Third Circuit Clarifies That FLSA Claims May Be Released By Absent Class Members

Seyfarth Synopsis: The Third Circuit held that Section 216(b) of the FLSA does not prohibit the release of FLSA claims in an opt-out class-action settlement.

Settling "hybrid" cases in the Third Circuit just became easier for parties asserting claims under both federal and state wage-and-hour laws.

By way of background, the FLSA provides, in relevant part, that "[n]o employee shall be a party plaintiff to [a FLSA action] unless he gives his consent in writing to become such a party and such consent is filed in the court in which such action is brought." 29 U.S.C. § 216(b). Thus, similarly-situated employees do not become plaintiffs in a FLSA case unless they file a consent in writing affirmatively agreeing to become a party-plaintiff. In contrast, in a certified class action under Rule 23 of the Federal Rules of Civil Procedure, class members are part of the class unless they opt out of the litigation.

The opt-in requirement of the FLSA has led some district courts to conclude that, while state wage-hour claims may be released pursuant to Rule 23's opt-out procedures (and, thus, typically a large portion of the relevant employee population will be bound by the settlement, because people tend not to opt out of class-action settlements), FLSA claims cannot be released through an opt-out mechanism. Rather, only those individuals who affirmatively opt into the litigation may be bound by a settlement agreement. In the settlement context, this usually results in fewer employees releasing their FLSA claims because far fewer employees tend to opt into the settlement than opt out.

In Lundeen v. 10 West Ferry Street Operations LLC, the Third Circuit addressed whether the FLSA's opt-in requirement prohibits named-plaintiffs in a class action from settling prospective class members' unasserted FLSA claims as part of an opt-out class settlement under Rule 23(b)(3). The Third Circuit held that the FLSA does not forbid such settlements.

The plaintiff in Lundeen filed a hybrid class and collective action alleging violations of the FLSA and the Pennsylvania Minimum Wage Act. The parties reached a settlement that included compensation for both opt-in collective members and opt-out Rule 23 class members. Importantly, the settlement provided that all the putative class members who did not opt out of the settlement released not just their Pennsylvania law claims, but also their FLSA claims. The plaintiff then filed a motion seeking preliminary approval of the settlement.

The district court denied preliminary approval, finding that the settlement was "neither fair nor reasonable" because it conflicted with the FLSA's opt-in requirement, which provides that no employee shall be a party to an action without written consent.

The plaintiff appealed, arguing that section 216(b) of the FLSA does not restrict employees from releasing FLSA claims in a class settlement. Both parties agreed that the district court had misinterpreted the statute.

The Third Circuit reversed. The court emphasized that section 216(b) governs litigation, not settlement, and began its analysis with the plain language of the statute. It rejected the district court's categorical prohibition on releasing FLSA claims in an opt-out settlement, noting that the Fifth and Ninth Circuits have enforced similar releases under the doctrine of res judicata.

The Court further explained that Congress added the opt-in requirement in 1947 to reduce duplicative litigation, not to protect employees from settling claims. The court concluded that the district court misconstrued the provision's purpose. The Court reiterated that courts "must not revise legislation to better serve its supposed purpose."

By allowing for FLSA claims to be released through a Rule 23 mechanism, at least where both FLSA and state law claims are asserted and settled, Lundeen allows employers within the Third Circuit (and hopefully beyond) to structure class-action settlements in a way that will offer them greater protection from future FLSA lawsuits.

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