Restaurants, hotels, and others in the hospitality industry recently have been faced with a rash of collective action cases brought under the Fair Labor Standards Act (FLSA) challenging their tip pooling practices. From high-end, trendy restaurants in Manhattan to large, popular chains with multiple locations throughout the country, there has been a significant increase in claims that such employers are illegally pooling tips allegedly due to employees, and that the employees, as a result, have not received the appropriate minimum wage and overtime. Now, these same employers should take note of the recent decision by the Seventh Circuit in Ervin v. OS Restaurant Serv, 09-3029 (7th Cir. Jan. 18, 2011), which adds an additional weapon to the arsenal of plaintiffs’ lawyers pursuing these claims – the potential ability to litigate supplemental state law claims as class actions under Rule 23(b)(3) within the same lawsuit as the FLSA claims.

In Ervin, the plaintiffs were a group of former tipped employees at Outback Steakhouse in Illinois who challenged the restaurant’s pay practices. They sued Outback under the FLSA and Illinois state wage acts claiming Outback violated the minimum wage and maximum hour provisions of both the federal and state laws. The Plaintiffs moved for conditional certification under section 16(b) of the FLSA (29 U.S.C. § 216(b)). At the same time, they moved for certification of three different classes under Rule 23(b)(3) for the state law claims. The magistrate recommended, that the FLSA collective action should proceed, but the class action should not. While the magistrate was satisfied the 23(a) elements had been met (numerosity, commonality, typicality, and adequacy requirements), he decided that the superiority element under Rule 23(b)(3) – that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy – could not be satisfied. In fact, he went so far as to say that a Rule 23(b)(3) class “will never be superior when another part of the case is proceeding under FLSA section 16(b).” Ervin, 09-3029 at 6.

In adopting the magistrate’s ruling, the district court allowed the FLSA collective action to move forward, and refused to certify the class action because there was “clear incompatibility between the ‘opt out’ nature of a Rule 23 action and the ‘opt in’ nature of a Section 216 action.” Id. The court further concluded that this conflict automatically meant the class action device was not a superior method for resolving the state law claims.

On appeal, Outback raised, and the Seventh Circuit considered, only the narrow issue of whether the plaintiffs could meet the requirements of Rule 23(b)(3). Outback argued that permitting a plaintiff who ends up in Rule 23 class because he failed to opt out to proceed as part of the class is “in tension with the idea that disinterested parties were not supposed to take advantage of the FLSA.” Id. at 12. The Seventh Circuit disagreed, finding that such a plaintiff will not be entitled to any FLSA remedy, and concluded that based on the plain language of the FLSA itself, “[n]othing…suggests that the FLSA is not amenable to state-law claims for related relief in the same federal proceeding.” Id. at 11. The court also rejected Outback’s argument that a combined action has a high risk for confusion when notice is sent to potential class members. The court stated that this potential is no worse that “countless others that district courts face with class actions” and that it would be preferable for notice to come from a single court in a unified proceeding, rather than multiple courts. Id. at 14. As a result, the Seventh Circuit reversed the district court’s denial of class certification and remanded it to the district court for further proceedings.

The Bottom Line: The implications of the case could be widespread as courts are divided across the country on the issue of whether FLSA and state law class claims can co-exist within one case. What is certain is that this issue is not going to be resolved uniformly anytime in the near future, and will most likely make its way to the Supreme Court for final clarity. In the meantime, decisions like this translate into the prospect of increased litigation and costs associated with wage claims for employers.