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Protecting Your Religious Entity Exemption Under The FEHA While Complying With Other Laws

Posted in Discrimination, Harassment, Labor Law, New Legislation and Regulations, Retaliation and Wrongful Termination, Wage & Hour

Updated 10/19/2020

California’s Fair Employment and Housing Act (“FEHA” or the “Act”) exempts certain religious entity “employers” from the application of the anti-discrimination laws found within the Act.

In 2018, after an unpublished case went to trial, I blogged to alert religious entities about steps they could take to preserve exemptions under the FEHA’s anti-discrimination laws, while complying with other laws from which they are not explicitly exempt.

Since that writing, the unpublished case settled post-trial (confidentially – thus why the case name has not been identified).  A similar published case, Mathews v. Happy Valley Conference Center, Inc., 43 Cal. App. 5th 236, 246 (2019), has been decided. In Mathews, the California Sixth District Court of Appeal has rejected two equitable arguments that plaintiffs’ attorneys have lately been raising against religious entities: that, by complying with other laws (such as having an anti-discrimination policy in the handbook) these employers waived their exemption from FEHA or should be “estopped” from asserting the exemption.  Mathews should reduce some of the anxiety religious entity employers have been feeling about their FEHA exemption, but my suggested best practices to avoid this potential trap remain relevant.

Employer versus Employer – Various Definitions in the Statutes

The FEHA prohibits discrimination, harassment, and retaliation on a large list of protected class statuses, and is more expansive than the federal analog, Title VII.  FEHA’s anti-discrimination provisions apply to “employer” – defined as any person who employs five or more persons, subject to certain exceptions.  Relevant to this blog, Cal. Gov. Code § 12926(d) a “religious association or corporation not organized for private profit” is not an “employer” for the “unlawful practices” provisions of FEHA.

FEHA, Cal. Gov. Code § 12950, also requires “all” employers, impliedly using the section 12926 definition and impliedly subject to the religious entity exemption – to post notices regarding employees’ rights under FEHA.  Indeed, most employers – including religious entities – are required to post a variety of other notices (minimum wage, payday notices, unemployment insurance, worker’s compensation, whistleblower rights, paid sick leave, etc.) pursuant to various Labor Code, Unemployment Insurance Code, federal law, local ordinances, and the Department of Industrial Relations requirements.  There are several vendors who supply “all in one” posters, updated annually. Most HR professionals and in-house counsel order these “all in one” posters from reputable sources, relying on them to be accurate.

FEHA, Cal. Gov. Code § 12950.1, also requires “an employer” to provide anti-harassment training (commonly referred to as “AB 1825” training, as modified by SB 1343Notably, there is NOT an express “religious entity” exemption from FEHA regulations. Instead, section 12950.1 has its own definition of employer: “(i) (1) For purposes of this section only, ‘employer’ means any person regularly employing five or more persons or regularly receiving the services of five or more persons providing services pursuant to a contract, or any person acting as an agent of an employer, directly or indirectly, the state, or any political or civil subdivision of the state, and cities.”  Thus, California “employers” are required to conduct bi-annual anti-harassment training to educate supervisors on the prohibitions against harassment and discrimination– apparently, even if those “employers” cannot be sued for discrimination under the FEHA.

Is a Nonprofit Religious Corporation Operating a School exempt from FEHA?

Certain religious entities have long been exempt under Cal. Govt. Code section 12926(d).  But effective January 1, 2002, section 12926.2(f) was added, expanding the definition of “employer” to include religious non-profit educational institutions that are (1) non-profit public benefit corporations; (2) formed by, or affiliated with a particular religion; and (3) operate an educational institution as its sole or primary activity. However, the amendment left intact the ability for such institutions to restrict employment in all categories of employment to adherents of the religion, regardless of whether the duties of the positions are connected to a religious function.  Some confusion has arisen over whether 12926.2(f) applies to religiously affiliated schools organized as nonprofit religious corporations, not public benefit corporations.

There has only been one case interpreting the 2002 amendment as preserving, rather than replacing or narrowing, the exemption for a school organized as a Nonprofit Religious Corporation, Henry v. Red Hill Evangelical Lutheran Church (2011) 201 Cal. App. 4th 1041.  In that case, the Court seemed to find it relevant that the school was part of the church’s ministry, did not exist as a separate legal entity, was on church property and was adjacent to the church.  Until 2017, no case had expressly protected the religious entity exemption for a school that is separately incorporated, is not on church grounds, but is nevertheless a religiously affiliated school organized as a Nonprofit Religious Corporation.

The good news for religious entities, especially nonprofit religious schools.

In 2017, a California Superior Court ruled on an issue of first impression, and decided that a private high school, organized as a California Nonprofit Religious Corporation primarily for religious and educational purposes, is exempt from FEHA.

The judge correctly interpreted the 2002 FEHA amendment (§12926.2(f)(2)) that narrowed the exemption for public benefit corporations operating schools as applying only to public benefit corporations, not to all schools including those organized and incorporated as nonprofit religious corporations.

This may seem axiomatic based on the plain language of the statute, but it was a hard-fought issue at trial because, unlike the school in Red Hill, this school is a distinct corporate entity from any church and is not on church grounds, and the school teaches secular (as well as religious) subjects.

Can a Religious Entity Waive its Exemption by Complying with Training and Poster Laws or Having a Policy Prohibiting Harassment and Discrimination?

In 2019, Mathews v Happy Valley Conference Center was decided (2019), involving a conference center (not a school). In Mathews, Mathews filed a FEHA retaliation claim against Happy Valley—his former employer, a conference center affiliated with a church. The parties did not dispute that the center was exempt from the FEHA under section 12926(d).   Like the 2017  case I previously blogged about, in Mathews, the plaintiff argued that, even though Happy Valley is exempt from the FEHA, it engaged in conduct that amounted to waiver of, or that it should be estopped from asserting, its exemption.

As I noted in 2018, one can “waive” certain statutory rights (waivers occur all the time, such as in release agreements). “Waiver” means the intentional relinquishment of a known right, or acting in a way that is so inconsistent with the intent to assert a right that the party should not be able to assert the right.  Estoppel is a similar doctrine, and requires that the other party relied on the party’s words or conduct and suffered harm as a result. Often treated as interchangeable by courts, these equitable principals developed to protect an innocent who has justifiably relied on the other party’s conduct.

Until 2019, waiver and estoppel as applied to a FEHA exemption had not been addressed in any published California case.  The trial court in Mathews addressed conduct that was cited as conduct demonstrating that Happy Valley had waived, or should be estopped from asserting, its religious entity exemption, and agreed that had; but the appellate court overruled these arguments.

a.  What “knowing and intentional” conduct might support waiver and estoppel of a nonprofit religious school’s FEHA exemption?

In the 2017 case, three facts allegedly supported waiver or estoppel: (1) having a handbook with a policy committing to enforce federal anti-discrimination laws and generally stating that discrimination and harassment are unlawful, (2) providing AB1825 supervisor anti-harassment training, and (3) posting standard breakroom “all in one” posters on the wall.

Similarly, in Mathews, the plaintiff argued that Happy Valley’s actions supporting waiver and estoppel were statements in the employee handbook that Happy Valley prohibited harassment, discrimination, and retaliation “made unlawful by federal, state and local laws”; that Happy Valley was “committed to compliance with all applicable laws providing equal employment opportunities”; and that employees “should be aware that the Federal Equal Employment Opportunity Commission and the California Department of Fair Employment and Housing investigate and prosecute complaints of prohibited harassment in employment.” (Id. 257-58.)   Happy Valley also did not raise the religious entity exemption in the EEOC investigation proceedings. (Id.)

b.  Mathews overturned trial court’s erroneous ruling that waiver and estoppel barred the religious entity exemption

In both Mathews and the 2017 trial I previously blogged about, the plaintiffs’ attorneys argued that the court should look to non-binding authorities interpreting the State of Washington’s antidiscrimination law.   On appeal, however, the Sixth District Court of Appeal refused to consider those outside authorities.   It ruled that, under California law, Happy Valley did not waive its exemption based on the statements contained in its employee handbook: “especially considered in the context of its creation, nothing in the handbook amounts to a knowing and voluntary waiver of the religious entity exemption.” (Id. at 257.) It also found that the trial court erred in estopping defendants from asserting FEHA’s religious entity exemption. (Id. at 259.) The appellate court did not need to reach the parties’ arguments related to nonbinding federal authorities interpreting the State of Washington’s antidiscrimination law because it was able to resolve the case based on California law.

While Mathews did not consider anti-harassment training or breakroom posters, the argument is analogous, and, if a case on those facts were to be decided today, I believe that the Mathews court rationale would lead a trial court judge to reject such waiver/estoppel arguments. This is because equitable estoppel doctrine is founded on the concepts of equity and fair dealing, and waiver is based on an intentional decision to relinquish a right (usually to obtain some other benefit).  These concepts are traditionally applied to prevent one from taking an unfair advantage of another. By establishing policies against harassment, and complying with state and federal laws by providing training and posting posters about laws and resources, the employers are not taking unfair advantage of employees by failing to explicitly tell employees that they are not protected by FEHA.

What’s the risk?

The result of a finding of waiver/estoppel of the FEHA exemption could be that a religious entity may be required to pay attorney’s fees and expert costs under the FEHA, that would not be recoverable for non-statutory claims, or risk a jury award that is not subject to the Title VII damages cap (the federal anti-discrimination statute).  A plaintiff who deliberately elected to pursue state law FEHA claims only, in order to avoid the Title VII damages cap, could blindside a nonprofit religious corporation which believed itself exempt from the FEHA.  So, it is important that religious entity employers act (and communicate with employees) in a manner consistent with their exemption.

What should a religiously affiliated nonprofit employer with more than five employees do to reduce its risk?

  1. Have your employee handbook, offer letter template, employment contract template, parent/student handbook, and any standalone policies and related acknowledgment forms reviewed by competent employment counsel. These documents should disclose the entity’s nonprofit religious entity status, and, where appropriate, a declaration of intent to preserve, and not waive, the religious entity’s rights and protections, while still preserving the commitment to a work environment free of harassment, discrimination and retaliation.
  2. When offering anti-harassment training to employees, be sure the trainer knows that the entity is a non-profit religious corporation and that the materials contain appropriate disclaimers and disclosures. If using the DFEH’s free materials, or your company’s usual training materials do not explain that the entity is exempt from the FEHA, look for a trainer who can modify the materials, or consider providing supplemental materials explaining the exemption.
  3. Consider modifying, or supplementing, the FEHA portions of the standard “all in one” breakroom employment notices to make employees aware of your religious entity exemption.
  4. Have competent legal counsel review your Articles of Incorporation, Bylaws, and corporate practices, to ensure that the entity’s organizational documents and practices comply with the Nonprofit Religious Corporation Code.
  5. If your entity is a religiously affiliated school incorporated as a Nonprofit Public Benefit Corporation, seek advice regarding whether it qualifies as a Nonprofit Religious Corporation and whether conversion would be appropriate and beneficial. Religiously-affiliated schools organized as Nonprofit Public Benefit Corporations enjoy only a narrow exemption from FEHA, except regarding the hiring of persons holding religious positions.

Weintraub Tobin’s team of employment and corporate attorneys understand these issues and provide training, handbook and other document review, and guidance tailored to your specific industry.