Resolving conflicting district court authority, this week, the Seventh Circuit held that there is no categorical rule against certifying a Rule 23 state law class action in a proceeding that also includes a collective action brought under the Fair Labor Standards Act (FLSA). Ervin v. OS Restaurant Services, Inc., 7th Cir., No. 09-3029 (1/18/11).

The case arose when former employees of Outback Steakhouse brought suit alleging that Outback’s employment policies violated the FLSA, the Illinois Minimum Wage Law (IMWL), and the Illinois Wage Payment and Collection Act (IWPCA). The plaintiffs alleged that Outback violated the FLSA and IMWL by requiring tipped employees to perform tasks during which they could not earn tips, by using required “tip pool” deposits to make up shortages in cash registers, and by requiring excessive contributions to the tip pool. The plaintiffs also alleged that Outback violated the IWPCA by altering entries in its timekeeping system. The plaintiffs moved to certify the FLSA claims as a collective action under Section 16(b) of the FLSA and for class certification of the state law claims under Rule 23(b)(3).  

The district court denied class certification of the plaintiffs’ state law claims, reasoning that there was a “clear incompatibility” between the FLSA’s opt-in collective action mechanism and the opt-out class mechanism of Rule 23(b)(3) class actions. On this basis, the district court held that a case involving an FLSA collective action could never meet the superiority requirement of Rule 23(b)(3).

Resolving a division within the circuit, the Seventh Circuit held that the district court had abused its discretion in rejecting the Rule 23(b)(3) class based solely on its “clear incompatibility” with the FLSA. The Seventh Circuit found instead that there was “no insurmountable tension” between the two actions.

The court acknowledged that the difference between opt-in and opt-out proceedings meant that some people included as part of the state law class would not be part of the FLSA collective action. However, the court looked to the text of the FLSA and found “[n]othing [to] suggest[] that the FLSA is not amenable to state law claims for related relief in the same proceeding.” Moreover, the court found “ample evidence” to suggest that a combined action is consistent with the FLSA regime, reasoning that having non-opt-in plaintiffs in a separate Rule 23(b)(3) class within the same proceeding did not undermine Congress’s intent to limit private FLSA plaintiffs to those who asserted claims in their own right. As the court explained: “Some [plaintiffs] may be part of both the FLSA group and the Rule 23 class; some may be in one but not the other. [T]here is nothing in the FLSA that forecloses these possibilities.”

Because the district court had ruled as a matter of law that the two actions could not proceed simultaneously, the Seventh Circuit reversed this holding and remanded to allow the district court to reconsider whether the plaintiffs had met the superiority and other requirements of Rule 23(b)(3). Through its holding, the Seventh Circuit severely restricted employers’ ability to defeat class certification of state law claims on the basis of incompatibility with the FLSA’s opt-in mechanism.