1.14.21

A groundbreaking ruling from the U.S. Court of Appeals for the Fifth Circuit threatens to upend decades of federal court practice concerning the management of collective actions brought under the Fair Labor Standards Act.

The decision, Swales v. KLLM Transport Services, LLC, abandons the longstanding doctrine of “conditional certification” and holds that notice may be sent to potential plaintiffs only after the court determines, on a full discovery record, whether and to what extent a group of plaintiffs is “similarly situated” within the meaning of the FLSA. If this new doctrine were to be adopted by other circuits or endorsed by the Supreme Court, it could disincentivize early settlement of FLSA collective actions, sharply reduce the volume of federal wage and hour litigation, and raise the stakes of those cases that remain.

Background

In a traditional class action brought under Federal Rule of Civil Procedure 23 and its many state analogues, a plaintiff seeks to bind other similarly aggrieved individuals to the case by persuading the court that the proposed class is sufficiently numerous, that the class members’ claims are common to and typical of those of the named plaintiff, and that the class would be adequately represented by plaintiff’s counsel. If those requirements are met, each member of the approved class is automatically bound by any settlement or judgment unless that class member affirmatively opts out. By contrast, section 216(b) of the FLSA authorizes a collective action, not a class action. Under the collective action model, any “similarly situated” plaintiff may choose to join the collective action by filing a notice of consent with the court. Those who fail to “opt in” to the collective action will not share in the judgment or settlement, but neither will they waive their right to bring a similar claim in the future. For this reason, courts have construed the section 216(b) collective action procedure as a “rule of joinder,” similar to a mass tort claim.

As employers grew in size and as their decision-making became more centralized in the decades following the 1947 enactment of section 216(b), the collective action process began to prove unwieldy. For example, an overtime claim traceable to a corporate decision to treat a particular position as exempt rather than non-exempt could easily lead to a finding that thousands of employees nationwide were similarly situated to the lead plaintiff. This posed risks for both the plaintiff’s law firm—who feared that their case would be poached by out-of-state counsel with access to a larger pool of potential litigants—and the defendant employer, who balked at the prospect of multiple lawsuits with potentially disparate outcomes.

To address these concerns, trial courts—beginning with a seminal 1987 decision in the District of New Jersey, Lusardi v. Xerox Corp.—created the “conditional certification” procedure. At the outset of the case, the plaintiff was required to establish a prima facie showing, through affidavit testimony, company records, and the like, that a particular class of potential plaintiffs was likely to be certified as an FLSA collective. If that low bar was cleared, the court would authorize notice to be sent to the members of the prospective collective, with instructions for opting in to the litigation. Then, at the close of discovery, the named plaintiff would renew the certification motion (with the defendant typically filing a counter-motion to decertify). Taking into account additional evidence generated during discovery, as well as the number of consent forms received by prospective plaintiffs, the court would make a final determination regarding which, if any, plaintiffs were eligible to participate in the case under section 216(b) of the FLSA. Significantly, there is a direct correlation between early notice and case value, since the FLSA statute of limitations does not stop  running for a particular member of the collective until that member files an opt-in notice with the court.

Although the Supreme Court has not explicitly approved conditional certification under the FLSA, its 1989 decision in Hoffman-LaRoche Inc. v. Sperling laid the groundwork for widespread use of the practice. The Court in Hoffman-LaRoche, construing a similar collective-action provision in the Age Discrimination in Employment Act, confirmed trial courts’ ability to issue and oversee notices to potential opt-in plaintiffs during the pendency of litigation. In so doing, the Court emphasized that potential plaintiffs should receive “accurate and timely notice” of the case “so they can make informed decisions about whether to participate.” More broadly, the Court held that federal courts have a “managerial responsibility to oversee the joinder of additional parties to assure that the task is accomplished in an efficient and proper way.” Most federal courts have assumed that they have leeway under Hoffman-LaRoche and their inherent case management authority to interpose the conditional certification process in collective action litigation.

The Swales Decision

The Swales case was a typical piece of FLSA litigation when it commenced. The named plaintiffs filed suit in federal court in Mississippi, alleging that the trucking company KLLM misclassified the plaintiff drivers as independent contractors and in so doing violated the FLSA’s minimum wage requirements. After limited discovery, the plaintiffs moved for conditional certification. The trial court granted the motion, but took the unusual step of certifying an interlocutory appeal to the Fifth Circuit on the ground that that there were “open questions regarding the applicable standard” of conditional certification.

On January 12, a three-judge panel of the Fifth Circuit unanimously vacated the trial court’s conditional certification order. Writing for the court, Judge Don R. Willett (joined by Senior Judge E. Grady Jolly and Judge Edith H. Jones) explained that conditional certification was a judge-made doctrine that found no support in the statutory text of the FLSA or in Supreme Court jurisprudence interpreting the FLSA. Instead, wrote Judge Willett, the FLSA requires that notice be sent only to individuals who the trial court has determined are “similarly situated” to the named plaintiff(s). “A district court abuses its discretion, then, when the semantics of ‘certification’ trump the substance of ‘similarly situated.’” In Judge Willett’s view, conditional certification granted on the basis of a thin factual record created an impermissible risk that individuals who might ultimately be disqualified as potential plaintiffs would nevertheless receive court-sanctioned notice. Particularly in the context of a misclassification case, where liability turned on the level of individual control that the employer had over the independent contractor, pre-discovery conditional certification threatened, in Judge Willett’s view, to undermine the merits-based assessment that is required to establish a section 216(b) collective action.

Acknowledging the “broad, litigation-management discretion” afforded to trial courts by Hoffman-LaRoche, Judge Willett reasoned that such discretion cannot be used to artificially inflate the size of a collective action beyond the FLSA’s statutory mandate:

Considering, early in the case, whether merits questions can be answered collectively has nothing to do with endorsing the merits. Rather, addressing these issues from the outset aids the district court in deciding whether notice is necessary. And it ensures that any notice sent is proper in scope—that is, sent only to potential plaintiffs. When a district court ignores that it can decide merits issues when considering the scope of a collective, it ignores the “similarly situated” analysis and is likely to send notice to employees who are not potential plaintiffs. In that circumstance, the district court risks crossing the line from using notice as a case-management tool to using notice as a claims-solicitation tool. Hoffman-LaRoche flatly forbids such line crossing.

Judge Willett summarized the court’s new standard as follows:

Instead of adherence to Lusardi, or any test for “conditional certification,” a district court should identify, at the outset of the case, what facts and legal considerations will be material to determining whether a group of “employees” is “similarly situated.” And then it should authorize preliminary discovery accordingly. The amount of discovery necessary to make that determination will vary case by case, but the initial determination must be made, and as early as possible. In other words, the district court, not the standards from Lusardi, should dictate the amount of discovery needed to determine if and when to send notice to potential opt-in plaintiffs.

Takeaway

One might be inclined to dismiss Swales as an aberration produced by an extremely conservative panel of the most conservative federal appeals court in the nation. That would be a mistake. As the Fifth Circuit noted, the conditional certification standard is rarely addressed by courts of appeal because the conditional certification order is interlocutory and because most conditional certification orders lead directly to settlement. When appellate courts have weighed in, they have also expressed skepticism of the Lusardi approach. For example, in its 2018 decision in Campbell v. City of Los Angeles, the much more progressive Ninth Circuit critiqued what it deemed the “ad hoc” approach to conditional certification, although it did not discard the conditional certification process altogether. And it is not unreasonable to think that Judge Willett’s textualist argument that the FLSA does not authorize conditional certification would find favor with a majority of the current Supreme Court.

Removing the conditional certification process will introduce significant barriers to early settlement. Plaintiffs’ firms, which have relied on conditional certification to increase the size of the proposed collective and maximize settlement value, will instead need to invest substantial resources into investigating any potential collective action before filing. Defendants and their counsel will likewise be disinclined to entertain early settlement, since they will have the opportunity (and resources) to hammer away at the size of the prospective collective by taking discovery and by obtaining declarations from current employees. And perhaps most significantly, since the statute of limitations continues to run for each plaintiff until his or her opt-in notice is filed, delay in sending the notice accrues to the employer’s benefit—particularly where the employer has discontinued the practice that the lawsuit challenges.

We will be watching the FLSA landscape carefully to see how courts, both within and outside the Fifth Circuit, interpret Swales and apply its holding to various types of wage and hour cases.

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