standards. 26 U.S.C. §§ 3301-3302. In addition, federal grants are available to the states to administer federally approved state plans. See 29 U.S.C. § 49d(b); 42 U.S.C. § 501. One of the requirements for federal approval is that state programs encompass certain broad categories of employment. See 26 U.S.C. §§ 3304 and 3309. The Secretary of Labor annually reviews each state program to determine whether it satisfies federal standards. 26 U.S.C. § 3304(a) and (c). Because of this combination of federal grants and tax credits, the federal government, for all practical purposes, dictates the minimum coverage of state unemployment insurance laws. The Oregon program is codified in ORS ch. 657.

"(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;

"(2) 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;

"(3) in the employ of a school which is not an institution of higher education. * * * " Pub.L. No. 91-373, § 104(b)(1), 84 Stat. 698.

In 1976, Congress again amended FUTA, eliminating the substance of section 3309(b)(3), and thereby removing the blanket exemption for school employes. See Unemployment Compensation Amendments of 1976, Pub.L. No. 94-566, § 115(b)(1), 90 Stat. 2670. In order to maintain compliance with FUTA, Oregon promptly amended the state statute. Or.Laws 1977, ch. 446, § 4.

For purposes of this appeal, there are three principal consequences to a covered employer. First, the employer is subject to financial liability as determined by either the periodic tax payment or the reimbursement method. Under the periodic tax payment method, required of most employers, the employer makes periodic tax payments into the state unemployment compensation fund; each employer's contribution rate is determined by the Employment Division based on the amount of benefits previously paid to former employes of that employer. 26 U.S.C. § 3301(a)(c); ORS 657.430 to 657.471. Nonprofit organizations, however, are permitted to elect the reimbursement method for determining tax liability, ORS 657.505(8), under which the employer is required to pay only the exact amount paid from the fund to the unemployed former employes of that employer. In contrast to the standard method, payments under the election provision are, in effect, reimbursements made after the benefit has been paid. Electing employers are required to file a surety bond or deposit other security with the Employment Division. ORS 657.505(8).

The second major consequence of coverage is that employers are required to maintain and submit to the Employment Division detailed employment records, which include the wages paid to each employe and other information necessary to compute the employer's tax liability. ORS 657.660; 657.662. Third, the Employment Division must analyze the reasons for the termination The present case arose when the Employment Division sent petitioner a notice of tax assessment seeking reimbursement for benefits paid during the first quarter of 1980 to four former employes; ² petitioner had previously elected the reimbursement method after being notified by the Division that it was subject to the Act. Petitioner requested a hearing pursuant to ORS 657.683, contending that it was "an exempted religious institution."

of employment for workers of covered employers in order to determine the employers' liability. In general, if the employe is terminated for "misconduct connected with work" as determined by the Division, subject to judicial review, the employer is not liable. See ORS 657.176(2).

At the hearing, petitioner contended that it comes within the statutory exemption of ORS 657.072(1), which provides:

" 'Employment' does not include service performed:

"(a) In the employ of:

"...