FALK ET AL. v. BRENNAN, SECRETARY OF LABOR
No. 72-844
Supreme Court of the United States
December 5, 1973
414 U.S. 190
Herbert V. Kelly argued the cause for petitioners. With him on the brief were Franklin O. Blechman and E. D. David.
Andrew L. Frey argued the cause for respondent. With him on the brief were Solicitor General Bork and Sylvia S. Ellison.*
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,
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 bеhalf 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
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,
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 manаgement 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
“(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 сlear 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.”
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”
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) (1), 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.”
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 bе 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
“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) (1), what enterprise made the sales or did the business.
The Secretary contends that the “sales made or business done” by D & F includes the grоss 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 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 prаctical 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 рredate 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
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 nоt 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 manage-
On these facts, we think the conclusion is inescapаble 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 “[e]nterprise engaged in commerce or in the production of goods for commerce,” within the meaning of the Act.
It is so ordered.
MR. JUSTICE BRENNAN, with whom MR. JUSTICE DOUGLAS, MR. JUSTICE WHITE, and MR. JUSTICE MARSHALL join, concurring in part and dissenting in part.
I concur in the Court‘s holding that petitioners are “employers” of the maintenance workers who service the apartment buildings managed by D & F.
I dissent, however, from the holding that, for the purposes of § 3 (s) (1), “the enterprise of D & F is limited to the sale of its professional management services,” and that those services must be measured by D & F‘s commissions. The record in this case leaves no doubt whatever that D & F‘s enterprise activities resulted in both the sale of professional management services and rental space. While the Court acknowledges that sales of rental space are “sales made or businеss done” within the meaning of § 3 (s) (1), ante, at 197, it nevertheless decides that rental sales should not be attributed to D & F because, “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
To be sure, D & F‘s remuneration for renting an apartment may not be subject to precise calculation at the time of the sale: compensation for the sale is derived from D & F‘s percentage of monthly rent receipts, which includes D & F‘s compensation for building operation and maintenance; and conceivably the building owner might terminate D & F‘s management contract before the tenant makes all the monthly payments required under the lease, thus reducing D & F‘s compensation for the sale of the rental space. It is also true that after selling the rental space, D & F performs other significant and substantial management services. But these rather unsurprising observations hardly supply a basis for the Court‘s conclusion that: “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,” and that such services must be measured by commissions. Neither the facts in this case, nor the plain words of § 3 (s) (1), and the uncommonly unambiguous legislative history of that section support the Court‘s conclusion that Congress meant to measure one pаrticular enterprise activity to the exclusion of others.
I
Section 3 (s) (1) limits coverage under the Act to those enterprises “whose annual gross volume of sales made or business done is not less than $500,000....“1
In addition, even were the wording of § 3 (s) (1) less clear, “[t]his is not a cаse where perforce we must attempt to resolve a controversy as to the true meaning of equivocal statutory language unaided by any reliable extrinsic guide to legislative intention,” Mitchell v. Kentucky Finance Co., 359 U. S. 290, 293 (1959). Senate and House Reports concerning the 1961 and 1966 “enterprise amendments” to the Act show explicitly that Congress
Prior to 1961, the protections of the Act were extended only to employees who were themselves “engaged in commerce or in the production of goods for commerce,” §§ 6 (a), 7 (a),
To insure that the term “sales” would not be given a narrow or technical interpretation that might exclude some enterprises that have the requisite dollar volume
“This test ... is intended to measure the size of an enterprise for purposes of enterprise coverage in terms of the annual gross volume in dollars (exclusive of specified taxes) of the business transactions which result from activities of the enterprise, regardless of whethеr such transactions are ‘sales’ in a technical sense.
“... The addition of the term ‘business done’ to the statutory language should make this intent abundantly plain for the future and remove any possible reason for misapprehension. The annual gross volume of sales made or business done by an enterprise, within the meaning of section 3 (s), will thus continue [under the 1966 Amendments] to include both the gross dollar volume of the sales (as defined in sec. 3 (k)) which it makes, as measured by the price paid by the purchaser for the property or services sold to him (exclusive of any excise taxes at the retail level which are separately stated), and the gross dollar volume of any other
business activity in which the enterprise engages whiсh 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 (1966). (Emphasis added.)
Congressional intent, with respect to the dollar-volume test in § 3 (s) (1), could not be more clear: “the business transactions which result from activities of the enterprise” are to be measured. No transactions are excepted from measurement. Nothing in the legislative history suggests that when remuneration for essentially different transactions is in some way commingled, or when an enterprise engages in closely related activities, only those transactions constituting the essence of enterprise should be measured. For the purposes of § 3 (s) (1), the only relevant inquiry is what activities the enterprise engages in, and what sales or business transactions result from those activities. Measurement of the dollar volume of those transactions indicates the size of the enterprise and its impact upon commerce.
Turning to the facts in this case, it is clear from the stipulated record in the District Court that D & F engages in essentially two distinct, though related, activities. First, D & F rents apartments to the public. In this connection, D & F employs a staff of sales personnel who advertise available apartments, interview prospective tenants, and negotiate and renew leases on behalf of the apartment-building owner. Second, D & F operates and maintains apartment buildings. By contract with the building owner, D & F agrees to collect rent; initiate, prosecute, and settle all legal proceedings for eviction, possession of the premises, and unpaid rent; make repairs and alterations; negotiate contracts for utilities and other necessary services; purchase supplies;
The business transactions resulting from these activities are quite distinct and subject to separate measurement. D & F‘s brokerage activities result in the sale of rental space to the public. D & F‘s management activities result in a business transaction between D & F and the building owner, i. e., D & F‘s sale of professional management services.
The Court, however, focuses upon D & F‘s management activities and measures only the resulting transaction between D & F and the building owners. To be sure, these transactions have an impact upon commerce and must, therefore, be measured under the dollar-volume test. As a result of these transactions, D & F hires and supervises more than 100 persons who perform all the functions necessary for the efficient operation and maintеnance of apartment buildings, and thus engages in activities which clearly induce a flow of men, money, and materials across state lines. But, as significant as this impact upon commerce may be, it pales by comparison to the impact caused by D & F‘s brokerage activities. To sell apartments, D & F employs a special staff of personnel whose duties include developing marketing strategies, placing advertisements in various media, interviewing prospective tenants, and negotiating
Ignoring D & F‘s brokerage activities and their resulting transactions, therefore, not only contradicts Congress’ clearly expressed intention that transactions resulting from any activity of the enterprise be measured, but also undermines the effectiveness of the dollar-volume test as a measure of an enterрrise‘s size and impact upon commerce.5 “Where both the words of a statute and its legislative history clearly indicate the purpose of Congress, it should be respected,” Schwegmann Bros. v. Calvert Distillers Corp., 341 U. S. 384, 402 (1951) (Frankfurter, J., dissenting).
II
Even proceeding on the Court‘s erroneous basic premise, however, D & F‘s sales of professional management services exceed $500,000 when computed, as Congress required, under the specific regulations promulgated by the Wage and Hour Division of the Department of Labor to effectuate § 3 (s) (1).6 As a guide to making computations under § 3 (s) (1), Congress instructed that:
“The method of calculating the requisite dollar volume of sales or business [for enterprise coverage purposes] will be the same as is now followed under the law with rеspect to calculating the annual dollar volume of sales in retail and service establishments, and in laundries under the exemptions provided in section 13 (a)(2), (3), (4), and (13) of the act. The procedure for making the calculation is set forth in the Department‘s Interpretative Bulletin [pertaining to retailers of goods and services]. As it is there stated, the ‘annual dollar volume of sales’ consists of the gross receipts from all types of sales during a 12-month period.” S. Rep. No. 145, 87th Cong., 1st Sess., 38 (1961). (Emphasis added.)
This “gross receipts” method of computation is presently embodied in regulations which state: “The annual gross dollar volume of sales made or business done of an enterprise or establishment consists of the gross receipts from all of its sales or its volume of business done during a 12-
Gross receipts from “sales” of professional services are not necessarily limited to commissions. True, if the “sale” is only of the personal labor of the seller, commissions may well be the sole measure of “sales made or business done” because commissions are the seller‘s only gross receipts. And where, in addition to his own labor, the seller of professional services provides, for a commission, personnel and materials as an integral part of the professional services rendered, the commission still constitutes the gross receipts for the sale of services. If, on the other hand, the purchaser of the professional services reimburses the seller for the costs of men and material and also pays a commission, plainly “gross receipts” under the statute and regulation are the reimbursement plus the commission.
D & F was compensated for its professional management services on a cost-plus-commission basis. It employed maintenance workers and purchased materials necessary for the operation and maintenance of the apartment buildings. By contract, the building owner agreed to reimburse D & F for these operation and maintenance costs,7 and, in addition, to pay D & F a commission.8 Thus, D & F‘s gross receipts must include amounts paid by the building owner to cover operation and maintenance costs, plus the amount paid as commissions.