Falk v. Brennan

Mr. Justice Stewart

delivered the opinion of the Court.

The Secretary of Labor initiated this action against the petitioners, partners in a real estate management company, for an injunction against future violations of various provisions of the Fair Labor Standards Act of 1938, 52 Stat. 1060, as amended, 29 U. S. C. § 201 et seq., and for back wages allegedly due to employees affected by past violations of the Act.¹ The petitioners’ defense was that they are not “employers” ² of the employees involved, and that their business is not a single “enterprise” that is subject to the Act’s requirements. This latter contention brought together two separate arguments. First, the petitioners contended that their combined activities do not constitute an “enterprise,” as that term is defined in § 3 (r), 29 U. S. C. § 203 (r). Second, the petitioners argued, even. if their business activities do amount to an “enterprise,” they are not an “[enterprise engaged in commerce or in the production of goods for commerce,” as that term is defined in § 3 (s), 29 U. S. C. § 203 (s), because they do not have an “annual gross volume of sales made or business done” of $500,000.³

Under the partnership name of Drucker & Falk (D & F), the petitioners render management services for the owners of a number of apartment complexes in the State of Virginia. Under its contracts with the apartment owners, D & F agrees to perform, on behalf of each owner and under his nominal supervision, virtually all management functions that are ordinarily required for the proper functioning of an apartment complex.⁴ These contracts are for a stated term of not less than one year. Each party can terminate the arrangement by giving the other party 30 days’ notice of his intent to do so. Neither D &. F nor any of its partners hold any property interest in the buildings that D & F manages. D & F receives as compensation a fixed percentage of the gross rentals collected from each project.⁵

The rentals collected by D & F are deposited in local bank accounts.⁶ From these accounts it pays all expenses incurred in operating and maintaining the buildings. After deducting its compensation, as well as any other applicable expenses, D & F transmits payments to the various owners on a periodic basis. If disbursements for any apartment complex exceed its gross rental receipts, the owner is required under the contract to reimburse D & F.

The subject of the Secretary’s complaint was the wages and hours of the maintenance personnel who work at each of the apartment complexes, the contention being that D & F is in violation of the minimum wage, overtime, and recordkeeping provisions of the Act with respect to these maintenance workers. These employees work under the supervision of D & F and are paid from the rentals received at the apartment complexes where they are employed. They are considered in the contracts between the owners and D & F as “employees of the project owners.”

In the District Court, D & F contended that its management activities at the several apartment complexes do not constitute a single “enterprise,” as that term is defined in § 3 (r) of the Act, 29 U. S. C. § 203 (r) ; that, even if its business is a single “enterprise,” it does not have the $500,000 “annual gross volume of sales made or business done” required by § 3 (s)(l), 29 U. S. C. § 203 (s) (1), for coverage by the Act; and that it is not an “employer” of these maintenance workers, as that term is defined in § 3 (d), 29 U. S. C. § 203 (d). The District Court agreed with all three of these contentions and dismissed the complaint. The Court of Appeals reversed. It held that the management activities performed by D & F constitute a single “enterprise” for coverage purposes and that D & F meets the statutory definition of “employer” with respect to the maintenance workers. The appellate court also concluded that, in determining whether the enterprise satisifi.es the dollar-volume limitation, it is the gross rentals that D & F collects at all the apartment complexes that must be considered, rather than, as the District Court had held, the gross commissions that D & F receives from the apartment owners. Since there is no question that these gross rentals exceed $500,000 annually, the court held that D & F is subject to the Act and in violation thereof with respect to the maintenance workers.

We granted certiorari to review this judgment of the Court of Appeals.⁷ Two days later, we held, in Brennan v. Arnheim & Neely, Inc., 410 U. S. 512 (1973), that a fully integrated real estate management company that directs management operations at several separately owned buildings was a single “enterprise” for purposes of the Act, thus confirming the holding of the Court of Appeals on that issue in the present case. But our decision in Arnheim & Neely did not reach the other two statutory questions raised by D & F. We accordingly limited the grant of certiorari to questions 2 and 3 presented by the petition:

"(2) Under the Fair Labor Standards Act to be covered an enterprise must have an ‘annual gross volume of sales made or business done’ of $500,000. Is this figure to be measured by the gross rentals collected by the agent or by that agent’s gross commissions?

“(3) Are maintenance workers employed at the buildings managed by petitioners employees of the apartment owner or of the petitioners?” 410 U. S. 954.

I

As to question 3, the “employees” issue, it is clear that the maintenance workers are employees of the building owners. But we think that the Court of Appeals was unquestionably correct in holding that D & F is also an “employer” of the maintenance workers under § 3 (d) of the Act, which defines “employer” as “any person acting directly or indirectly in the interest of an employer in relation to an employee.” 29 U. S. C. § 203 (d). Section 3 (e) defines “employee” to include “any individual employed by an employer.” 29 U. S. C. § 203 (e). In view of the expansiveness of the Act’s definition of “employer” and the extent of D & F’s managerial responsibilities at each of the buildings, which gave it substantial control of the terms and conditions of the work of these employees, we hold that D & F is, under the statutory definition, an “employer” of the maintenance workers. We turn, therefore, to the other question embraced in the grant of certiorari.

II

In Brennan v. Arnheim & Neely Inc., supra, we held that the integrated operations of a real estate management company satisfied the definition of “enterprise” under § 3 (r) of the Act. This holding was based upon the conclusion that the management activities met the three statutory tests of an “enterprise”: related activities, unified operation or common control, and common business purpose. It is important to understand, however, that the “enterprise” the Court found in Arn-heim & Neely consisted of the sale of management services by the respondent. The Court did not hold that the separate property interests of each apartment owner were to be considered part of the management enterprise of Arnheim & Neely. Indeed, § 3 (r) and the legislative history of the 1961 “enterprise amendments” to the Act strongly suggest that the use of common agents by independent entities is not sufficient to convert to a single “enterprise” what otherwise are independent businesses.⁸ Thus, D & F’s enterprise in the present case, as in Arnheim & Neely, consists of and is limited to its combined management activities at the various apartment complexes.

The Act imposes its requirements, not on every “enterprise,” but only on an “enterprise engaged in commerce or in the production of goods for commerce.” ⁹ One of the statutory elements of the latter term is the dollar-volume limitation, which in this case is $500,000 annually.¹⁰ The bone of contention between the Secretary and D & F is whether this dollar-volume limitation is to be measured by the annual gross rentals collected by D & F as agent of the apartment owners, or by the gross commissions paid to D & F by the owners as compensation for its management services. Section 3(s)(l), which prescribes the dollar-volume limitation, speaks of “an enterprise whose annual gross volume of sales made or business done is not less than $500,000.” 29 U. S. C. § 203 (b)(1). (Emphasis added.) This statutory language requires that, after determining what the relevant enterprise is, we turn our attention to what that enterprise sells or to what business it does.

Any doubt about whether the rental of space is a “sale” for purposes of the Act was removed when Congress amended § 3 (s) in 1966 to provide that the dollar-volume limitation would henceforth be measured by “annual gross volume of sales made or business done,” 80 Stat. 831 (emphasis added). The Senate Report on the 1966 amendments makes clear that the added language was intended to dispel any uncertainty that revenue derived from services, rentals, or loans, even though perhaps not literally “sales,” was nevertheless to be considered in measuring the dollar-volume limitation of § 3 (s). The Report indicates that the amendment was intended to signify legislative approval of the result in Wirtz v. Savannah Bank & Trust Co., 362 F. 2d 857, which so interpreted § 3 (s) as it read before -the addition of the “business done” language. As the Senate Report explained:

“The annual gross volume of sales made or business done by an enterprise, within the meaning of section 3 (s), will thus continue to include both the gross dollar volume of the sales . . . which it makes, as measured by the price paid by the purchaser for the property or services sold to him . . . , and the gross dollar volume of any other business activity in which the enterprise engages which can be similarly measured on a dollar basis. This would include, for example, such activity by an enterprise as making loans or renting or leasing property of any kind.” S. Rep. No. 1487, 89th Cong., 2d Sess., 7-8.

But, a determination that rentals are “sales made or business done” within the meaning of the Act does not begin to dispose of the issue before us. The question remains, under § 3 (s)(l), what enterprise made the sales or did the business.

The Secretary contends that the “sales made or business done” by D & F includes the gross rental income of apartments in the buildings that it manages. He argues that the fact that D & F does not own the buildings should not preclude attribution of the rentals to it. D & F argues that it sells only managerial services and thus that the rentals it collects on behalf of the owners are not “sales made or business done” by its enterprise. It contends, therefore, that its gross sales should be measured, not by the rentals it collects from the tenants, but rather by the management fees that the owners pay it as compensation for its services — i. e., its gross commissions.

The line between a seller of a product and a seller of a service is not always readily discernible, especially when one of the services relates to the sale of a product or, what amounts to the same thing for purposes of the Act, the rental of space. As an abstract proposition, the Secretary is undoubtedly correct in his position that ownership is not necessarily determinative in attributing “sales made or business done” for purposes of the statute. For example, a consignment seller's gross sales might properly be measured by his gross receipts from sales of the product, even though he did not actually hold title to the product that he sold. Realistically, such a seller is in the business of selling the product that is consigned to him, and he is functionally in a position no different from that of a seller who has purchased the product before resale. The only practical difference may be that the “cost of goods sold” element of the profit equation is expended before resale in the one case and after resale in the other.

In the present case, however, we are convinced that the enterprise of D & F is limited to the sale of its professional management services, and, accordingly, that the commissions it receives are the relevant measure of its gross sales made or business done for purposes of the dollar-volume limitation in § 3 (s) (1). D & F collects a number of rentals on behalf of the property owners. In nearly every case, these rentals are paid pursuant to lease agreements of significant duration. Some may predate D & F’s management of the premises, and D & F may thus have had absolutely nothing to do with the “sales” underlying the periodic rentals it collects for the owner.¹¹ When a lease does expire and is not renewed by the tenant, D & F undertakes to find a new tenant for the owner and serves as agent for the owner in the negotiation and execution of a new lease. With respect to such a lease, a colorable argument can be made for attribution of the rentals to D & F, since its negotiation of a new lease increases, or at least maintains, the volume of rents collected and thus also its percentage compensation. But such an argument does not withstand any but the most superficial analysis.

In the typical commodity sale the seller’s remuneration is a function of the gross margin between the cost of the product to him and the resale price. At first blush, the determination of D & F’s compensation as a percentage of the gross rentals seems somewhat akin to the margin of. the typical seller. Upon reflection, however, a critical difference appears: when a lease is negotiated by D & F, its remuneration is calculated, not from the proceeds derived from that lease, but only from the rentals collected during its managerial tenure, during which period it renders significant and substantial management services beyond its earlier service in negotiating the lease. It is clear, therefore, that the business of the D & F enterprise is not the sale of a product (the rental of realty) but a sale of professional management services. This conclusion follows logically from our holding in Arnheim & Neely that the relevant enterprise for purposes of deciding whether a real estate management company is covered by the Act, consists of its “aggregate management activities” at the various buildings that it supervises. 410 U. S., at 519. In this regard, the commissions received by D & F differ even from the compensation received by the typical broker of realty or stock, whose primary undertaking is to negotiate a sale of the principal’s property and whose compensation is calculated on the proceeds of that sale.

On these facts, we think the conclusion is inescapable that D & F vends only its professional management services, and that the gross rentals it collects as part of these services do not represent sales attributable to its enterprise. It follows that the correct measure of the “gross volume of sales made or business done” by D & F is the gross commissions it receives from the apartment owners as compensation for the management services it renders.¹² Since these commissions did not reach $500,000 annually during the period involved in this litigation, it follows that D & F was not an “[enterprise engaged in commerce or in the production of goods for commerce,” within the meaning of the Act.

The judgment of the Court of Appeals is vacated and the case is remanded to the District Court for further proceedings consistent with this opinion.¹³

It is so ordered.

1 The complaint alleged violations of the minimum wage (29 U. S. C. §206 (b)), overtime (29 U. S. C. §207 (a)(2)), and recordkeeping (29 U. S. C. §211 (c)) provisions of the Act.

2 Section 3 (d), 29 U. S. C. §203 (d), states that an “'Employer' includes any person acting directly or indirectly in the interest of an employer in relation to an employee.”

3 The dollar-volume limitation was $500,000 at all times relevant to this action. 29 U. S. C. §203 (s)(l). On February 1, 1969, the dollar-volume limitation was reduced to $250,000.

4 D & F performs all the functions required for leasing, maintaining, and operating the apartment buildings. These include advertising the availability of apartments for rent; signing, renewing, and canceling leases; collecting rents; instituting, prosecuting, and settling all legal proceedings for eviction, possession of the premises, and unpaid rent; maldng necessary repairs and alterations; negotiating contracts for essential utilities and other services; purchasing supplies; paying bills; preparing operating budgets for the property owners’ review and approval; submitting periodic reports to the owners; and hiring and supervising all employees required for the operation and maintenance of the buildings and grounds.

5 The commission that D & F receives varies between 4% and 6%, depending on the particular arrangements with the building owner.

6 The rents for all the buildings managed by D & F totaled over $7,700,000 in 1967 and over $8,600,000 in 1968.

7 Both the District Court and the Court of Appeals had this case before them twice. Initially, the District Court dismissed the complaint. The Court of Appeals reversed and remanded for further proceedings. Shultz v. Falk, 439 F. 2d 340. The petitioners sought certiorari, and we denied the writ. Falk v. Hodgson, 404 U. S. 827 (1971). On remand to the District Court, the petitioners resisted the imposition of judgment and particularly the awarding of prejudgment interest. The District Court rendered judgment against the petitioners and awarded prejudgment interest. The Court of Appeals affirmed, and the petitioners again sought certiorari.

8 Section 3 (r), 29 U. S. C. §203 (r) provides, in pertinent part: “[A] retail or service establishment which is under independent ownership shall not be deemed to be so operated or controlled as to be other than a separate and distinct enterprise by reason of any arrangement, which includes, but is not necessarily limited to, an agreement, (1) that it will sell, or sell only, certain goods specified by a particular manufacturer, distributor, or advertiser, or (2) that it will join with other such establishments in the same industry for the purpose of collective purchasing, or (3) that it will have the exclusive right to sell the goods or use the brand name of a manufacturer, distributor, or advertiser within a specified area, or by reason of the fact it occupies premises leased to it by a person who also leases premises to other retail or service establishments.”

The Senate Report on the 1961 amendments to the Act included the following statements regarding this portion of § 3 (r):

"[T]he mere fact that a group of independently owned and operated stores join together to combine their purchasing activities or to run combined advertising will not for these reasons mean that their activities are performed through unified operation or common control and they will not for these reasons be considered a part of the same ‘enterprise.’ ” S. Rep. No. 145, 87th Cong., 1st Sess., 42.

9 See, e. g., § 6 (b) (29 U. S. C. §206 (b)), § 7 (a) (29 U. S. C. §207 (a)), and § 11 (e) (29 U. S. C. §211 (c)).

10 The petitioners’ gross commissions amounted to slightly more than $434,000 and somewhat less than $463,000 in 1967 and 1968, respectively, the years involved in this litigation.

11 The record does not show what proportion of the rentals is attributable to leases predating D & F’s managerial tenure at each building. When the underlying lease does predate D & F’s contract with the owner, however, the total absence of any participation by D & F in the lease transaction, of which the periodic rentals are merely the proceeds, belies any attempt to attribute these rentals to D & F as an index of its gross “sales made or business done.”

12 Part II of the dissent suggests that the “annual gross volume of sales made or business done” of D & F’s enterprise “must include amounts paid by the building owner to cover operation and maintenance costs, plus the amount paid as commissions.” Post, at 211. The dissent’s rationale is that D & F was in effect paying the operation and maintenance costs itself and then being reimbursed by the apartment owners. Such an argument was not made by the Secretary. Even if such a payment and reimbursement arrangement would cause the operation and maintenance costs to be included in measuring “annual gross volume of sales made or business done” (which we do not decide), it is clear that such an arrangement did not exist between D & F and the building owners. The rentals were collected by D & F as the agent for the owners and were placed in bank accounts on their behalf. D & F paid the operation and maintenance costs of the buildings from the owners’ funds pursuant to its agreement with, and on the authority of, the owners.

13 A footnote in the Secretary's brief states that, in addition to its management services, D & F also sells insurance and real estate. These operations might bring D & F’s “annual gross volume of sales made or business done” to more than $500,000 for the years in question if the insurance, real estate sales, and real estate management operations of D & F’s business are “related activities” for enterprise coverage purposes under § 3 (r) of the Act. We leave for the District Court the consideration of the Secretary’s contention.