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                ARKANSAS COURT OF APPEALS
                                      DIVISION I
                                      No.E-14-623

SUNSHINE ACADEMY/FIRST                         Opinion Delivered   APRIL 1, 2015
PENTECOSTAL CHURCH OF
BRYANT                                         APPEAL FROM THE ARKANSAS
                   APPELLANT                   BOARD OF REVIEW
                                               [NO. 2014-EC-08]
V.


ARTEE WILLIAMS, DIRECTOR,
DEPARTMENT OF WORKFORCE
SERVICES EMPLOYER
CONTRIBUTIONS UNIT                             REVERSED
                      APPELLEE



                              BART F. VIRDEN, Judge

      The Arkansas Department of Workforce Services (Department) found that the

Sunshine Academy daycare operated by the First Pentecostal Church of Bryant (First

Pentecostal) was an organization separate from the church within the meaning of Arkansas

Code Annotated section 11-10-210(a)(4)(A) and therefore, Sunshine Academy must report

wages and pay unemployment insurance on daycare employees. For its only point on appeal,

Sunshine Academy argues the Department erroneously construed the statute. We agree, and

we reverse.

      In early 2013, a former employee of the daycare filed a claim for unemployment

benefits. On May 30, 2013, the Department sent a letter to Sunshine Academy stating it was

“liable to report wage information paid to workers subject to the unemployment tax.” A
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hearing was held on May 15, 2014, to determine whether Sunshine Academy was exempt

from paying unemployment-insurance taxes under Arkansas Code Annotated section 11-10-

210. The pastor of First Pentecostal, Jerry Paul Whitley, testified that everyone employed at

the daycare is paid by the church, including the director of the daycare, Diann Crouse. Pastor

Whitley testified his secretary, Regina Fields, is in charge of the “day-to-day financial

dealings” of Sunshine Academy and reports directly to him, and the General Board of First

Pentecostal Church of Bryant is also the board for the daycare. He testified the State partially

funds Sunshine Academy, and the money is deposited into First Pentecostal’s Sunshine

Academy account. He explained the daycare uses only church facilities, and during church

hours the church uses the daycare facilities for Sunday school.

       Diann Crouse also testified at the hearing. She testified Sunshine Academy has around

twenty employees, and everyone is paid by the church. The daycare receives state funding

through the “Better Beginnings Program” and vouchers, as a part of the Department of

Human Services’ state licensing program for the daycare; federal funding supports a nutritional

program at the daycare.       Crouse explained Better Beginnings, vouchers, and federal

nutritional funding are all voluntary, and a daycare could be operated without those programs

and funding. Crouse testified Pastor Whitley has the final say concerning the hiring and firing

of all daycare employees, and those processes are handled through the church business office.

The daycare license is held in the name of First Pentecostal.

       Regina Fields, the church secretary, testified she processes the church-employee payroll


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and explained that First Pentecostal is the named holder of the account on all the checks,

including the daycare employees’ checks. Fields stated she thought possibly half the funding

for the daycare comes from the church and tuition.

       Jeremy Brown, Acting Unit Supervisor for the Alternative Base Period Unit, testified

on behalf of the Department. He asserted Sunshine Academy is liable for unemployment

insurance because it receives funding from the aforementioned state and federal programs.

Brown asserted that receiving outside funding means that First Pentecostal does not have total

control of the daycare and is therefore a separate employing unit. Additionally, Brown asserted

Sunshine Academy is not primarily operated for religious purposes.

       In the Department’s opinion issued on July 11, 2014, it found that Sunshine Academy

was not exempt from payment of unemployment taxes. In the section of the opinion entitled

“findings of fact and conclusions of law” the Department found that “it does not matter who

or what entity hires or pays the workers; they are still deemed to be engaged by the

employing unit, in this case, Sunshine Academy.” The Department stated:

       [B]ecause Sunshine Academy is a separate employing unit under § 11-10-208(a)(1),
       it is not entitled to the exemption under Ark. Code Ann. § 11-10-210(a)(4)(A)(i)
       because the exemption is only applicable to employees of a church or convention or
       association of churches, and not a separate employing unit.

       The Department further asserts that Sunshine Academy is not exempt from
       unemployment insurance tax contributions under Ark. Code Ann. § 11-10-
       210(a)(4)(A)(ii) because Sunshine Academy is not operated primarily for religious
       purposes[.]

                                     I. Standard of Review


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       We conduct a de novo review when there are issues of statutory construction. Ark.

Comprehensive Health Ins. Pool v. Denton, 374 Ark. 162, 286 S.W.3d 698 (2008).

                                     II. Applicable Law

       Arkansas Code Annotated section 11-10-210 sets forth the following:

       For the purposes of subdivisions (a)(2) and (3) of this section, the term “employment”
       does not apply to service performed:
       (A) In the employ of:
       (i) A church or convention or association of churches; or
       (ii) An organization that is operated primarily for religious purposes and that is
       operated, supervised, controlled or principally supported by a church or convention
       or association of churches.

Id. § 11-10-210(a)(4)(A)(i) & (ii)( Supp. 2013). The Department interpreted the statute to

mean the daycare must also be operated for primarily religious purposes to qualify for the

exemption from paying unemployment insurance. In fact, the statute requires only that the

services performed be under the employment of a church, or convention or association of

churches, or, in the alternative, the services may be performed for an organization that is

operated for religious purposes and that organization must be supported or controlled by a

church.

       Our supreme court dealt with this issue in Arkansas Employment Security Division v.

National Baptist Convention U.S.A., Inc., 275 Ark. 374, 630 S.W.2d 31 (1982). In that case,

the National Baptist Convention owned and operated a hotel and bathhouse in Hot Springs.

It was run for a profit and was open every week except the one week when annual the

National Baptist Convention was held there. It had its own Commission appointed by the


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National Baptist Convention, which supervised the bathhouse and hotel, and employed a

manager to supervise the employees. Profits were turned over to the National Baptist

Convention, but employees were paid from a bank account held by “National Baptist Hotel

and Bathhouse maintained in Hot Springs.”

       The Employment Security Act, Arkansas Statutes Annotated section 81-

1103(i)(1)(D)(i)(I) (Repl. 1976), preceded the current statute and provided that the term

“employment” did not apply to service performed “in the employ of a church or convention

or association of churches, or an organization which is operated primarily for religious

purposes and which is operated, supervised, controlled, or principally supported by a church

or convention or association of churches.” The language is essentially the same in the current

statute.

       In National Baptist Convention, our supreme court reversed the Board of Review’s

determination that the bathhouse and hotel were separate entities. The court explained its

reasoning concerning the issue of whether there was a subordinate organization to the

National Baptist Convention that qualified as an employing unit:

       No such entity exists in this case. The three-member commission does not have title
       to the property, has no funds of its own, is not a partnership or other form of
       organization, and merely employs Puckett to manage the facility. Thus, there is wholly
       lacking the intermediate employing unit that would be required to pay taxes if the
       Convention’s own exemption is not applicable.

       . . . Hence, neither the supervisory commission nor the manager of the establishment
       supplants the Convention as the employing unit.

Id. at 377-8, 630 S.W.2d at 33.

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       Our supreme court also held it was the legislative intent to categorize employees hired

to work at the hotel as employees of the National Baptist Convention:

               If there were any remaining doubt about the legislative intention to make
       subordinate personnel the direct employees of the first, higher organization qualifying
       as an employing unit, that doubt would be completely dispelled by the following
       explicit subparagraph in the definition of an employing unit:

              Each individual employed to perform or to assist in performing the work of any
              person in the service of an employing unit (here the Convention) shall be
              deemed to be engaged by such employing unit for all the purposes of this act,
              whether such individual was hired or paid directly by such employing unit or
              by such person, provided the employing unit had actual or constructive
              knowledge of the work.

National Baptist Convention, 275 Ark. at 377–8, 630 S.W.2d at 33 (citing) Ark. Stat. Ann. §

81-1103(g)(2).

       The Department attempts to distinguish National Baptist Convention from the facts of

the present case, asserting the employer in National Baptist Convention “was a convention or

an association of churches. The appellant daycare is not. As such, it must be determined

whether the organization was operated primarily for religious purposes.” In National Baptist

Convention, the supreme court stated,

                Thus the Convention is exempt under Clause I if the hotel and bathhouse staff
       are its [the church convention] employees. On the other hand, since the facility is not
       operated primarily for religious purposes, there is no tax exemption if the workers are
       employed by some subordinate organization controlled by the Convention.

Id. at 376, 630 S.W.2d at 32. In other words, our supreme court determined that if the

organization is a church or a convention of churches, or an association of churches, then the

employer is exempt. If it is not, and then if the facility is operated primarily for religious

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purposes, the exemption still applies. Only if the facility is not operated by a church and it is

not operated for primarily religious purposes, does the tax exemption not apply.

       The differences between the case above and the present case only strengthen Sunshine

Academy’s position. The employees of Sunshine Academy are paid from the First Pentecostal

account that pays all other employees, rather than from a separate account from the daycare.

In National Baptist Convention, there was a separate account for just the hotel and bathhouse

from which paychecks were drawn. The directors of the daycare are the same directors of the

church, and there is no separate governing body, as there was in the form of a three-person

panel for the hotel. The pastor of First Pentecostal makes the final hiring and firing decisions,

and the church secretary maintains the payroll accounts. As in the case above, a director or

manager was hired to handle the day-to-day aspects of the operation. The daycare exists

physically within First Pentecostal itself, and the church uses the daycare facilities during

church hours. The Arkansas Supreme Court held that the hotel and bathhouse employees

were in the employ of the National Baptist Convention, and therefore by the same analysis,

we hold Sunshine Academy employees are considered employees of First Pentecostal.

       After our de novo review of the issues concerning Arkansas Code Annotated section

11-10-210, we find the Department of Workforce Services erred, and we reverse.

       Reversed.

       HARRISON and HIXSON, JJ., agree.

       Friday, Eldredge & Clark, LLP, by: Michael Moore and Amanda Moore, for appellant.

       Phyllis A. Edwards, for appellee.




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