Last year, the United States Supreme Court rejected Wisconsin’s denial of an unemployment tax exemption to Catholic Charities, holding that the state’s analysis violated the First Amendment.
Recently, the First District Appellate Court addressed a related issue under Illinois law. In Jeffries v. IDES, the court considered whether the Salvation Army qualifies as a “church” under the Illinois Unemployment Insurance Act. Although unpublished, the decision is the first time an Illinois court has addressed Catholic Charities and it may give some insight into how these issues will be handled going forward.
Catholic Charities: Limits on State Review of Religious Activity
Like Illinois, Wisconsin exempts certain religious organizations from unemployment insurance taxes. The statute applies to nonprofits that are “operated primarily for religious purposes” and are “operated, supervised, controlled, or principally supported by a church.” Wis. Stat. § 108.02(15)(h)(2).
Catholic Charities and related entities applied for the exemption. Each was controlled by a Catholic diocese. The State denied the exemption, and the Wisconsin Supreme Court agreed, reasoning that the organizations were not “primarily” religious because they did not proselytize and did not limit services to co-religionists.
The U.S. Supreme Court unanimously reversed. The problem was not the statute itself, but how the State applied it. Conditioning exemption on proselytization or religious exclusivity effectively preferred some religious practices over others. Because that is a denominational distinction, this triggered strict scrutiny.
The Court also rejected the State’s attempt to treat those criteria as neutral. Whether an organization proselytizes or limits services by faith is a theological, not a secular question. Courts and agencies are not permitted to resolve those questions.
The statute, as applied, did not survive strict scrutiny. The State’s interests: namely, funding unemployment insurance and avoiding entanglement, did not sufficiently justify the lines it drew. Therefore, the Court held that Wisconsin’s application violated the First Amendment.
Illinois Unemployment Tax Law: Church Exemption Framework
Illinois uses a different structure. The Act generally includes nonprofit employment, but excludes services performed “in the employ of … a church or convention or association of churches.” 820 ILCS 405/211.3(A)(1).
That distinction matters. Illinois does not ask whether the work is “primarily religious.” The question is whether the employer qualifies as a church (or is sufficiently tied to one). The statute does not turn on the employee’s duties.
Jeffries v. IDES: Illinois Applies Employer-Based Religious Exemption
In Jeffries v. Illinois Department of Employment Security, the claimant sought unemployment benefits after she was terminated from the Salvation Army. She stated that her role was secular, as she did training and compliance work within a social service program. She stated that this was not religious and therefore, this should qualify as covered employment.
The Illinois Department of Employment Security’s Board of Review rejected the claim. The Circuit Court of Cook County affirmed in a one-page order. The First District affirmed as well, albeit in an unpublished decision.
The court held that the Salvation Army is a church as a matter of settled law. That ended the analysis. Because the statute excludes services performed in the employ of a church, the claimant’s work did not qualify as “employment,” regardless of its content.
The claimant’s argument, that her duties were not religious, did not matter. The statute does not draw that distinction.
The court then tied that conclusion back to Catholic Charities. Even where services are not religious in nature, that does not defeat exemption status. Requiring otherwise would force courts and agencies to decide what counts as sufficiently religious activity, which is an inquiry that is prohibited by the First Amendment.
Why This Matters for Illinois Religious Organizations and Nonprofits
These cases are not about whether the work looks religious. They are about how the organization is defined. If an organization describes itself as primarily charitable or secular in its filings, grant materials, or internal documents, that characterization will carry through. By the time a claim is filed, the agency is working from an existing record.
And once the agency fixes that classification, it can difficult to unwind. So, it becomes important to correctly characterize an entity as religious, or simply charitable in the secular sense.
Catholic Charities limits how far the State can go in second-guessing religious activity. It does not prevent the State from asking whether the entity qualifies for the exemption in the first place. That is where most disputes arise.
Practical Takeaway: Exemption Depends on How the Organization Is Defined
These cases are about how the organization is defined. Once the agency fixes that characterization, it is difficult to unwind. Catholic Charities limits how far the State can go in second-guessing religious activity, but it does not eliminate disputes over whether an entity qualifies for the exemption in the first instance. Those disputes are often decided by the record the organization creates at the outset.
If you have a question regarding whether your religious or nonprofit organization is exempt from certain taxes, please contact Michael A. Airdo (mairdo@airdowerwas.com) or Jake A. Leahy (jleahy@airdowerwas.com).