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Unemployment Tax Victory, And the Government’s Role in Defining Religion

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What is religious enough for the government to recognize a ministry’s tax exemption? Within the unemployment tax context, Illinois and other state laws exempt churches and “church-controlled” nonprofits “operated primarily for religious purposes.” If they meet either definition, then they are not “employers” for unemployment purposes and therefore need not participate in the state unemployment system. But how does the government determine whether the “primarily” religious element is met? A recent court decision involving By The Hand Club For Kids, a Chicago ministry of The Moody Church, illustrates the inherent tension and the critical religious liberty interests at stake.

With the tremendous help of Alliance Defending Freedom, a public interest law firm dedicated to upholding religious liberty, our law firm has been privileged to represent By The Hand before the Illinois Department of Unemployment Security and on appeal. By The Hand recently won a victory from Judge McGing of the Circuit Court of Cook County (Case No. 17 L 50886), who recognized that the government must defer to the ministry’s good faith and amply demonstrated primarily religious purpose, consistent with First Amendment religious freedom principles. [1] The government has appealed the court’s decision to the Illinois Court of Appeals, seeking to uphold the IDES’s decision that By The Hand is not religious enough and thereby to allow the government to substitute its judgment instead of deferring to the ministry.

The Clash Between Illinois Government and Christian Ministry

Since 2001, By The Hand Club For Kids has worked to lead underprivileged children to Jesus through chapel services, Bible studies, discipleship, prayer, worship, and engage with explicitly Christian evangelistic curricula. By The Hand requires its staff and volunteers to be churchgoing Christians who also provide free food, medical care, and educational services as additional practical outworkings of their religious mission. Indeed, By The Hand explicitly understands its evangelistic purpose to be the very reason and goal of providing all of its services to the children.

Under Illinois law, entities defined as “employers” must participate in the Illinois unemployment insurance system so terminated employees – if they otherwise qualify (i.e., not discharged for misconduct or voluntary resignation) may receive monetary unemployment insurance benefits. Unemployment insurance thus serves as a social safety net for many employees, but not all. In particular, the Illinois Act expressly exempts both churches (presumably including religious institutions too) and church-controlled entities operated primarily for religious purposes.

When By The Hand began as a separately incorporated ministry of The Moody Church, it sought official recognition of the church-controlled unemployment exemption – and such exemption was expressly granted by the Illinois Department of Employment Security (“IDES”). Nearly a decade later, and following an employee’s unemployment benefits claim, the IDES changed its position and asserted that By The Hand was now an “employer” subject to the Illinois Unemployment Insurance Act.

In seeking to subject By The Hand to employment tax liability, the IDES has contended that By The Hand is both liable in specific employee-related claims and with respect to mandatory unemployment insurance contributions. The monetary liability is based on the total number of employees and amount of compensation; for By The Hand, the potential financial impact is severe. Nevertheless, throughout the IDES and By The Hand’s interaction, the IDES has refused to honor its prior recognition of By The Hand’s exempt status – and notwithstanding no material change in By The Hand’s operations for purposes of the statutory exemption and the significant religious liberty aspects involved here. Instead, the IDES has rejected such status and has even asserted that the statutory religious exemption may be eviscerated in light of underlying public policy of unemployment benefits as a social safety net, thereby substituting its judgment not only regarding religion but also for legislative policy.

By The Hand’s Unemployment Case

The court arose after a former employee of By The Hand filed a unemployment insurance claim. In finding her eligible for such benefits, the IDES had to determine that By The Hand was an “employer” for purposes of the unemployment statute, not a church-controlled ministry operated primarily for religious purposes, as previously recognized. The IDES was willing to contradict itself and thus awarded benefits to the former employee.

In doing so, the IDES accepted that By The Hand is “church controlled” for purposes of the unemployment statute, just not “operated primarily for religious purposes” as required under the statute’s second prong. The IDES thus impermissibly undertook to define religious activities. More specifically, the IDES found that because By The Hand engaged in certain activities (like providing free food or tutoring services) that the government viewed as being secular, its primary purpose could not be “religious.”

On administrative appeal to the Circuit Court of Cook County, Judge McGing agreed with By The Hand’s position that it is indeed operated primarily for religious purposes, in keeping with By The Hand’s own good faith characterization and along with due deference to By The Hand rather than government interference. In its opinion, the Court highlighted that since By The Hand characterized “superficially secular activities as part of its religious practice, and … nothing on the record indicates that [By The Hand] made this characterization in bad faith … the inquiry need not go further.”

In so ruling, the Court relied on the Illinois case of Calvary Baptist Church v. Dep’t of Revenue, a 2004 case upholding a church’s religious property tax exemption, since the church’s good-faith assertion that the property was used primarily for religious purposes satisfied the statutory requirement that the land be used…primarily for religious purposes. The Court also pointed to the 2014 Illinois unemployment insurance case of Unity Christian Sch. of Fulton v. Rowell, which recognized that if an entity makes a good-faith claim that its property is used primarily for religious purposes, or that the entity operates primarily for religious purposes, then the government may not substitute its own judgment of religious purpose. Rather, the government—and the Court—must defer to such a good-faith characterization.

This court decision underscores the importance of preserving the integrity of the religious and political spheres—one of the fundamental purposes of the First Amendment—through certain restraint. While the government agency sought to entangle itself in religious matters, and vigorously argued that it may do so, thankfully the court pulled it back. By The Hand now faces further government efforts to deny its religious liberty rights, and to reverse the Court’s decision, through the IDES’s recently filed appeal to the Illinois Court of Appeals.

The Legal Landscape and the Key to Pluralism

The issue here is not whether social safety nets are good or bad policy. Nor is it whether churches and their ministries are morally obligated to provide for former employees, or whether they should always be exempt from all taxes. Those issues are, of course, very important, and should be addressed elsewhere. The central focus here is that given a statutory framework designating church-controlled entities operated primarily for religious purposes as exempt from a tax system—for valid constitutional and policy reasons—the government is limited in its ability and authority to define “religious.” Stated differently, the resulting issue is thus whether the government may decide which activities are categorically religious and which are categorically secular, then make a final determination about whether such activities taken together reflect a “primarily religious purpose.”

The legal landscape is somewhat more complicated than it may first appear, largely due to the safeguards of liberty put into place by our system of federalism. In summary, there are at least three different levels of law and regulation applicable to a nonprofit organization: federal, state, and local. Certain matters are left to the state and local governments, while others are handled by the federal government, and sometimes issues overlap – particularly those of constitutional proportion. Sometimes issues may seem to overlap, when they actually do not.

The well-known Internal Revenue Code Section 501(c)(3) of the federal statutory scheme treats the term “religious” generously, in a way which may or may not differ from the way various states understand and use the same term. Thus, even if the federal laws recognize certain exemptions for certain organizations if they fit the federal test for “religious,” the various states may or may not exempt those same organizations from State-level property, sales, or unemployment taxes. With respect to By The Hand, Illinois unemployment law provides a particular statutory exemption for churches and certain church-controlled entities operated primarily for religious purposes, which is more narrow than for Section 501(c)(3) definitional purposes.

Over and above all of different governing authorities’ various tax determinations (e.g., sales tax exemptions, unemployment tax), the First Amendment to the United States Constitution requires that the government shall neither “establish” a religion, nor prohibit the “free exercise” thereof. Thus, regulations concerning churches or entities operated for religious purposes must not be subject to a constraining governmental definition of what constitutes religion and what does not. In constitutional legal parlance, such government interference would be deemed “excessive entanglement” with religion and therefore unconstitutional. For when the government can decide what is religious and what is not religious, it also has the power to say what is orthodox belief and what is not—essentially favoring and establishing one religion over another, if not creating its own religion entirely.

It is for this reason that the IRS properly takes a deferential stance when determining whether an organization is organized and operated exclusively for religious purposes, or even if an organization is a church. While admittedly imperfect in several respects, the IRS uses a multi-factor non-dispositive test that helps it recognize a good-faith claim to a church’s religious faith and practice - without undue interference or proclamation of legitimacy. (See Schedule A of IRS Form 1023; for a recent and fascinating illustration of the IRS’s determination of “church” status, see Defining “Church” with an IRS Focus. )

No matter the level of governance or subject matter being regulated, the principle of deference remains the key to our society’s functioning pluralism. Of particular significance, and as Judge McGing capably recognized, context matters. The government, being the authority within its own contextual sphere, must respect the boundaries of its own and of other spheres of culture. The government is ill-equipped to do otherwise, and such excessiveness (entanglement) would ironically risk a dangerous theocratic situation with the state as the head of the church.

The Context Matters (or At Least It Should)

Few would question the ability of the government to distinguish between corporations and limited liability companies. After all, these corporate forms are themselves creatures of the state, and they owe their very existence to the government, and their “personhood” is itself a legal fiction. The same is true of various administrative agencies or even courts, whose existence and manner of practicing their craft and disciplines are either determined, defined, or regulated by some branch of the government.

However, the government’s ability, power, and authority to distinguish between organizations and their practices diminishes, when certain entities are not only not creatures of the state but operate within a different cultural sphere entirely. The state simply lacks legitimate definitional ability to distinguish within the religious sphere.

Consider the following. The consumption of bread and wine at a picnic makes for a lovely snack—but done within the context of a church service may represent the holy sacrament of communion. May the government make a categorical pronouncement that the eating of bread and the drinking of wine is always a secular activity? Or a religious one, for that matter? Similarly, the wearing of a head scarf on a fall day may be a fashion statement—or it may be a religious practice of wearing a hijab in accordance with a theological interpretation of the Qur’an. May the state categorically decide that head scarfs are merely secular head coverings? Was Mother Teresa’s care for the poor an example of secular charity or rather a religious ministry? What about teaching children about the Bible – is that a reading lesson or an invitation to faith? And eating, playing, and studying – are these opportunities to practice faith in action, or simply everyday activities with no religious dimension?

The impossibility of making such categorical determinations undergirds the historic doctrine of deference observed by the courts and other government agencies. Out of respect for its own limits, and for the pluralism endemic to American society, the government has traditionally and should continue to defer to good faith assertions of religious faith and practice. The limits of such deference are subjects of good faith discussion, of course. A prominent Supreme Court example is Employment Division v. Smith, in which the Court deferred to Smith’s own characterization of his activities as being religious but nevertheless held that the government may permissibly burden such religious belief through a neutral law of general applicability (and with the resulting enactment of the federal Religious Freedom Restoration Act’s more stringent balancing test). A more recent example is Hosanna-Tabor v. EEOC, in which the Supreme Court required government deference to a church’s ability to select its own religious leaders, even those who engage in teaching activities that could be deemed secular, through application of the “ministerial exemption” barring an employee’s disability discrimination claim. But the norm remains: the government should not categorically determine some practices to be religious and others to be secular.

Implications and Applications of Government Deference

The paradigm of deference, when applied to the instant case involving By The Hand’s religious ministry cuts strongly against the argument asserted by the IDES. Fundamentally, the IDES argued that certain activities and physical acts—providing free food and education—were categorically secular, so an organization offering such activities could not be operated primarily for religious purposes. However, case law, common sense, and the United States Constitution reflect otherwise. Thankfully, the Court recognized that the IDES “Board clearly erred when it substituted its own judgment of religious purpose for [By The Hand]’s.”

In doing so, the Court recognized the contextual nature of By The Hand’s emphatically evangelistic mission in all that it does:

[By The Hand] does indeed provide many services that could, in a different context, be considered secular. But context is important. Analyzing an activity’s purposes requires looking not only at the activity itself, but why it [is] being undertaken. In the instant case, the court sees two reasons by [By The Hand] provides, free of charge, hot meals, tutoring, and medical services. The first is that performing charitable acts is, in itself a religious practice. The second is that [By The Hand] seeks to induce the children in its care to become religious Christians.

Regardless of the specific activity, and focusing instead on why By The Hand carries out its work (and, helpfully here, so thoroughly) the Court recognized that the IDES should have and must now defer to By The Hand’s good-faith characterization of itself as organized “primarily for religious purposes” for unemployment tax purposes.

For other organizations that engage in practical outworkings of their faith commitments, where the work of the hands is but a manifestation of the religious convictions of heart and minds, it may be helpful to assess not only their own practices but also how they communicate the underlying motivations and reasons. In other words, religious convictions should be carefully thought through to determine—and to articulate—what kind of outward work is demanded by such convictions. It should be possible to infer a religious motive or at least a theological argument for a given practice. And then an organization should carefully determine how best to communicate its faith commitments and how its work is consistent with and actually manifests those commitments, particularly if the organization’s leaders are interested in religious exemptions or similar benefits. The clearer the message, the more likely it will be that the government respects the bounds of its own sphere.

Whether at a federal, state, or local level, a pluralistic society requires a healthy respect for difference among persons and among organizations, not to mention the limited roles of particular social authorities. And the only way to respect such difference is for social authorities—like the government—to exercise proper restraint to provide for the flourishing of human beings and the effectiveness of their many institutions.

[1] For a prior summary of the decision, see For the ADF press release, see For the court decision itself, see

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