Third Circuit Provides Welcome News to Employers Settling Hybrid Class and Collective Wage and Hour Cases

A recent decision by the United States Third Circuit Court of Appeals brings welcome news to employers facing “hybrid” wage-and-hour class and collective actions under federal and state law.

Background

In Lundeen v. 10 West Ferry Street Operations LLC d/b/a Logan Inn, the Third Circuit considered the claims of a former restaurant employee who brought a “hybrid” action under the federal Fair Labor Standards Act (“FLSA”) and the Pennsylvania Minimum Wage Act (“PWMA”), alleging wage and hour violations stemming from the restaurant’s bar manager’s alleged participation in the employee servers’ tip pool.

By way of background, in FLSA claims, claimants must affirmatively “opt in” to demonstrate their desire to be part of the wage and hour “collective” action, while under state law (once a class is certified), class members are presumed to be members of the class and have to affirmatively “opt out” should they wish to exclude themselves.

The Lundeen parties ultimately settled. As part of the settlement, they proposed that all class members receive a pro rata share in exchange for releasing all class and collective claims—both asserted and unasserted—including unasserted FLSA claims of individuals who did not “opt in” to the FLSA collective. The District Court, however, denied approval of the settlement, holding that those individuals who had not affirmatively joined the FLSA collective by opting in could not release their FLSA claims.

Third Circuit: FLSA Opt-In Requirement Does Not Bar Settlements Including Unasserted Claims

Disagreeing with the District Court, the Third Circuit examined the legislative intent behind Section 216(b) of the FLSA and held that the opt-in requirement was intended to curb litigation and did not intend to address settlement. The Third Circuit also focused on the “plain text” of the statute (the Third Circuit noted that the FLSA “says nothing about waiver of such a claim in settlement”) and held that the law simply did not address the waiver of claims in settlement and it would be improper for the Court to supply such language. Given this intent and language, the Third Circuit held that Section 216(b) does not forbid settlements or prospective class members’ unasserted FLSA claims as part of an opt-out settlement. Notably, the Third Circuit observed that no other Circuit has yet to decide this issue.

Notably, while the Third Circuit vacated the District Court’s denial of the settlement, it remanded for a full fairness hearing under Rule 23(e), not automatically approving the settlement. Courts must still ensure any hybrid settlement is fair, reasonable, and adequate, especially regarding notice, opt‑out procedures, and attorney’s fees.

What is the Impact of Lundeen on Employers?

Any employer faced with a class/collective action in the Third Circuit (which encompasses Delaware, New Jersey, and Pennsylvania) can now be confident in securing releases of employees when settling class/collective actions. Instead of settling parts of a case and leaving FLSA claims unresolved, this decision provides employers in the Third Circuit with welcome clarity and certainty.