Recently, the Seventh Circuit Court of Appeals weighed in on a significant legal issue that continues to divide federal courts — the so-called "incompatibility" between FLSA collective actions and state law wage and hour class actions brought in a single lawsuit. This incompatibility argument, frequently espoused by defense counsel and adopted by some courts, asserts that an "opt-in" collective action, which limits class members to those who affirmatively opt to join in the lawsuit, cannot exist alongside a state law class action, where class members must "opt-out" or else become part of the class.

Supporters of this argument provide several justifications for it. Some contend that class members may become confused after receiving notices asking them to both opt-in and opt-out. Others have argued that a parallel state law wage and hour class action is nothing more than an attempt to circumvent the FLSA's opt-in procedure, which was intended to minimize class size. Whatever the justification, where courts have found incompatibility, they typically toss out the state law claims, and more often than not, plaintiffs' counsel re-file those claims separately in state courts.

Although the incompatibility argument has received mixed treatment from the federal district courts, no appellate court had yet addressed the issue until recently. In January, however, the Seventh Circuit, which covers Indiana, Illinois and Wisconsin, became the first appellate court to issue an opinion on the matter. In Ervin v. OS Restaurant Services, Inc., the court held that there is no categorical bar preventing a state law class action existing alongside an FLSA collective action in the same federal lawsuit. The court also rejected the argument that the presence of both in a single case automatically means that a class action is not a superior method of adjudicating the case as required under Federal Rule of Civil Procedure 23(b)(3).

But the court did not stop there. It also restricted federal courts' ability to jettison state law wage and hour class claims under 28 U.S.C. § 1367, which grants federal courts supplemental jurisdiction over related state law claims. While noting that § 1367 authorizes courts to refuse supplemental jurisdiction over state law claims where those claims may "substantially predominate" over the federal claims at issue, the Seventh Circuit observed that the mere fact that state law class actions are typically much larger than FLSA collective actions was not sufficient to find that the state law claims substantially predominated under § 1367.

The Seventh Circuit admonished district courts to focus on the nature of the state and federal claims, not the size disparity between them, when deciding whether state claims substantially predominate. In fact, the Seventh Circuit went so far as to declare that in most wage and hour cases, the state law claims are similar in nature to the federal FLSA claims, and hence, do not substantially predominate.

Although the Seventh Circuit's Ervin decision does not completely foreclose the incompatibility argument, the practical effect is that the decision makes it exceedingly difficult to prevail on such an argument within the Seventh Circuit. Of course, this decision is not binding precedent for defense counsel defending such lawsuits outside the Seventh Circuit, but the Ervin decision nevertheless strips the argument of much of its persuasiveness. At the end of the day, Ervin serves to limit — and essentially foreclose in the Seventh Circuit — the availability of the incompatibility defense.