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Horner v. Acosta

October 8, 1986; As Amended November 3, 1986.


Appealed from: Merit Systems Protection Board.

Markey, Chief Judge, Cowen, Senior Circuit Judge, and Archer, Circuit Judge.


ARCHER, Circuit Judge.

The decision of the Merit Systems Protection Board (MSPB or Board), 19 M.S.P.R. 101, holding that respondents, although not appointed to federal positions during the time periods in issue, were entitled as contract employees to service credit under the Civil Service Retirement Act (CSRA) is reversed.


A. In 1968, the Department of the Navy formed a unit*fn1 to perform intelligence functions. Because of its special requirements, such as non-attribution and ability to hire, fire, transfer and compensate personnel without regard to the civil service laws, the Navy created a personnel system distinct from, but similar in many respects to, the civil service system. The commanding officer of the organization was authorized to engage the services of individuals to carry out its mission. An elaborate system of recruiting and interviewing was established, and the final interview was conducted by a hiring board of three naval officers and two civilians which made recommendations to the commanding officer. Individuals were recruited through direct contact, third party referrals and disguised newspaper advertisements. Prospective candidates were not cognizant of the connection of the job with the government until advised by the hiring board after it had determined to recommend their hire.

Individuals selected to participate in the program were required to enter into a contract for personal services with the Navy (designed a "career provisional contract" or "career contract") or with a proprietary corporation. Each proprietary corporation used was incorporated by the Navy, created solely to provide cover and support for intelligence functions, funded with public funds and controlled by a Navy officer. When the contract was with the Navy, it was signed by a contracting officer, and by the commanding officer as contract approving officer. An official of the proprietary corporation signed the contracts on its behalf.

Civil service documentation and other formalities in connection with the hiring were not utilized.*fn2 The contracts, whether entered into with the Navy or its proprietary corporation, provided expressly that respondents were independent contractors. They provided for compensation on a regular basis and within-grade promotions, legislative pay adjustments and a post differential in substantial conformance with rules and regulations applicable to government appointed personnel. Other benefits covered by the contracts included living quarters allowances, annual and home leave, health benefits for the individual and dependents for illness or injury incurred in the line of duty while abroad, life insurance and a retirement plan. All benefits, such as health, life and dental insurance and retirement programs, were funded through the proprietary corporations and underwritten by private insurers. The salaries of respondents, which were subject to Social Security withholding taxes, were paid by the proprietary corporations with appropriated funds.

After their selection, respondents were trained by other employees of the unit or at government training facilities, issued government identifications, official passports, and other documents. Those documents represented that respondents were federal employees but did not identify their true positions or functions. At all times active duty naval officers, or other unit employees under the supervision of naval officers, supervised respondents and determined their retention in or discharge from the unit. The Board found that the naval officers involved in the hiring process considered the respondents to be federal employees but did not believe they were "being appointed in the civil service" or were "regular civil service employees."

B. In 1979, respondents filed claims with the Office of Personnel Management (OPM) seeking service credit for retirement and other purposes in respect of their employment in the unit during various periods of time between 1968 and 1976. OPM, both in its initial decision and on reconsideration, denied the claims on the basis that respondents had not been appointed in the civil service.*fn3

On appeal to the MSPB, the Chief Administrative Law Judge (CALJ) reversed OPM's denial of respondents' claims for service credit, concluding that respondents' contractual arrangement constituted an appointment in the civil service within the meaning of 5 U.S.C. § 2105 (1982). By final decision dated January 20, 1984, the Board affirmed on different grounds. It held that respondents had not been appointed in the civil service, but nevertheless found respondents to be entitled to service credit based on a provision of the Federal Personnel Manual Supplement 831-1, Subchapter S3-3 (September 21, 1981) (FPM Supplement) allowing contract service to be credited.*fn4 OPM has petitioned this court for review of the MSPB decision under 5 U.S.C. § 7703(d) (1982).

C. In March 1984, respondents submitted petitions for enforcement to the Board contending that OPM had failed to comply with the Board's final decision rendered January 20, 1984. The CALJ dismissed the respondents' petitions for enforcement in August 1984, finding that the documentation which OPM had prepared for inclusion in respondents' retirement records constituted sufficient evidence of full compliance with the Board's final decision. Upon petition for review to the full Board, this decision was affirmed. Respondents have cross-appealed on this issue.

Preliminary Issue

The MSPB has intervened in this case. It asks the court inter alia to deny OPM's petition for review for failing to meet the substantial impact requirement of 5 U.S.C. § 7703(d) (1982). Under § 7703(d), the Director of OPM seeks review of a final Board decision upon a determination:

That the Board erred in interpreting a civil service law, rule, or regulation affecting personnel management and that the Board's decision will have a substantial impact on a civil service rule, regulation or policy directive. . . .

The Board argues that the revisions to the FPM Supplement on March 29, 1985*fn5 effectively nullified its decision, so that any impact that the decision might have had on the future interpretation of civil service rules is eliminated. We deny this request because the Board's decision, as the Board itself recognizes, would continue to impact future claims for service credit for all pre-March 29, 1985 contract service if the new FPM Supplement is only applied prospectively.

A. OPM asserts in this appeal that the Board erred in holding respondents' contract service to be creditable for retirement and other purposes. It contends that the FPM Supplement relied on by the Board is contrary to and conflicts with 5 U.S.C. § 2105(a) (1982)*fn6

Respondents, on the other hand, argue that the FPM Supplement properly recognized contract service as creditable service and that, in any event, they were appointed in the civil service as that term is used in § 2105(a).

Because of our disposition of OPM's appeal, we need not consider the issue raised in the ...

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