Many Catholics have been baffled a particular aspect of the contraception mandate proposed by the U.S. Department of Health and Human Services: the definition of a religious employer. The rule granted an exemption to an institution that “(1) has the inculcation of religious values as its purpose; (2) primarily employs persons who share its religious tenets; (3) primarily serves persons who share its religious tenets; and (4) is a non-profit organization.”  The definition effectively excluded most Catholic hospitals and higher education institutions.
Although the mandate is new, the distinction is rather well established in labor and employment law – helping explain, for instance, why employees of Catholic hospitals can turn to the National Labor Relations Board (NLRB) or Equal Employment Opportunity Commission (EEOC) for protection of their rights, while those employed by a Diocese or parish cannot.
Jurists have generally read the expansive protections of our First Amendment (“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof”) as conferring virtual immunity from government regulation on houses of worship. The courts often defer to the elected branches of government, however, when dealing with religious-affiliated organizations operating in the secular realm, employing and serving those who are not co-religionists.
Catholic hospitals pretty clearly fall in the latter category, but schools are a bit of a mixed bag. In NLRB v. Catholic Bishop of Chicago (1979)  the Supreme Court ruled that K-12 schools, which include mandatory religious instruction, belong in the category immune from regulation under the National Labor Relations Act. Manhattan College  and St. Xavier University, which are currently fighting union organizing efforts by their adjunct faculty, are currently arguing much the same case – though from a weaker set of facts, since Catholic higher education institutions don’t necessarily make religious education much of a priority.
None of this background renders the mandate by Health and Human Services wise or just. But it does render it a bit more comprehensible, and can inform our dialogue as we seek redress.