Catholic Charities Entitled to State Unemployment Tax Exemption, Says SCOTUS

In a unanimous decision, the U.S. Supreme Court held that Wisconsin violated a church-affiliated charity’s First Amendment rights by denying a state unemployment tax exemption based on “theological choices.” (Catholic Charities Bureau, Inc. v. Wisconsin Labor & Industry Review Commission, No. 24-154)

In the case, Catholic Charities, the social ministry arm of a Roman Catholic diocese, challenged Wisconsin’s reading of a statute that provides a “religious purposes” exemption from unemployment tax.

The state contends that because Catholic Charities and its sub-entities are not engaged in “distinctively religious activity that would create difficulty in resolving unemployment disputes,” they do not qualify for the exemption. The Wisconsin Supreme Court ruled in favor of the state last year.

But the U.S. Supreme Court, in a June 5 decision authored by Justice Sonia Sotomayor, disagreed, finding Wisconsin’s interpretation of the religious purposes exemption “grants a denominational preference by explicitly differentiating between religions based on theological practices.”

Religious purposes exemption.

In Wisconsin, all paid work is generally covered by the state’s unemployment system, to which employers must make quarterly contributions. An exception is provided, however, under Wis. Stat. § 108.02(15)(h) for those employed by “an organization operated primarily for religious purposes.”

Wisconsin, and its state high court, view this exemption narrowly, looking both to an organization’s “motivations” and “activities.” The Wisconsin Supreme Court found that while Catholic Charities’ motivations are tied to religion, its activities — which include “job training, placement, and coaching, as well as services related to activities of daily living” — are “primarily charitable and secular.” (Catholic Charities Bureau, Inc. v. Labor & Industry Review Commission, 411 Wis.2d 1 (2024))

While the case revolves around a state statute, it has potentially broader implications. The Wisconsin statute is “textually parallel” to a portion of the Federal Unemployment Tax Act (26 U. S. C. §3309(b)(1)(B)). In addition, Justice Sotomayor notes that more than 40 states have adopted similar exceptions.

Court finds First Amendment violation.

U.S. Supreme Court concluded that the state of Wisconsin and its high court’s interpretation of the religious purposes exemption violates the First Amendment.

Catholic Charities could qualify for the exemption, said Justice Sotomayor in the majority opinion, by simply “providing their current charitable services if they engaged in proselytization or limited their services to fellow Catholics.” However, the Catholic faith bars a limitation in charitable services based on religion (or race or sex). “Many religions apparently impose similar rules,” she added.

Catholic Charities’ “eligibility for the exemption ultimately turns on inherently religious choices (namely, whether to proselytize or serve only co-religionists),” reads the decision. This constitutes a “denominational preference.”

The Court also rejected Wisconsin’s argument that Catholic Charities had failed to identify “distinctively religious” activities that would make resolving unemployment disputes difficult. Justice Sotomayor notes that at oral argument, Wisconsin characterized “distinctively religious activity” as “activities that express and inculcate religious doctrine: worship, proselytization, religious education.”

“Decisions about whether to ‘express and inculcate religious doctrine’ through worship, proselytization, or religious education when performing charitable work are, again, fundamentally theological choices,” writes Justice Sotomayor.

Church autonomy doctrine concerns remain.

In a concurrence, Justice Clarence Thomas contends the Court came to the right conclusion but should have gone farther. He views as a “threshold question” whether Catholic Charities, as an arm of the Diocese of Superior, should be treated as “an entity entirely distinct and separate from the Diocese” for purposes of the tax exemption.

Justice Thomas argues that the Wisconsin Supreme Court improperly treated Catholic Charities as a distinct organization — but the “church autonomy doctrine leaves it to religious institutions to define their internal structure for themselves.”

And this treatment by Wisconsin high court was “outcome determinative,” says Justice Thomas. The state court had “recognized that the Diocese’s ‘purpose is religious by nature,'” he explained.

Justice Ketanji Brown Jackson, in a separate concurrence, agreed that Wisconsin’s practice of treating “church-affiliated charities that proselytize and serve co-religionists exclusively differently from those that do not” violates the First Amendment’s religion clauses. But a “motivations-only” approach to the religious purposes exemption does not align with the Federal Unemployment Tax Act’s legislative history, according to Jackson.

Justice Jackson asserts that Congress, in enacting the Federal Unemployment Tax Act, intended to allow most nonprofit employees access to unemployment benefits — exempting just those whose church affiliation was “most likely to cause significant entanglement problems for the unemployment system.”

To Justice Jackson, the relevant question is a “function-based” inquiry: “what an entity does, not how or why it does it.” To her, a “motivation-focused exemption inquiry” can amount to “an intrusive exploration into the hearts and minds” of those who run a religious entity.