Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

As the surge of wage and hour collective actions continues, one strategy utilized by employers to avoid such multi-plaintiff litigations is the use of arbitration agreements with class/collective action waivers.  In essence, such provisions mandate that an employee arbitrate any wage and hour and other (subject to certain limitations) disputes on an individual basis.   Arbitration agreements containing these provisions prohibit individual and collective court actions as well as class/collective arbitration proceedings.  While there are potential hurdles to the enforceability of these agreements -- such as consideration, unconscionability and even (as discussed here) the National Labor Relations Act – in general an arbitration agreement with a well-drafted class/collective action waiver is enforceable as to wage and hour claims.  A recent decision of the United States District Court for the Eastern District of Virginia, Richmond Division, upholding such a class/collective action waiver is instructive.   See Johnson v. Carmax, Inc., 2010 U.S. Dist. LEXIS 70700 (E.D. Va. July 14, 2010). 

In Johnson, plaintiffs filed an FLSA collective action in federal court.  The employer moved to dismiss, asserting that each plaintiff signed an arbitration agreement requiring resolution of all disputes on an individual basis through arbitration.  In granting the employer's motion, the Court relied on the plain language of the relevant documents which "clearly prohibit Plaintiffs from bringing their claim in this Court and furthermore from pursuing this claim on a collective basis in any forum."  

The Court rejected Plaintiffs' assertion that the failure of the relevant documents to mention "collective actions" mandated denial of the motion stating that the documents both specifically referred to FLSA claims being covered and mandated arbitration on an individual basis.  Plaintiffs' argument that the arbitration agreement was procedurally and substantively unconscionable also was not given credence by the court.  Judge James R. Spencer stated that the presence of "alleged unequal bargaining" power based on the fact that the agreement was a condition of employment was insufficient to demonstrate unconscionability.  Similarly, the court held that since all remedies available to each plaintiff through a collective action are available through an individual arbitration proceeding: "[r]equiring Plaintiffs to arbitrate their claims individually does not diminish either the remedial or protective functions of the FLSA."

All employers must not only be vigilant in regard to wage and hour compliance but also constantly analyze potential strategies to limit the breadth of potential actions and properly implement such strategies.  In fact, in another decision issued the same week in the very same federal district, an employer was unable to foreclose potential collective arbitration of wage claims.  Davis v. Terminix International Co., 09-CV-00309 (E.D. Va. July 15, 2010).  In Davis, the arbitration agreement did not expressly address collective action claims, and referred generally to the parties’ obligations being governed by North Carolina’s arbitration statute.  The Court scheduled a hearing to determine whether the arbitration of the wage claims should proceed on a “consolidated” (i.e., collective action) basis with the approximately 30 opt-in Plaintiffs. 

Of course, use of an arbitration agreement poses numerous other considerations for employers.

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As wage and hour litigation continues to be the majority of litigation in the workplace law arena, many employers are faced with defending federal and state law claims in the same federal court lawsuit.  This poses a practical issue as the FLSA provides for an opt-in class while state laws generally provide for opt-out classes.   Many members of the defense bar feel that allowing the actions to coexist in a federal case renders the opt-in process practically irrelevant.  Further, such dual actions often have the result of a minimal opt-in class and a large opt out class.

While district courts within the Second Circuit (which covers New York, Connecticut and Vermont) have held that such claims can coexist in a federal court action, the Second Circuit Court of Appeals has not yet ruled on the issue. Such a ruling is expected in the near future as the Second Circuit recently agreed to consider a restaurant employer’s appeal of the district court’s decision allowing federal and state claims to proceed in a situation where only 22 of approximately 300 of the putative plaintiffs who comprise the state law opt-out class opted in to the FLSA action.  Shahriar et al. v. Smith & Wollensky Restaurant Group Inc. et al., Second Circuit Case No. 10-477-mv (Order dated May 14, 2010). Courts within other Circuits are divided as to the appropriateness of the “hybrid” opt-in/opt-out lawsuit which permits such claims to coexist.  Compare De Asencio v. Tyson Foods, Inc., 342 F.3d 301, 306 (3d Cir. 2003)(upholding refusal to certify 4,000+ member state law opt-out class in wage case with 447 potential opt-in participants) with Lindsay v. Gov't Emples. Ins. Co., 448 F.3d 416 (D.C. Cir. 2006)(reversing denial of certification of state law claim in certified federal action and holding that dual actions are permissible).   

Should the Second Circuit rule that such claims cannot coexist in a federal court action, there may be a significant reduction in wage and hour actions initiated in federal court within the Circuit, as Plaintiffs’ counsel seek solely large opt-out state law classes in New York state courts.  However, such a finding and strategic shift could also have the effect of requiring employers to simultaneously defend parallel cases in federal and state court.  This site will keep you apprised of the Court’s decision.

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On the heels of its ruling in Shady Grove regarding the inapplicability of state procedural rules in federal court (discussed here), on April 19, 2010, the Supreme Court issued a decision reviving another dismissed class action.  In Holster v. Gatco Inc., Case Number 08-1307, the Court granted the appeal petition of an individual seeking to bring a class action in New York federal court under the Telephone Consumer Protection Act (a different law than the one at issue in Shady Grove), and sent the case immediately back to the Second Circuit to consider whether the plaintiff could proceed with a Rule 23 class action in light of Shady Grove. Holster v. Gatco, Inc., 2010 U.S. LEXIS 3118 (U.S. Apr. 19, 2010).  This second ruling reinforces the initial interpretation of Shady Grove: namely, that class actions brought in federal court (including those alleging state law claims under statutes such as the New York Labor Law) are governed by Rule 23, and procedural limitations on those class actions contained in the state’s procedural rules may not apply. 

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In the Second Circuit, employees generally can waive their right to bring a class or collective action as long as the cost of arbitrating the case on an individual basis is not cost-prohibitive  and does not “remov[e] the plaintiff’s only reasonably feasible means of recovery.”  See In Re American Express Merchants’ Litigation, 554 F.3d 300 (2d Cir. 2009).   In late March, Judge Gleeson of the Eastern District of New York analyzed the viability of such a collective/class action waiver in the wage and hour context.  The court upheld the waiver finding that the plaintiffs did not demonstrate that individual litigation would be “cost-prohibitive.”  Judge Gleeson rejected the plaintiffs’ claim that incurring arbitration costs of up to $1,500 to process the arbitration rendered the agreement substantively unconscionable.” See Reid, et al. v. Supershuttle International, Inc., 2010 U.S. Dist. LEXIS 26831 (E.D.N.Y. March 22, 2010).

This decision parallels the Southern District of New York’s recent decision in Arrigo v. Blue Fish Commodities Inc., 2010 U.S. Dist. LEXIS 9547 (S.D.N.Y. Feb. 4, 2010), in which the court also  dismissed an employee’s Fair Labor Standards Act collective action and required him to arbitrate his claim on an individual basis pursuant to the Federal Arbitration Act.  See “Federal Courts in New York Continue to Enforce Arbitration Agreements” http://www.jacksonlewis.com/legalupdates/article.cfm?aid=1989 for a further discussion of this decision and other recent New York federal court decisions addressing mandatory arbitration.

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The Supreme Court dealt a blow to New York wage-and-hour defendants sued in federal court last week, overruling established precedent requiring plaintiffs bringing New York Labor Law (“Labor Law”) class actions in federal court to waive the 25% liquidated damages “penalty” in order to proceed on a class basis.  In Shady Grove Orthopedic Assocs., P.A. v. Allstate Ins. Co., 2010 U.S. LEXIS 2929 (U.S. Mar. 31, 2010), the Supreme Court applied the age-old test from Erie R. Co. v. Tompkins, 304 U.S. 64 (1938) and held that the state law rule requiring such a waiver is “procedural” as opposed to “substantive”, and has no application in federal court, where opt-out class actions are governed by Federal Rule of Civil Procedure 23. 

Class action Labor Law plaintiffs in federal court now may seek a 25% penalty in behalf of all class members, increasing the potential class-wide damages.  It remains a divided question, unanswered by the higher courts, as to whether any wage-and-hour plaintiff may recover the 25% penalty and the 100% liquidated damages under the FLSA for the same time period.  Compare Yu G. Ke v. Saigon Grill, Inc., 595 F. Supp. 2d 240, 261 (S.D.N.Y. 2008) with Jin v. Pac. Buffet House, Inc., 2009 U.S. Dist. LEXIS 74901 at * 24 (E.D.N.Y. Aug. 24, 2009).

Other states containing class action limitations in their state procedural codes, whose federal courts previously had deferred to the state rule, may now also be subject to class actions in federal court seeking relief under the state’s wage-and-hour laws.   However, the Court did not conclusively state that all such provisions were unenforceable but rather focused its analysis on the intent of the New York provision requiring waiver of penalties.

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 In 1981, the Supreme Court issued general guidance as to what an employer can say to “putative class members” In doing so, the Court explained that the judiciary has the power to control communications See generally Gulf Oil v. Bernard, 452 U.S. 89 (1981) (holding a district court has both the “duty and broad authority to exercise control over a class action and to enter appropriate orders governing the conduct of counsel and parties,” including the duty and authority to enter orders limiting communications by class counsel for the plaintiff to members of the class). Since then, counsel for all parties in a class action have wrestled with the strategic and ethical implications of communicating with an individual who is not formally represented by either side (Note: this issue is further confounded by the collective action “opt-in” nature of the FLSA – an issue for another day). 

This communication process is made all the more difficult in the employment context, where management must interact with putative class members on a daily basis – because they still work for you! One recent opinion addressing communications from both plaintiff and defense counsel in a putative class action is Clincy v. Galardi S. Enters., 2010 U.S. Dist. LEXIS 22796 (N.D. Ga. March 12, 2010). In Clincy, a putative collective wage and hour action filed by several dancers at Club Onyx, an adult entertainment night club in Atlanta, counsel for plaintiffs sent a communication about the lawsuit to the homes of dancers who had not joined the lawsuit. In response, counsel for defendants circulated a memo to potential class members, correcting what they perceived to be misleading information contained in plaintiffs’ letter. Id. at * 8-11.

After reviewing these two submissions (and in light of already-substantiated allegations of retaliatory acts by the employer and other Defendants – some of which were partially captured on audiotape by the Plaintiffs), the Court cautioned Defendants strongly against any further retaliation or coercive behavior. Id. at * 10-11. Acknowledging Defendants’ need to communicate with putative participants in order to defend the case, the Court permitted future communication with those individuals, but required that any further written communication contain an “introductory paragraph” with specified language in a font “that is bold and larger than the text contained in the body of the communication”, reading:

This communication represents the opinion of the management of Club Onyx. It is unlawful for Club Onyx, its management, or any other Defendant, to retaliate against employees who choose to participate in this case or assist Plaintiffs' counsel in this case.

Id. 

Interaction with putative class members is one of the most difficult and subtle aspects of class action defense. It is important to consider all of the ramifications of any proposed communication, even when the subject matter does not directly relate to the lawsuit, before implementing a communication strategy. Employers do not want to put themselves in a position whereby by court mandate the credibility of their communication is expressly circumscribed.

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