“Hybrid” Wage and Hour Class Actions Approved by Third Circuit

On March 27, 2012, a unanimous three-judge panel of the Third Circuit Court of Appeals issued an opinion in Knepper v. Rite Aid, Inc. reversing the district court’s ruling that the plaintiffs could not pursue state wage and hour claims as a Rule 23 class action alongside parallel Fair Labor Standards Act (FLSA) collective action claims. The decision makes the Third Circuit one of five federal appellate courts to reject employers’ arguments against this practice, and it paves the way for plaintiffs to continue to pursue such hybrid actions in the future.

Under § 216(b) of the FLSA, an employee can only become a party to an FLSA action if “he gives his consent in writing to become such a party and such consent is filed in the court in which such action is brought.” Accordingly, claims under the FLSA cannot be pursued as opt-out class actions under Rule 23. However, plaintiffs frequently file “hybrid” actions that combine claims under state wage and hour laws, which can be certified as Rule 23 class actions, with FLSA claims.

Employers have raised numerous challenges to hybrid actions over the years but have had limited success in most jurisdictions. One argument employers have raised is that Rule 23 opt-out class actions are “inherently incompatible” with the opt-in procedure provided by the FLSA, and that hybrid wage and hour actions therefore violate Congress’s explicit intent to create an opt-in requirement for FLSA claims. Before Knepper, the Second, Seventh, Ninth, and D.C. Circuits had rejected this argument, but a few cases, most within the Third Circuit, still supported the argument that FLSA claims were inherently incompatible with class actions based on state wage and hour laws.

With its opinion in Knepper, the Third Circuit joined the other four circuits that have rejected the inherent incompatibility argument, finding that Congress did not intend to eliminate opt-out class actions entirely when it amended § 216(b). The Third Circuit provided a lengthy discussion of the legislative history of the Portal-to-Portal Act of 1947 to support its conclusion that Congress “created the opt-in scheme primarily as a check against the power of unions, whose representatives had allegedly manufactured litigation in which they had no personal stake, and as a bar against one-way intervention by plaintiffs who would not be bound by an adverse judgment.” Because neither of these purposes addressed the propriety of opt-out class actions (“especially since modern Rule 23 opt-out actions did not exist at the time”), the Third Circuit found no inherent incompatibility between the FLSA’s opt-in procedure and opt-out class actions based on state law wage and hour claims.

Rite Aid also argued that the FLSA preempted the two state wage and hour laws under which the plaintiffs in Knepper were suing. The Third Circuit rejected this argument, finding no express preemption because of the FLSA’s savings clause and finding no evidence that the two state laws were impliedly preempted as an obstacle to Congress’s purpose. Rite Aid argued in the alternative that, even if the FLSA did not preempt the state laws, enforcement of those laws through opt-out class actions would conflict with Congress’s intent in enacting the FLSA. The Third Circuit also rejected this argument, reasoning that the opt-out procedures were provided by a subsequently enacted federal law—not state law.

Finally, the Third Circuit rejected the argument that permitting hybrid actions to proceed is a violation of the Rules Enabling Act (REA). The REA authorizes the U.S. Supreme Court to create rules of procedure as long as they do not “abridge, enlarge, or modify any substantive right.” The Knepper court noted that one district court within the Third Circuit (the Western District of Pennsylvania) had previously endorsed this argument, but that every other district court to examine the issue had concluded that the REA did not bar certification of an opt-out class action of state law claims parallel to the FLSA. The Third Circuit rejected the REA argument in light of the Supreme Court’s 2010 ruling in Shady Grove Orthopedic Associates v. Allstate Insurance Co. that certification of a Rule 23 class action over New York state law claims did not violate the REA, even though New York law prohibited class actions over such claims.

Before Knepper, the Third Circuit was the most favorable jurisdiction in which to challenge the propriety of hybrid wage and hour actions. Now, all circuit courts of appeal to address the issue have ruled that state wage and hour claims can be certified as class actions in the same lawsuit alongside FLSA claims. The uniformity among the circuits makes it unlikely that this issue will be addressed by the U.S. Supreme Court any time soon.