A recent decision by the Seventh Circuit underscores the importance of employers taking proactive measures to avoid exposure arising from the Fair Labor Standards Act (“FLSA”) and state law wage class actions. In Ervin v. OS Restaurant Service Case No. 09-3029 (7th Cir. January 18, 2011), the Seventh Circuit on January 18, 2011 tentatively resolved the issue of whether FLSA collective actions can be maintained in the same suit as state wage class actions under Federal Rule of Civil Procedure (“FRCP”) 23. The Court decided such claims can be litigated in a single lawsuit.

Ervin was a case of tip pooling among certain employees at an Outback Steakhouse, including allegations that the employees were required to perform tasks that did not allow for tips, required the employees to make large contributions to the “tip pool” and used the “tip pool” to make up for cash register shortages. The plaintiffs brought both a FLSA collection action claim and an Illinois state law class action claim for violating minimum wage and maximum hour provisions. On appeal, the Seventh Circuit decided the narrow issue of whether plaintiffs’ state law claims could meet the superiority requirements for class actions under FRCP 23(b)(3).

Previously, some employers had defeated class certification under FRCP 23 by arguing that certification of state law claims was incompatible with the FLSA’s opt-in procedure. Such a dismissal limits the size of the FLSA class and, as a result, an employer’s exposure to damages. The Court specifically rejected this long-time argument that plaintiffs trying to pursue both options in a single proceeding would never be able to demonstrate the superiority required by FRCP 23(b)(3). The Court found that the FLSA opt-in procedure does not necessarily “rule[] out any chance of finding that class treatment under Rule 23(b)(3) is a superior way to structure the case.” The Court also rejected the employer’s argument that confusion would result because of the options to both opt-in and opt-out in a single case.

The Seventh Circuit ruled that there is no steadfast rule against certifying a class action under state wage law and a collective action under the FLSA. The Court acknowledged that an opt-in class (collective action) and an opt-out class (Rule 23 class action) may result in some individuals being included in the FRCP 23 class action who were not included in the FLSA collective action. However, the Court found nothing in the language of the FLSA to indicate that “the FLSA is not amendable to state law claims for related relief in the same proceedings.”

This decision may create difficulties for employers attempting to dismiss a FRCP 23 state law claim. For example, in the past employers successfully moved to dismiss a state law claim arguing that the opt-in procedure and opt-out procedure were incompatible or that the state wage claims predominated over federal claims and thus, a state wage law class action is not a superior method of adjudication. In light of Ervin, though, plaintiffs’ attorneys will argue that federal and state wage claims can co-exist in the same lawsuit. It is important to note, however, that Ervin does not lessen the plaintiffs’ burden in proving superiority under FRCP 23. It should be noted that because there is currently a conflict among the circuits on this issue, the Supreme Court may take up the issue at some point in the future.

Lessons for Employers

Plaintiffs’ lawyers can be expected to now routinely bring combined actions based on both federal and state wage claims. Thus, employers’ potential exposure will increase. It is important for employers to avoid such combined actions by assessing their current policies and procedures with respect to employee wages, implementing training and policies to ensure employees are paid properly and continually monitoring pay practices to ensure compliance with both the FLSA and state wage laws.