The Price of Poker Just Went Up

March 14, 2011

Federal courts across the country are split on whether collective and class actions can be combined in a single proceeding. On January 18, 2011, the Seventh U.S. Circuit Court of Appeals (the federal court of appeals governing Wisconsin) ruled that employees can proceed in a single lawsuit with combined class and collective claims. As we discuss in the following article, such combined actions now create more expo­sure to greater damages for employers.

The Cards are Dealt

Former employees of an Outback Steakhouse in Calumet City, Illinois, sued on behalf of themselves and all others who had previously worked or were currently employed at the res­taurant as hourly or tipped employees. The employees claimed that the fol­lowing Outback policies violated the FLSA as well as Illinois state wage and hour law:

  • requiring tipped employees to per­form tasks for which they could not earn tips;
  • using money that tipped employees were required to deposit in a “tip pool” to make up for shortages in restaurant cash registers; and
  • demanding that tipped employees contribute an excessive amount of their tips to the tip pool.

The employees asked the trial court for conditional approval of a federal collective action under the FLSA. They proposed that the court send notice of the lawsuit to anyone who had worked as a tipped employee at Outback since 2005.

At the same time, the employees requested certification of three different classes under Illinois state law. The trial court granted their request to condition­ally certify the federal collective action but denied certification of the three state classes. The court concluded that per­mitting the employees to proceed on the state-law class claims at the same time they were proceeding on the federal col­lective claims would be incompatible with Congress’ intent when it allowed collective actions.

That question has split federal courts across the country. The employ­ees appealed the trial court’s denial of certification of the three state-law classes to the Seventh Circuit.

Employees Go All In
Employees can file individual claims under federal law or they can attempt to show that they are similarly situated to other employees and seek certification of a collective action. If the court allows the case to be con­ditionally certified as a collective ac­tion, it will authorize notice to be sent to all potential class members. Only cur­rent and former em­ployees in the class who return a written consent form will be part of the collective action. In this case, the trial court conditionally certified the collective action and authorized notice to be sent to potential class members.

At the same time employees pursue collective FLSA claims, they also may ask the court to certify a class ac­tion under state wage and hour law. Class actions differ from collective actions in an important way: If a state-law class is certified, all class members are part of the case unless they take specific action to exclude them­selves from the class. That can significantly increase the size of the class and, correspondingly, the employer’s exposure if it’s found to have violated federal and state wage and hour laws.

As noted above, the trial court found that an FLSA collective action and a state wage and hour class action are incompatible. The Seventh Circuit disagreed and ruled that the collective and class claims could proceed in a single lawsuit. Ervin et al. v. OS Restaurant Services, Inc., App. No. 09-3029 (7th Cir., 1/18/11).

A Turn for the Worse?

This decision has the potential to be significant when an employer’s actions violate federal and state wage and hour law. The FLSA has a two-year statute of limitations (three years if the employer’s conduct is willful). That means a lawsuit may include claims by current and for­mer employees for up to three years. If both federal and state classes are certified, the case will include claims by workers who opt in — i.e., who complete a consent form — and those who do nothing when they receive notifi­cation of the class action. That can significantly increase the size of the damages claims against the employer.

Federal law allows liquidated damages equal to 100 percent of the damages awarded (i.e., doubling of dam­ages). State laws vary on the penalties and additional damages they allow. Wisconsin permits a damages in­crease of 50 percent if the employee didn’t file a com­plaint with the Wisconsin Department of Workforce De­velopment before suing and a 100 percent increase if the employee did file a complaint. Additionally, employees who succeed on their claims can recover attorneys’ fees and costs, which can be substantial in class-based litigation.

How to Avoid Being up a River without a Paddle

Employees are entitled to relief under either fed­eral or state wage and hour laws only if their employer violated those laws. If your pay practices are lawful, it won’t matter whether the suit is filed by one employee or a class of thousands. The key, therefore, is to make absolutely certain that your pay practices are consistent with federal and state wage and hour law.

Wage and hour law is often highly technical, making compliance difficult. The single best action you can take is to conduct an audit of your pay practices, policies, and procedures to ensure that you are in compliance.

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For more information about "The Price of Poker Just Went Up," contact Michael J. Modl at mmodl@axley.com or 608.283.6702.