Collective Action and Class Action Settlements Require Careful Consideration

We often report in our monthly digests on cases asserting claims under the federal Fair Labor Standards Act (FLSA) and state wage and hour laws. These cases generally involve claims that a company, often a restaurant or delivery service company, failed to pay overtime, used an improper “tip pool,” or treated workers as independent contractors, not employees. Resolving these cases can become complicated because they involve both a collective action and a class action.

Claims asserted under the FLSA are considered collective actions, not class actions. Collective actions share some of the same characteristics as class actions, but the mechanics are quite different. The primary difference is collective actions under the FLSA are “opt-in” actions. Unlike a Rule 23 class action, class members must affirmatively agree to join the class by filing an individual written consent form. This procedure typically decreases class participation because only those employees who raise their hand and agree to join will be considered part of the class. The outcome of a collective action also does not impact future claims brought by employees who did not opt in to join the class. By contrast, in class actions for money damages under Rule 23(b)(3), employees are presumed to be part of the class unless they opt out.* The employee must affirmatively state they do not want to join the class to preserve future claims against the company.

Many cases assert both a collective action under FLSA and a class action under state wage and hour laws. Settling both a collective action and a class action can become tricky given the differences between the opt-in class and opt-out class procedures. As an example, the plaintiff in Autry vs. Charlotte Palm Corp. was a server and bartender in Charlotte at The Palm, a high-end chain steakhouse. In her complaint, she alleged that the restaurant failed to pay her for time recorded and asked her to continue working after she had already clocked out for the day. She also alleged that, although she was paid in part by tips, she was asked to perform untipped work without full payment.

The plaintiff filed her complaint in November 2016. The restaurant answered in January 2017, and the parties moved for a stay in February 2017 to discuss the possibility of an early resolution, which was granted. In July 2018, Judge Graham C. Mullen ordered the parties to file a status report within seven days on his own motion. The parties settled the case, and the plaintiffs filed a motion to approve the settlement last month.

The docket does not indicate that the parties engaged in discovery, and they did not file a report from an initial attorneys’ conference. There were no class certification proceedings, and the parties do not appear to have mediated the case. In essence, the plaintiff filed a complaint alleging a collective and class action, and the parties quickly proceeded to settlement negotiations, ultimately resolving the case in just under two years. The case is now going through the process required by the Federal Rules for settlement of a class action, including notice to class members and an upcoming settlement approval hearing.

Although this case took longer to settle than FLSA cases often do, the overall approach is common in this kind of litigation. When a case involves employees at a single location, as in this matter, the cost of discovery and extended litigation often outweighs the value of the alleged claims. Here, for example, there were about 75 servers, bartenders and runners who will receive a total settlement payment of $95,000 according to formulas for hours worked and tip credits. The plaintiffs’ counsel will seek fees in the amount of $50,000, and the plaintiff who filed the complaint would receive an additional payment of $5,000.

Even in a case of this size, the issue of how to release future class claims under the North Carolina Wage and Hour Act and collective claims under FLSA can be tricky. The parties’ settlement agreement releases future state claims under the North Carolina Wage and Hour Act because the parties are settling the claims on a class-wide basis under Rule 23(b)(3), which requires that individuals have the ability to opt out. For the FLSA claims, only those individuals who endorse the settlement check and cash it will be deemed to have provided their written consent to opt in to the collective action. Thus, only employees who affirmatively opt in to the collective action by cashing their checks waive their future FLSA claims. If an employee fails to respond, she has released her state law claims but preserved her federal law claims under FLSA.

The process for obtaining an employee’s written consent to opt in to the FLSA collective action and waive future federal claims may vary depending on the jurisdiction. Some courts may require more than an employee’s signature and deposit of a settlement check such as a signed opt-in form obtained during the litigation or as part of a settlement claims process.

* We have previously addressed whether courts are required to provide class members the ability to opt out of a settlement, including in corporate merger litigation and in an unusual settlement of a class with an estimated 200 million members.