There Goes The Neighborhood–Third Circuit Decides FLSA “Opt-In” Collective Actions and State Law “Opt-Out” Class Actions Can Exist In The Same Lawsuit
By: Jason E. Reisman, Obermayer Rebmann Maxwell & Hippel LLP
Back in the beginning of 2011, in Knepper v. Rite Aid Corporation, the United States District Court for the Middle District of Pennsylvania effectively held that collective actions (i.e., opt-in actions) under Section 216(b) of the Fair Labor Standards Act (“FLSA”) and class actions under Rule 23 (i.e., opt-out actions) of the Federal Rules of Civil Procedure were “inherently incompatible.” In the case, Rite Aid assistant store managers were pursuing claims that they had been improperly classified as exempt from the overtime provisions of the FLSA and state law. As a result of the court’s decision, the plaintiffs’ Rule 23 class actions were dismissed. (For additional details of the 2011 decision, please refer to my prior post of April 5, 2011.)
On March 27, 2012, on appeal, the U.S. Court of Appeals for the Third Circuit took up the issue of “inherent incompatibility” in Knepper and reversed the decision of the Middle District of Pennsylvania. Knepper v. Rite Aid Corp., 3d Cir., Nos. 11-1684 & 11-1685, March 27, 2012. The Third Circuit found that the FLSA opt-in action was not inherently incompatible with a Rule 23 state law opt-out action, thereby bringing the Third Circuit in line with four other federal appeals courts–the Second, Seventh, Ninth and District of Columbia Circuits. In analyzing the plain text of the FLSA, the Third Circuit found nothing in the statute that precludes a Rule 23 action from proceeding at the same time as an FLSA Section 216(b) action. In fact, the court noted that the FLSA is not ambiguous–it “explicitly limits its scope to the provisions of the FLSA, and does not address state-law relief.” Although noting it unnecessary given the clear text of the FLSA, the court stated that the FLSA’s legislative history also did not support the inherent incompatibility argument. Announcing its decision, the Third Circuit stated: “In sum, we disagree with the conclusion that jurisdiction over an opt-out class action based on state-law claims that parallel the FLSA is inherently incompatible with the FLSA’s opt-in procedure.”
Certainly, the Third Circuit has now fallen in line with, and indeed reinforced, the trend set by the four other Circuit Courts of Appeal. It is a critical blow to employers defending such cases in Pennsylvania, New Jersey, Delaware and the Virgin Islands, as they no longer will have the argument or opportunity to limit pursuit of such claims to an FLSA opt-in action, which traditionally only achieves opt-in rates of 15 to 20 percent of those potentially eligible class members. The ruling also allows employees to more efficiently pursue both FLSA and state law claims in a single federal court action.
 The opt-in FLSA claims and opt-out state law claims originated in separately filed actions, so this was not the typical “hybrid” single action. Ultimately, the Middle District of Pennsylvania heard the claims on the issue of whether the separately filed actions were compatible and decided to extend the “inherent incompatibility” rationale to the situation at hand.