It must be admitted that the last thing I thought I would ever post would be a case summary involving a non-compete provision between a member of the clergy and a church or denominational organization. While non-compete provisions might have a place among sales people that make sales based on employer created resources in some circumstances or sale of a business, it is hard to visualize a non-compete against an evangelist, a minister or a pastor. The needs met and the skills brought by these people are supposed to be outside the pale of government intervention, influence, interference or regulation. The First Amendment, the Ecclesiastical Exception Doctrine and the Ministerial Exception Doctrine are intended to protect from government some of the most valuable and fragile treasures in a free society. Of course, so also enshrined in the Constitution is the sanctity of contracts.
In Steiner v American Friends of Lubavitch (Chabad), Slip Op., (DC App., 2018), the Plaintiff was a rabbi employed to operate a campus ministry. He was employed under a written employment contract that contained a non-compete provision. The non-compete provision also contained elements that might be recognizable as a non-solicit clause. The Defendant sought a preliminary injunction. The trial court determined the non-compete provision was greater in breadth than necessary to protect the Defendants’ reasonable interest and modified the non-compete provision and then granted a preliminary injunction. The preliminary injunction precluded the Plaintiff from conducting ministry within one mile of the college campus (geographic limitation), precluded it for two years (temporal limitation), and Plaintiff could not be hired by another campus ministry on the same campus that supported orthodox Jewish belief or practice. The Plaintiff continued to use the former employer’s name and some of its property. The appellate court affirmed. However, the trial court’s injunction of the Plaintiff’s personal, i.e., non-employment ministry to the college students was reversed. The appellate court also questioned whether the injunction could also prohibit the Plaintiff’s wife conduct in any respect and remanded for a hearing on that subject. As an unemployed rabbi, the Plaintiff could continue to host Friday night Shabbos dinners, classes, social events for students, and annual trips to Israel for the students. But, the Plaintiff could not do these things for a paycheck from another employer religious organization on that college campus for two years.
It is clear that this court, and maybe others, will determine that a written employment contract does not require interference in ecclesiastical issues or structures in order to enforce it. However, practitioners that want to adopt employment contracts containing non-compete or non-solicit clauses between churches or para-church organizations and ministers will generally find that east of the Mississippi River it works better than west of the Mississippi River. Also, hierarchical church and para-church organizations will find them easier to use than congregational or connectional church organizations. It is likely that the church name and property will be subject to protection by injunction just like trade dress and trade secrets. In the Steiner case, the parties engaged in an ecclesiastical hearing as well as multiple court hearings, followed by appellate review, and had not reached finality. That might indicate that great expense will accompany an effort to enforce a ministerial non-compete.
There may not be any housing tax exemption for pastors. Such an exemption has existed since 1954. Most pastors lived at the “parsonage” owned and provided by the church. As churches became more affluent, the involuntary vow of poverty became less appealing. Pastors wanted to build up equity and own their own home. The parsonage began to slip into history. To aid pastors in acquiring a home churches turned to the “housing allowance.” The “housing allowance” began to form a significant part of the compensation of pastors. The allowance allowed the minister to buy a home near enough to the church to allow rapid access to the church but not owned by the church. The “housing allowance” was not included in taxable income. The “housing allowance” will remain a viable tax exemption for anyone, including pastors, that are required to live at a certain place by their employer just like any other secular employee. But, the “housing allowance” may not continue in the absence of the employer’s mandate if this decision stands.
In Gaylor v Mnuchin, Opinion and Order (WD Wis. 2017), 26 USC §107(2) has again by the same federal court been held to be in violation of the Establishment Clause. The Court held that the statute discriminates against secular employees because they cannot qualify for the exemption. The Court held the exemption does not have a secular purpose. The argument that the statute was enacted to implement the constitutional entanglements clause was rejected. The Court held the legislative history indicated the motive behind the statute was a preference for ministers over secular employees. The Court noted that taxes have been held to be neutral and not a burden on free exercise of religion, otherwise every tax would have to be inapplicable to employees of religious organizations. Housing allowances for pastors required to live on church grounds will not be effected because that is governed by a different section of the statute. The opinion of the Court runs to 47 pages.
Tax preparers that try to apply this decision should be cautioned that the Court expressly omitted from its ruling the other sections of the statute. Only 26 USC §107(2) is the subject of the decision. The practical loss of the housing allowance will only occur in those situations in which the housing allowance is used to shelter part of the income of the pastor. It will not be lost under this decision if the religious organization requires its pastor to live in a certain location or in a church owned parsonage. Any housing allowance that would be permitted to a secular employer’s employee will still be allowed for a religious organization employee.
No doubt this decision will be appealed as it has been in the past. Ultimately, the issue will be decided by a federal appellate court and possibly someday by the US Supreme Court. Several if not many tax years will come and go before then. Technically, the reach of this decision is not outside of the Western District of Wisconsin. But, the IRS could chose to insist it be followed nationally.
One of the interesting questions in church law is whether an employment contract with a pastor overrides the Ministerial Exception. The Ministerial Exception is the label for the First Amendment doctrine which excludes some church employment issues from governance by secular law or secular courts. Indeed, the uncertainty in recent years has been to determine the other church jobs that were outside the scope of court and regulatory jurisdiction. Of course, ministers, priests and pastors were outside the scope. Employment contracts raise the uncertainty of whether they remain outside the scope in whole or in part.
In Rev. Lee v Sixth Mount Zion Baptist Church, Slip Op., 2017 WL 3508140 (WD Penn. 2017) the federal court carefully traced the contours of a written employment agreement with a senior pastor to determine whether the employment relationship or parts of it had been carried outside of the Ministerial Exception. The opinion also contained most of the salient terms of the employment agreement verbatim which might also assist practitioners. The question the court answered was whether the employment contract terminated the applicability of the Ministerial Exception. The Court held that the Ministerial Exception had, indeed, been preserved in its applicability to termination of the pastor by the employment contract. Of course, that reserved for a future case whether some other contract might not.
The language in the employment contract that preserved the Ministerial Exception was a catch all reserve clause that merely stated termination could be “by law” and on “other grounds.” The employment contract also specified “for cause” termination grounds and the church was claiming that the “for cause” grounds had been triggered. The church put on evidence of declining attendance and declining finances, both of which the church labeled as “spiritual stewardship” and “financial stewardship” in the employment contract. The Court held that these grounds for termination were ecclesiastical and triggered the Ministerial Exception because to decide them would lead to “excessive entanglement” in church affairs. For example, the Court would have to decide whether the cause of declining finances was due to mismanagement or declining giving reflecting a loss of confidence in the pastor either of which could be ecclesiastic.
Too often the pastor going out the door wants to take the door with him. That generally reflects poor church management such that at the end of what should be a long and honored tenure there is no fully funded retirement plan. Pastors need a portable retirement plan to which employing congregations can contribute. Any church that lacks this creates the framework for poverty or a dispute.
In National Church of God v Carrington, 2017 NY Slip Op 51007 (NY Sup 2017), the trial court excellently detailed such a situation. Carrington was the founder of the church in 1980 and may have gotten the church property started by his own contributions. The church was apparently small because a church list from 2015 numbered the members at 47. Nevertheless, the church property was noted by the Court to be valued at $2,000,000 debt free. Like a lot of churches started by a founder the church had no constitution or bylaws, did not follow the corporations statute, did not have regular congregational meetings, boards appointed only by the pastor in contravention of the statutes and the certificate of incorporation and had only ad hoc leadership outside of Carrington. In the dispute that inevitably arose over the habitual if not also resulting lack of financial transparency, Carrington’s faction locked out the church board elected by the congregation in 2015 after the new church board tried to lock him out. Carrington tried to transfer the title to the property to a new church entity and his lock out of the congregation deprived the church of its sanctuary. The elected church board was able to prove its validity and the Court enjoined Carrington from transferring the title and ended the lock out.
Some pastors seem to have the idea that they own the church property. That is rarely true. Even a founder of many years will typically find they have created a non-profit entity funded by members that have an interest in the church property, and usually the overwhelming interest. Long term pastors should recognize the need to plan for a transition and retirement. It should be discussed with the church leadership which should be composed of regularly elected members. Some churches have non-member advisory boards and such a process might work as well. The retirement plan should be adopted by a vote of the congregation and entered into like any other contract.
Most pastors at some point in their lives begin planning retirement and grooming a successor or teaching leaders how to search for one. Sometimes, however, someone else wants to impose retirement on the pastor. In churches that have a high turnover among their pastors, this presents no problem because the revolving door solves the problem. But, when a pastor has been on station a long time, and is not ready to step aside even though someone wants the pastor to do so, disputes arise.
In Gregorio v Hoover, Memorandum Opinion (DDC 2017), the denominational foundation loaned money to the local church and the denomination co-signed. The church in a side contract agreed to pay the loan and the denomination agreed to hold legal title until the loan was repaid or refinanced. Once the loan was retired, the denomination was expected to transfer legal title to the local church corporation. The payments were timely made by the local church and the loan was retired. The local church had no turnover in the position of pastor. The denomination paid a small stipend to the pastor but his income was for the most part earned from the local church. Two decades passed. The denomination stopped paying the small stipend to the pastor. Three years later the denomination advised the pastor of the local church he would retire because the denomination wanted to appoint “younger people” to take his place. The pastor declined and suggested the denomination had no authority to appoint or terminate the pastor of that particular local church. The denomination locked the pastor out.
The pastor withdrew the age discrimination claim probably because the pastor had not exhausted administrative remedies by filing a complaint with the federal EEOC and obtaining a right to sue letter. However, because the pastor was the founding pastor of the local church, the local church’s corporate identity was and had always been owned and controlled by the pastor. Thus, the pastor was able to keep his claim alive by suing the denomination for failing to transfer legal title after the loan was repaid. The pastor was able to make a breach of contract claim also because the promised small stipend was two years in arrears after being paid for nearly two decades. The Ministerial Exception does not override a contract damages claim, even if it might not allow a court to compel reinstatement. Finally, the pastor asserted a claim against the denomination for unjust enrichment because the legal title was not transferred.
The success or failure of these particular claims lies in the future but there are lessons to learn from this order overruling the denomination’s motions to dismiss. Denominations that have longstanding engagements with pastors should review the governing documents, including real estate titles, to make certain current denominational retirement policies are reflected and that a retirement strategy has been agreed upon. A financial incentive to obtain agreement with updated governing documents will almost always be cheaper than litigation. A contract will often be enforced at least as to money damages. Contracts are enshrined in Article 1, Section 10 of the United States Constitution, co-equally with the First Amendment, which is why the Ministerial Exception or the Ecclesiastical Abstention Doctrine may not eclipse the contract.
While a court will typically refuse to reinstate a defrocked or fired pastor under the Ecclesiastical Abstention Doctrine or the “ministerial exception,” in most states a purely contract based dispute will be heard under neutral contract principles. In most states, the contract will be enforced as written or legal defenses to contracts will be considered.
In Bigelow v Sassafras Grove Baptist Church, Slip Op. (NC App. 2016), the Pastor and the church entered into an employment contract that contained a disability provision. In case it is not obvious, the contract did not require that the Pastor remain at his post to receive the disability benefits. The disability benefit provided by the contract was that the church would pay salary and medical benefits if the Pastor became disabled during the twelve year term of the contract, which might turn out to be several years in this particular case if the contract was enforced.
The trial court dismissed the case under the aforementioned 1st Amendment doctrines. The appellate court reversed the dismissal and sent the case back to the trial court for further proceedings, which would probably include discovery and trial until verdict or settlement. The reversal was based on a thorough review of the Ecclesiastical Abstention Doctrine and the “ministerial exception,” and the conclusion that neutral contract law principles governed the dispute.
The contract was, in part, quoted in the court opinion. The contract was clearly not drafted by a lawyer. Drafting errors may have resulted in confusion about the terms agreed upon or the full extent of the promises exchanged, especially duration of the promises. Further, the disability insurance policy in effect at the inception of the contract was no longer in force and it seems likely the church did not anticipate that the loss of that coverage might or might not expand the financial commitment. The portion of the contract quoted did not specify which party had the obligation to keep the disability coverage in force. If that was the Pastor’s duty, then the church might have a setoff to assert.
Employment contracts are generally enforceable between Pastors and churches as to financial terms, but not as to actual employment. If the church removes the Pastor from that position, no court will intervene, even if the financial aspects of the contract are still enforceable.
In the United States Supreme Court case, Hosanna – Tabor Evangelical Lutheran Church and School v EEOC, 565 US___, (01/11/2011), with which everyone is now trying to bring their employment relationships into alignment, the teacher in question was classified as a “minister” because of her religious licensure and her religious teaching responsibilities. As such, employment decisions could not be reviewed by the courts without violation of the First Amendment Ecclesiastical Abstention Doctrine. Other religious organizations have had the idea based on the case that all of their employees, regardless of expertise, are also religious operatives and so described them in employment contracts and employment policy manuals.
Will it work?
So far, it generally has. It probably will if the job, as described in the policy manual, includes religious education or other religious duties. In the absence of a policy manual or job description, there may be other proof of the religious entanglement of even secular positions. If the religious organization accepts government money there may be the need to trace whether the federal programs in which the employees serves is secular, and funded by government, or secular but related to the religious objectives. Absent a financial entanglement with government, most courts will likely allow church schools to enforce the tenants of their religious sponsors and probably most other types of organizations, too.
Another valid question would be, is it necessary? Most courts will see the reality rather than look only to the form. For now, until a few more court decisions come down the pipeline, the better practice is to revise employment agreements and policy manuals of church schools to make clear the religious nature of the duties of the teachers.
Another method of deflecting employment claims will be the “morality clause” inserted in employment contracts or policy manuals. Most denominations have a central document that sets forth a clear statement of the religious morality expected or sought, too. Evangelical churches that do not have a denominational base document usually have corporate bylaws or other constitutional documents upon which the church school or employment policy manual can be based to achieve the same result.