78-53 MEMORANDUM OPINION FOR THE

SECRETARY OF LABOR

Service Contract Act of 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 collective 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 subcontractor 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. [Ill 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. [Ill 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

of 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 of Minneapolis v. Delta County Register of 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 of Boston v. Commissioner of

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

'For 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 of the Federal Reserve banks.

3In Department o f Employment v. United Slates, 385 U .S. 355, 358 (1966), the Supreme Court 

conclu d ed ". . . in accord with an unbroken line of authority and convincing evidence o f legislative 

purpose, that § 1341 does not act as a restriction upon suits by the United States to protect itself and 

its instrumentalities from unconstitutional exactions."

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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 collection 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 anything, 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 Government, 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 Subcommittee of Labor o f the Committee on 

Labor and Public W elfare, United States Senate, 89th C ong., 1st sess. p. 15 (1965).

6Presidential directives and Civil Service regulations providing for prevailing rates for bluecollar direct employees of the Federal Government were inapplicable to em ployees o f nonappropriated 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 of 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, cl.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 zaw as. 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 construction 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 whether the Congress which enacted the Naturalization 

Act of 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 of the same 

considerations that § 3 of the Sherman Act applied to American Samoa.

''The congressional awareness of the predominantly governmental character of the Federal 

Reserve banks has been underscored by the recent legislation, referred to above, extending to them 

some aspects o f the conflict-of-interest statutes and of the Comptroller 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 Comptroller General of 

nonappropriated fund Agencies 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.

J o h n M . H a r m o n

Assistant Attorney General

Office of Legal Counsel

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