Applicability of the Service Contract Act of 1965 to Federal Reserve Banks ( 1978 )

78-53 MEMORANDUM OPINION FOR THE
SECRETARY OF LABOR
Service Contract Act o f 1965 (41 U .S.C . § 351 et. seq.)
— Applicability to Federal Reserve Banks
The Attorney General has asked me to respond to your request of January 23,
1978, for an opinion on the question whether the Service Contract Act of 1965,
41 U.S.C. §§ 351-358, 79 Stat. 1034, as amended (Act), is applicable to the
Federal Reserve banks. For the reasons hereafter set forth we conclude that the
Federal Reserve banks are subject to the provisions of the Service Contract
Act.*
Section 2 of the Act, as amended, 41 U.S.C. § 351, provides in substance
that every contract entered into “ by the United States” in excess of $2,500, the
principal purpose of which is to “ furnish services in the United States through
the use of service employees,” shall contain the following:
(1) A provision specifying the minimum wage to be paid to the
various classes of service employees as determined by the
Secretary of Labor, or in accordance with an applicable collec­
tive bargaining agreement,
(2) A provision specifying fringe benefits similarly determined, and
(3) A provision that no part of the services shall be performed in
buildings or surroundings furnished by the contractor or subcon­
tractor which are unsanitary or hazardous to the health or safety
of the service employees.
In no case are the wages to be less than the minimum wages provided for by § 6
of the Fair Labor Standards Act, 29 U.S.C. § 206.
The term “ service employee” is defined in § 8(b) of the Act, as amended, 41
U.S.C. § 357(b). It includes guards, watchmen, and persons employed in
laundry, dry cleaning, custodial, janitorial, cafeteria, and miscellaneous
housekeeping operations. See Rept. No. 798, 89th Cong., 1st sess. pp. 2, 3
(1965) (hereafter S. Report).
♦The court in Brink's Inc. v. Board o f Governors, etc., 466 F. Supp. 116 (D .C . D .C . 1979),
discussed this opinion and agreed with its conclusion.
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The purpose of the Act is to provide “ much needed labor standard protection
for employees of contractors and subcontractors furnishing services to or
performing maintenance service for Federal agencies” ; at the time of its
enactment “ the service contract was the only remaining category of federal
contracts to which no labor standard protections apply.” H. Rept. No. 948,
89th Cong., 1st sess., p. 1 (hereafter H. Report); see also S. Report, p. 1. The
perceived need for protection resulted from the fact that service employees
frequently were not covered by the Fair Labor Standards Act and State
minimum wage laws, and often were not members of unions. Consequently,
they were “ one of the most disadvantaged groups of our workers and little hope
exists for improvement of their position without some positive action to raise
their wage level.” H. Report, p. 2; S. Report, p .3. Members of Congress had
expressed their concern over the status of the employees of contractors having
service contracts with the United States for several years prior to the adoption
of the Act in 1965. H. Report, p .2. These concerns were epitomized by the
statement on the floor of the House of Representatives by Representative
O ’Hara, who was in charge of the bill:
. . . the purpose of this bill is to extend the long-standing policy of
Congress that the Federal Government shall not be a party to the
depressing of labor standards in any area of the Nation. [ I l l Cong.
Rec. 24387 (1965)]
And Representative Burton pointed out:
When a Government contract is awarded to a service contractor with
low wage standards, the Government is, in effect, subsidizing
subminimum wages. [ I l l Cong. Rec. 24388]
Your Department takes the position that in the light of the purpose and policy
of the Act and the governmental functions exercised by the Federal Reserve
banks, the latter are sufficiently identified with the United States so as to be
embraced by the term “ United States” in § 2 of the Act. The Federal Reserve
banks contend otherwise on three grounds:
First, they assert that the banks, although possessing a hybrid character, are
essentially private banking corporations and not Agencies of the United States;
second, the Act does not apply to Agencies such as the Federal Reserve banks,
which do not conduct their business through appropriated funds; and third,
when statutes are intended to assimilate the Federal Reserve banks to the United
States they do so expressly.
I.
It is generally recognized that the Federal Reserve banks do possess a hybrid
character. While in some aspects their activities are like those of private
banking corporations, they are under strict governmental control and perform
important governmental functions. Although the United States does not own
any part of their capital stock, which is subscribed to by their member banks,
12 U.S.C. § 284 note, and does not elect a majority of their boards of directors,
12 U.S.C. § 302, the stockholders’ rights are strictly limited. Thus, the
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directors elected by the stockholders are not eligible for the positions of
chairman or vice chairman of boards of directors, 12 U.S.C. § 305; the
stockholders are limited to a dividend of 6 percent, 12 U.S.C. § 289; in the
event of liquidation any surplus goes to the United States and not to the
stockholders. The banks are under the supervisory control of the Board of
Governors of the Federal Reserve System. 12 U.S.C. § 248.1 In addition, they
perform important functions of a governmental nature, acting as fiscal agents of
the United States pursuant to 12 U.S.C. § 391, and engaging in open “ market
operations” under the rules and regulations prescribed by the Board of
Governors of the Federal Reserve System. 12 U.S.C. §§ 353-358. Indeed, as
stated in The Federal Reserve System, Purposes and Functions (1974), a
publication issued by the Governors of the Federal Reserve System, the
important governmental operations of the Federal System are conducted
through the 12 Federal Reserve banks; the Office of the Board of Governors in
Washington, D .C., is a headquarters-type facility, and no ordinary operations
of a banking character are conducted there. At p. 15. The mixed nature of the
Federal Reserve banks is illustrated by 12 U.S.C. § 531, pursuant to which they
are covered by the customary exemption of the Federal Government and its
Agencies from State and local taxation except with regard to real estate taxes.
The courts have also recognized that the Federal Reserve banks perform
important governmental functions, and hence have refused to treat them as
private banks with respect to their governmental operations, See, e.g ., Raichle
v. Federal Reserve Bank, 34 F. (2d) 910 (2d Cir., 1929); Federal Reserve Bank
o f Richmond v. Kalin, 11 F. (2d) 50, 51 (4th Cir., 1935); Schmoll, Inc. v.
Federal Reserve Bank, 286 N.Y. 503 (1941), or for the purpose of taxation.
E .G ., Geery v. Minnesota Tax Commission, 202 Minn. 366, 373-378 (1938);2
Federal Reserve Bank o f Minneapolis v. Delta County Register o f Deeds, 288
Mich. 120 (1939). The Attorney General ruled that Federal Reserve banks are
entitled to Government telegraph rates for their operation as fiscal agents of the
Government. 33 Op. A.G. 54 (1921).
The recent decisions in Federal Reserve Bank o f Boston v. Commissioner o f
C. & T., 449 F. (2d) 60 (1st Cir., 1974); 520 F. (2d) 221 (1st Cir., 1975), are
highly pertinent here. The issue in those cases was whether a Federal Reserve
bank had a sufficiently governmental character to overcome the prohibition of
28 U.S.C. § 1341, pursuant to which the Federal “ district courts shall not
enjoin, suspend or restrain the assessment, levy or collection of any tax under
State law where a plain, speedy and efficient remedy may be had in the courts
of such State.” 3
The court held that Federal Reserve banks “ are plainly and predominantly
'F o r a more detailed analysis, see the quotation from Federal Reserve Bank o f Boston v.
Commissioner o f C.& T., infra.
2See pages 373-375 for the careful analysis o f the powers o f the Federal R eserve banks.
3In Department o f Employment v. United Slates, 385 U .S . 355, 358 (1966), the Suprem e Court
co n c lu d e d ". . . in accord w ith an unbroken line o f authority and convincing evidence o f legislative
purpose, that § 1341 does not act as a restriction upon suits by the U nited States to protect itself and
its instrum entalities from unconstitutional e x actio n s."
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fiscal arms of the federal government,” 499 F. (2d) 62, and therefore not
subject to the statute. This was based on the following analysis of the structure
and functions of the Federal Reserve banks:
There are twelve such banks in the nation, of which the plaintiff is
one. They were created and are operated in furtherance of the
national fiscal policy. They are not operated for the profit of
shareholders, and do not provide ordinary commercial banking
services; their stockholders, the member banks, lack the powers and
rights customarily vested in shareholders of a private corporation.
Federal reserve banks act as depositories for money held in the
United States Treasury and as fiscal and monetary agents of the
United States. 12 U.S.C. § 391. They hold the legal reserves of
member banks, issue currency, facilitate check clearance and collec­
tion and have supervisory duties as to member banks. They also
provide important services for the Treasury with respect to the public
debt and the issuance, handling and redemption of government
securities. The limited income generated is used to pay expenses and
dividends limited to 6 percent. Any remaining earnings are paid into
the surplus fund, 12 U.S.C. § 289, where they may be used by the
United States Treasury to supplement the gold reserve. Should a
federal reserve bank go into liquidation, any surplus becomes the
property of the United States, 12 U.S.C. § 290. See generally Board
of Governors, The Federal Reserve System: Purposes and Functions
(5th ed. 1969). [499 F. (2d) 62, 63]
Indeed, the court held that the interests of the Federal Reserve banks are
“ indistinguishable from those of the sovereign and there are good reasons to
relieve them of any symbolic joinder with and by the United States,” as would
be required of Federal savings and loan associations. 499 F. (2d) 62.
At a later stage of the proceedings the court explained its earlier decision
stating:
We reversed, holding that a federal reserve bank belonged to the very
narrow class of entities forming an integral part of the United States
Government which were entitled to a federal forum even with respect
to a state tax claim. [520 F. (2d) 223]
We believe that an entity so closely integrated with the Federal Government
as to be able to litigate its exemption from State taxes in the Federal courts
despite 28 U.S.C. § 1341, and to do so without the normal requirement of a
joinder of the United States, should also be considered the United States for the
purposes of a statute designed in the words of its sponsor, Congressman
O ’Hara, supra., “ that the Federal Government shall not be a party to the
depressing of the labor standards in any area of the nation.”
II.
The Federal Reserve banks argue that the Service Contract Act is limited to
Agencies operating with appropriated funds and therefore does not apply to
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them because their funds are not derived from the Treasury of the United
States. The Act does not provide any pertinent specific limitation to its
coverage. The argument is based in part on passages in the legislative history of
the Act to the effect that the United States Government should not subsidize
substandard wages4 and in part on a statement of the Solicitor of Labor before
the Senate Committee on Labor and Public Welfare and a passage in the Senate
report.
With respect to the subsidization point, we cannot perceive in those passages
any intent to limit the scope of the Act to contracts financed by appropriated
funds. The gist of the statutory purpose appears in the statement made by
Congressman O ’Hara that the United States should not be a party to the
depressing of labor standards. Congress apparently was not concerned with the
technical fiscal, and to some extent the fortuitous, question whether specific
contracts were financed by appropriated or nonappropriated funds. If any­
thing, as shown below, those legislators aware of the distinction between
appropriated and nonappropriated funds believed that it was irrelevant to the
purposes which the Act was designed to accomplish.
During the hearings on the Act before the Senate committee, Senator Javits
asked the Solicitor of Labor whether the Act had the effect of closing all gaps in
the statutes providing for labor standard protections to all employees of the
Federal Government and its contractors.5 The Solicitor explained that one
group would still lack the badly needed protection, namely, those employees of
the Federal Government who were paid out of nonappropriated funds, such as
employees of the Post Exchanges. At that time they were not covered by any
wage standards legislation, and, as direct employees of the Federal Govern­
ment, would not be entitled to the benefit of the Act, which is limited to
employees of Government contractors.6 When Senator Javits suggested that
thought be given to the protection of direct Government employees paid from
nonappropriated funds, apparently by broadening the scope of the Act, he
replied that this goal could be achieved by administrative action.
The Senate report referred (at pp. 2-3) to the failure of the Act and of related
legislation to cover certain direct service employees of the Department of
Defense and “ strongly urged that the appropriate directive be issued by the
Department of Defense or any other appropriate Federal Agency to give such
service employees the coverage provided for by the bill.”
The above legislative discussion does not support the proposition that the Act
does not extend to the employees of contractors with the Government in the
case of contracts financed by nonappropriated funds. It merely point out that
the Act does not cover direct employees of the Federal Government, and, of
course, was not intended to do so. To the contrary, it demonstrates a
4See, e.g., H. Report, pp. 2-3; S. Report, pp. 3-4; 111 Cong. Rec. 24388 (Burton).
5Service Contract Act o f 1965, Hearing before the Subcom m ittee o f L abor o f the C om m ittee on
Labor and Public W elfare, United States S enate, 89th C ong., 1st sess. p. 15 (1965).
6Presidential directives and Civil Service regulations providing for prevailing rates for blue-
collar direct em ployees o f the Federal G overnm ent were inapplicable to em ployees o f non­
appropriated fund activities.
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congressional purpose that all Government employees ought to be covered by
legislation prohibiting substandard wages and working conditions, that it
should not make any difference whether employees work directly for the
Government or for Government contractors or subcontractors, and as to the
latter whether the money paid to them is derived from appropriated or
nonappropriated funds.
III.
Finally, the argument is made that when Congress means the term “ United
States” to include the Federal Reserve banks it does so expressly; hence, that a
failure to do so here indicates a legislative intent that the Act should not apply
to the Federal Reserve banks. It is true that some statutes expressly state that a
provision applicable to the United States or to Federal Agencies encompasses
the Federal Reserve banks. See, e .g ., § ^(2) of the Labor-Management
Relations Act, 29 U.S.C. § 152(2); § 101(1) of the Uniform Assistance and
Real Property Acquisition Act of 1970, 42 U.S.C. § 4601(1). To those statutes
have been added within the last year the Act of November 16, 1977, amending
18 U.S.C. § 208, one of the conflict-of-interest statutes, to include specifically
the directors, officers, and employees of the Federal Reserve banks; and the
Federal Banking Agency Audit Act, Pub. L. No. 95-320, 92 Stat. 391-2,
amending § 117 of the Accounting and Auditing Act of 1950, 31 U.S.C. § 67,
which subjects the Federal Reserve banks to a limited extent to an audit by the
General Accounting Office. On the other hand, the Federal Reserve banks have
informed us that they have submitted themselves to the operation of certain
statutes which exempt the United States from their operation but do not in terms
extend the exemption to the Federal Reserve banks. See, e.g ., § 3(d) of the Fair
Labor Standards Act, 29 U.S.C. § 203(d) of the Fair Labor Standards Act, 29
U.S.C. § 203(d); § 3(5) of the Occupational Safety and Health Act of 1970, 29
U.S.C. § 652(5); § 701(b) of Title VII (Equal Employment Opportunities) of
the Civil Rights Act of 1964, 42 U.S.C. § 2000e(b).
These legislative precedents show that Congress has at times expressly
indicated that the term “ United States” includes the Federal Reserve banks,
and there may be additional instances to that effect. This, however, does not
demonstrate a consistent drafting technique of Congress to the effect that a
statute applicable to the United States never applies to the Federal Reserve
banks in the absence o f a specific provision to that effect.
The legislative history of the Act shows that the specific question whether the
coverage of the Act should include the Federal Reserve banks was not brought
to the attention of Congress nor considered by it. A noteworthy analysis of such
a situation may be found in Chief Justice Marshall’s opinion in Dartmouth
College v. Woodward, 4 Wheat. 518, 644 (1819). That case involved the
question whether the Contract Clause of the Constitution (Art. I, § 10, c l.l)
applied to corporate charters. After having stated that it was “ more than
possible” that the Framers of the Constitution did not have the preservation of
such charters in mind when they drafted the Contract Clause, the Chief Justice
stated:
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It is not enough to say, that this particular case was not in the mind of
the convention, when the article was framed. . . . It is necessary to go
further, and to say that had this particular case been suggested, the
language would have been so varied, as to exclude it, or it would
have been made a special exception.
Seealso, O za w a s. United States, 260U .S. 178, 195-198(1922); United States
v. Thind, 261 U.S. 204, 207-208 (1923);7 Puerto Rico v. Shell Co., 302 U.S.
253, 257-259 (1937); United States v. Standard Oil Co., 404 U.S. 558,
559-560 (1972).
Particularly pertinent in the context is Puerto Rico v. Shell Co., supra,
concerning the question whether the term “ any Territory of the United States”
in § 3 of the Sherman Act, 15 U.S.C. § 3, included an unincorporated insular
dependency, such as Puerto Rico, which did not exist when the Sherman Act
was enacted in 1890. The Court answered the question in the affirmative in
view of the congressional purpose to ‘‘deal comprehensively with the subject of
contracts, combinations, and conspiracies in restraint of trade, ‘and to that end
to exercise all the power it possessed.’” 8
The test, established by those decisions of the Supreme Court, is whether
Congress would have excluded the Federal Reserve banks from the coverage of
the Act, if that question had been brought to its attention. In our view, this
question must be answered in the negative, based on the following: First, the
close connection, if not the identity, of the Federal Reserve banks with the
United States and the important governmental functions performed by them;
second, the purpose of the Act evidenced by the House debate, the Senate
hearings, and the Senate report, to protect the iabor standards of all those
working directly or indirectly for the Government who were not already
covered by pertinent legislation.9
A related consideration is that the Act constitutes highly remedial legislation
designed to benefit, as stated in the House and Senate reports, “ one of the most
disadvantaged groups of our workers.” A familiar canon of statutory construc­
tion requires that such legislation “ should be construed broadly to effectuate its
purposes.” See, e.g ., Tcherepnin v. Knight, 389 U.S. 332, 336 (1967).
In summary, it is our opinion that the Act applies to the Federal Reserve
banks. We add as a word of caution that we reach this result because of the
purposes the Act was designed to achieve and its legislative history. This
’These two cases involved the question w hether the Congress which enacted the Naturalization
Act o f 1790 would have included Japanese and high-caste “ aryan” Hindus in the term “ free white
person,” who alone were eligible for naturalization. The Court answered the question in the
negative.
8United Slates v. Standard Oil Co., 404 U .S . 558 (1972), decided on the basis o f the same
considerations that § 3 o f the Sherm an Act applied to American Sam oa.
''The congressional aw areness o f the predom inantly governm ental character o f the Federal
Reserve banks has been underscored by the recent legislation, referred to above, extending to them
som e aspects o f the conflict-of-interest statutes and o f the C om ptroller G eneral's auditing authority.
Legislation was required for those purposes since 18 U .S .C . § 208 is a criminal statute, and
because a statute, 31 U .S .C . § 53, had precluded auditing by the C om ptroller G eneral o f
nonappropriated fund A gencies such as the Federal Reserve banks.
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opinion therefore does not necessarily stand for the proposition that the term
“ United States” as used in other statutes equally applies to the Federal Reserve
banks.
Jo h n M . H a r m o n
Assistant Attorney General
Office o f Legal Counsel
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