U.S. Supreme Court Supports Religious Exemption for Catholic Charities in Wisconsin

The U.S. Supreme Court (SCOTUS) recently determined that religious discrimination occurs when legal criteria discriminate between religions based on their “theological practices” or “inherently religious choices” as opposed to secular criteria that incidentally have different effects on different religious organizations.

On June 5, SCOTUS unanimously reversed a Wisconsin Supreme Court decision which denied Wisconsin-based Catholic Charities Bureau an exemption from paying taxes into the state’s unemployment compensation system. Wisconsin is one of more than 40 states that, like the federal government, offers such exemptions to religious employers. Wisconsin also exempts nonprofit employers that primarily operate for religious purposes. However, Wisconsin denied Catholic Charities Bureau’s request for an exemption because the group’s subsidiaries seeking the exemption do not proselytize (attempt to convert someone to Catholicism) and do not limit their services only to Catholics.

SCOTUS held that Wisconsin’s denial of Catholic Charities Bureau’s exemption request amounted to a violation of the religion clauses of the First Amendment to the Constitution because the denial amounted to “denominational discrimination.” The Court noted that the charity’s Catholic faith barred it from using charitable acts for proselytization and required charitable services to be provided regardless of race, sex, or religion. Thus, due to the tenets of its religion, it could not meet the standard set by Wisconsin. SCOTUS found that standard to be unconstitutional, as it wrongfully differentiated between religions based on theological practices in evaluating the charity’s tax exemption request.

The Court’s decision may potentially lead to more employers seeking, and receiving, tax exemptions in other states. The entities within the scope of the Catholic Charities Bureau that had sought the exemption are predominantly focused on charitable service as opposed to religious advancement. Neither the charity’s employees nor the people it serves are required to ascribe to any particular faith, much less Catholicism. One issue that likely may arise is that an observer examining the day-to-day functions of the respective organizations might find it difficult to distinguish them from their secular counterparts that otherwise are subject to paying into the unemployment system.

Simultaneously, the Court ruling also subjects more state and local governments that deny those organizations tax exemptions to a strict scrutiny analysis by courts, a difficult threshold to withstand that requires the government to prove that its denial is justified by a compelling government interest. Once a strict scrutiny analysis is applied, government entities must meet a very high standard to prevail in those actions because courts are hesitant to allow for infringements of fundamental constitutional rights — including religious rights.

Steptoe & Johnson’s Labor & Employment Compliance team and Taxation team will continue to monitor any developments following this recent decision. For any assistance or questions about this alert, we encourage you to contact the authors or a member of either team.

The authors thank Timmy Gwinn, Summer Associate, for his contributions to this article.