The obligations of a district court to analyze conflicting evidence regarding class and collective action certification was recently addressed by the Third Circuit Court of Appeals in Reinig v. RBS Citizens N.A., 912 F.3d 115, (3d Cir. 2018) (“Citizens”). In that case, the Third Circuit opined that Fed.R.Civ.P. 23 class certification orders (i) must explicitly define the classes and claims that are the subject of a certification order and (ii) provide an analysis of how the court reconciled any conflicting evidence supporting class certification.

In addition, the Third Circuit held that while Rule 23(f) permits an interlocutory appeal from a class certification order relating to 10 state law wage hour claims, the court did not have pendent appellate jurisdiction to review a related order certifying a nationwide collective action under Section 216(b) of the Fair Labor Standards Act (“FLSA”).

Facts

Plaintiffs, a group of mortgage loan officers, alleged that, among other things, Citizens failed to pay overtime wages in accordance with the FLSA and state law. Plaintiffs pursued a collective action under Section 216(b) of the FLSA and separate Rule 23 class actions under the laws of 10 states.

Each mortgage loan officer was informed of Citizens’ policy that he or she was “required to obtain prior approval from [his or her] supervisor for any hours worked in excess of 40 hours per week,” and could be disciplined for working unapproved overtime. But, plaintiffs claimed, Citizens’ written overtime policy was a “ruse,” and that the company actually had a “policy-to-violate-the-policy.” Specifically, plaintiffs alleged that Citizens’ “coordinated, overarching scheme” was to encourage unreported overtime by: (1) disciplining mortgage loan officers who reported working overtime that was not preapproved; (2) restricting the amount of overtime hours that could be approved; (3) violating its own attendance monitoring and timesheet approval policies so that overtime hours could go unreported; and (4) discouraging or harassing mortgage loan officers who reported or requested overtime.

In May 2016, the District Court for the Western District of Pennsylvania granted plaintiffs’ Section 216(b) motion for conditional certification of a collective action. In August 2017, based on the recommendations of a Special Master, the District Court denied Citizens’ motion to decertify the FLSA collective action, granted the plaintiffs’ motion for certification of the FLSA collective action claims, and granted plaintiffs’ Rule 23 motion for certification of 10 state wage/hour class actions.

Pursuant to Rule 23(f), Citizens appealed from the District Court’s order certifying the state law wage class claims.

A Rule 23 Class Certification Order Must Define Class and its Claims

Reiterating its earlier decision in Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 592 (3d Cir. 2012), the Third Circuit vacated the District Court’s order, because it failed to define the classes being certified and to define the claims, issues, or defenses accorded class treatment. The District Court’s order stated only that Plaintiffs’ “state law subclasses are for Pennsylvania, Connecticut, New York, Massachusetts, Rhode Island, Illinois, Michigan, New Hampshire, North Carolina, and Ohio,” without defining the scope of those subclasses.

The Third Circuit commented that the District Court’s analysis was insufficient to allow it to determine whether the evidence proffered by the plaintiffs satisfied Rule 23’s commonality and preponderance requirements. It opined that, when ruling on a motion for class certification, a district court must “clearly articulate its reasons,” so that the certification decision can be reviewed on appeal.

Rule 23(a)(2) requires that the putative class members “share at least one question of fact or law in common with each other,” and Rule 23(b)(3) requires that common issues predominate over issues affecting only individual class members. Analyzing these elements together, the Third Circuit stated that the plaintiffs had to demonstrate that (1) Citizens’ managers were carrying out a “common mode” of conduct through the company’s internal “policy-to-violate-the-policy,” and (2) Citizens had actual or constructive knowledge of this conduct.

Rather than conduct its own rigorous analysis, the District Court relied on the Special Master’s reports, which cited to testimony from “roughly two dozen [mortgage loan officers]” that “Citizens’ managers nonetheless regularly and almost uniformly instructed [mortgage loan officers] not to report all the hours that they worked.” The Third Circuit commented that the Special Master’s reports did not specifically identify the testimony relied upon to reach this conclusion and did not reference the evidence showing that knowledge of the purported policy was imputable to Citizens.

The record on appeal failed to support uniform application of the “policy to violate the policy,” but rather evidenced different, individualized experiences. Witness testimony was “confined to interactions with specific managers in distinct offices.” On multiple occasions, the testimony of putative class members contradicted the plaintiffs’ argument that managers “almost uniformly” instructed mortgage loan officers not to report all hours worked. The District Court did not reconcile these record conflicts. The Third Circuit was unable to determine whether the evidence met the commonality and predominance requirements of Rule 23.

Relying on Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1046-47 (2016), the Third Circuit stated that, for the plaintiffs’ representative evidence to satisfy the commonality/predominance requirements of Rule 23, the evidence must be sufficiently representative of the class as a whole, such that each individual plaintiff “could have relied on [the] sample to establish liability if he or she had brought an individual action.” The record on appeal was to the contrary.

The Third Circuit vacated the order and remanded the matter to District Court with instructions that a class certification order must include: “(1) a readily discernible, clear, and precise statement of the parameters defining the class or classes to be certified, and (2) a readily discernible, clear, and complete list of claims, issues or defense to be treated on a class basis.”

No Pendent Appellate Jurisdiction over the District Court’s FLSA Collective Action Order

The Third Circuit’s decision is also important because it signaled an unwillingness to conflate the FLSA’s similarly situated standard for a collective action with FRCP Rule 23’s more stringent test for class certification. In declining to do so, the Third Circuit recognized that other circuit courts have “treated FLSA and Rule 23 certification as nearly one and the same.” See Epenscheid v. DirectSat USA, LLC, 705 F.3d 770, 772 (7th Cir. 2013), and Theissen v. Gen. Elec. Capital Corp., 267 F.3d 1095, 1105 (10th Cir. 2001).

Rule 23(f) permits interlocutory review of a Court’s order granting or denying class action certification. No comparable procedural rule permits review of an order certifying a collective action pursuant to FLSA Section 216(b). In Citizens, defendant sought appellate review of the District Court’s interlocutory order denying defendant’s motion to decertify the collective action through the doctrine of pendant appellate jurisdiction.

Pendant appellate review is available in two limited circumstances, to wit: (i) ‘”inextricably intertwined’” orders and (ii) review of a “non-appealable order when it is necessary to ensure meaningful review of [an] appealable order.” Neither circumstance was met to permit appellate review of the District Court’s order certifying a Section 216(b) collective action, while vacating an order certifying a Rule 23 class.

Pendent appellate jurisdiction allows an appellate court to exercise jurisdiction over issues that are not independently appealable, but that are inextricably intertwined with issues over which that court has independent jurisdiction. The question before the Third Circuit was whether Rule 23(b)(3)’s requirement that common state law issues predominate over issues affecting only individual class members was inextricably intertwined with the issue of whether the plaintiffs were “similarly situated” as required to certify an FLSA collective action. The Third Circuit opined that the doctrine of pendant appellate jurisdiction is “narrow” and “should be used ‘sparing.’” (Citations omitted).

The Third Circuit joined with the Second Circuit in Myers v. Hertz Corp., 624 F.3d 537, 553-54 (2d Cir. 2010), to conclude that FLSA and Rule 23 certification orders were not inextricably intertwined, because the requirements of Rule 23’s predominance standard were significantly higher than the FLSA’s similarly situated standard. Therefore, a court may find that Rule 23 requirements had not been met without addressing whether the lower FLSA standard had been satisfied. The Third Circuit aligned with the Second Circuit in holding that Rule 23 certification is not “inextricably intertwined” with an FLSA collective action certification, and, therefore, declined to exercise pendent appellate jurisdiction over the interlocutory FLSA certification order.

The Third Circuit’s ruling in Reinig will assist employers who are faced with Rule 23 class certification motions that seek to certify ill-defined classes and ambiguous claims based on anecdotal evidence. However, under Reinig, employers will be hard pressed to obtain immediate appellate review of the certification of an FLSA collective action.

Our colleagues , at Epstein Becker Green, have a post on the Retail Labor and Employment Law blog that will be of interest to many of our readers: “New Jersey’s Appellate Division Finds Part C of the “ABC” Independent Contractor Test Does Not Require an Independent Business

Following is an excerpt:

In a potentially significant decision following the New Jersey Supreme Court’s ruling in Hargrove v. Sleepy’s, LLC, 220 N.J. 289 (2015), a New Jersey appellate panel held, in Garden State Fireworks, Inc. v. New Jersey Department of Labor and Workforce Development (“Sleepy’s”), Docket No. A-1581-15T2, 2017 N.J. Super. Unpub. LEXIS 2468 (App. Div. Sept. 29, 2017), that part C of the “ABC” test does not require an individual to operate an independent business engaged in the same services as that provided to the putative employer to be considered an independent contractor. Rather, the key inquiry for part C of the “ABC” test is whether the worker will “join the ranks of the unemployed” when the business relationship ends. …

Read the full post here.

In a move likely to impact employers in a variety of industries, U.S. Secretary of Labor Alexander Acosta announced on June 7, 2017 that the Department of Labor has withdrawn the Administrator’s Interpretations (“AIs”) on independent contractor status and joint employment, which had been issued in 2015 and 2016, respectively, during the tenure of former President Barack Obama.

The DOL advised that the withdrawal of the two AIs “does not change the legal responsibilities of employers under the Fair Labor Standards Act . . . , as reflected in the department’s long-standing regulations and case law.” As discussed below, however, this announcement may reflect both a change in the DOL’s enforcement priorities going forward, and a return to the traditional standards regarding independent contractor and joint employment status that had been relied on by federal courts prior to the issuance of the AIs.

Independent Contractor Status

In determining whether a worker is properly classified as an independent contractor under the Fair Labor Standards Act (“FLSA”), courts have historically relied on the six-factor “economic realities test,” which considered: (1) the extent to which the work performed is an integral part of the employer’s business; (2) the worker’s opportunity for profit or loss; (3) the nature and extent of the worker’s investment in his/her business; (4) whether the work performed requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. While no single factor was meant to be determinative, courts typically placed primary emphasis on the degree of control exercised by the putative employer.

Under the Obama administration, the DOL increased its emphasis on the potential misclassification of workers as independent contractors. As part of this initiative, the agency issued Administrator’s Interpretation No. 2015-1 on July 15, 2015.  While this guidance nominally reaffirmed DOL’s support for use of the “economic realities test” to determine independent contractor status, it reflected a far more aggressive interpretation of several of the six “economic realities” factors than that historically used by courts, and emphasized the agency’s position that most workers should be classified as employees under the FLSA.

The 2015 AI rejected courts’ historical emphasis on the “control” factor, and focused instead on workers’ entrepreneurial activities, and whether they were “economically dependent” on the putative employer or actually in business for themselves. For example, while courts had merely considered whether a worker had an opportunity for profit or loss, the AI emphasized that the critical inquiry should be whether the worker had the ability to make decisions and use his/her managerial skill and initiative to affect the opportunity for profit or loss.  Similarly, while courts focused on the nature and extent of a worker’s investment in his/her business, the AI stated that a worker’s investment must be significant in magnitude when compared to the employer’s investment in its overall business, in order for the worker to properly be classified as an independent businessperson.  The AI further indicated that courts had been focusing on the wrong criteria when evaluating whether workers possessed “special skills,” stating that only business skills, judgment, and initiative, not specialized technical skills, were relevant to the independent contractor inquiry.

With the withdrawal of the 2015 AI, one may reasonably assume that the DOL has chosen to reject this more aggressive interpretation of the “economic realities test,” and return to the traditional independent contractor analysis used by courts before the AI was issued. If this is the case, employers may expect to see a decreased emphasis on workers’ entrepreneurial activities in DOL enforcement proceedings, and a return to the previous emphasis on the degree of control exerted by the putative employer over workers.

It remains to be seen whether this withdrawal indicates that the current administration views potential misclassification of independent contractors as less of a priority than the previous administration did. A key barometer will be the level of DOL activity in agency audits or enforcement actions related to independent contractor status.  Any change in the DOL’s focus, however, will likely not impact the spread of misclassification litigation (including class and collective actions), which has continued to increase in recent years.

Joint Employment

With the recent growth of the “fissured workplace” or “gig economy,” the Obama administration also directed significant attention to the concept of joint employment.  In light of this development, the former Administrator of the DOL’s Wage and Hour Division issued Administrator’s Interpretation No. 2016-1 on January 20, 2016, to clarify DOL’s position on the increasing number of circumstances under which two or more entities may be deemed joint employers.

In its August 2015 decision in Browning-Ferris Industries of California, Inc., the National Labor Relations Board expanded the concept of joint employment under the National Labor Relations Act, holding that two entities may be joint employers if one exercises either direct or indirect control over the terms and conditions of the other’s employees or reserves the right to do so.  The 2016 AI similarly expanded the circumstances under which the DOL would deem two entities to be joint employers under the FLSA.

For the first time, the AI differentiated between two different types of joint employment. The existing joint employment regulations were deemed to apply to “horizontal joint employment,” a situation where a worker has an employment relationship with two or more related or commonly owned business entities.  “Vertical joint employment,” on the other hand, would exist where an individual performed work for an intermediary employer, but was also economically dependent on another employer, such as a staffing agency.  The AI stated that, in horizontal joint employment scenarios, the DOL would apply the FLSA regulations to assess whether a joint employment relationship existed between the two business entities.  In a vertical joint employment scenario, however, DOL would focus on the relationship between the worker and each business entity, applying the “economic realities test” to determine whether the worker was economically dependent on the potential joint employer(s).

The AI made it clear that the purpose of this revised analysis was to expand the number of businesses deemed employers under the FLSA, stating that “[t]he concept of joint employment, like employment generally, should be defined expansively under the FLSA . . . .” This would, in turn, increase the number of entities potentially liable for wage and hour violations, allowing employees and the DOL to pursue claims against multiple potential employers simultaneously.

With the withdrawal of the 2016 AI, presumably the DOL has chosen to reject the more expansive horizontal/vertical joint employment analysis, and the agency’s stated intent to rely on the “economic realities test” in the joint employment context. Instead, the agency will likely rely on the existing regulations regarding joint employment, which state that a joint employment relationship may exist where: (1) there is an arrangement between employers to share an employee’s services; (2) one employer is acting directly or indirectly in the interest of the other employer(s) in relation to an employee; or (3) multiple employers are not completely disassociated with respect to the employment of a particular employee, and may be deemed to share direct or indirect control of the employee by virtue of the fact that one employer controls, is controlled by, or is under common control with the other employer(s).

Similarly, as with the independent contractor scenario, the DOL’s withdrawal of the 2016 AI may reflect a change in DOL’s enforcement priorities with regard to joint employment. As noted above, however, any such change in administrative priorities will likely not affect the scope of private litigation in this area.

Impact on Employers

While the DOL’s action does not impact employers’ legal responsibilities under the FLSA, this change presumably reflects a reversion to the traditional independent contractor and joint employment standards that were in effect prior to the issuance of the AIs. The withdrawal of the AIs may reflect a shift in the DOL’s enforcement priorities, but private litigation regarding independent contractor and joint employment status remains prevalent.

Since 2000, the number of wage and hour cases filed under the Fair Labor Standards Act (“FLSA”) has increased by more than 450 percent, with the vast majority of those cases being filed as putative collective actions.  Under 29 U.S.C. § 216(b), employees may pursue FLSA claims on behalf of “themselves and other employees similarly situated,” provided that “[n]o employee shall be a party plaintiff to any such action unless 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.”  Despite the prevalence of FLSA collective actions, the legal implications and consequences of being a “party plaintiff” in such an action continue to be addressed.  The Court of Appeals for the Third Circuit recently examined this issue, in an opinion that may prove useful to defendants seeking to obtain discovery from all opt-in plaintiffs in a putative collective action.

In Halle v. West Penn Allegheny Health System, Inc. et al., the named plaintiff filed a putative collective action alleging defendants violated the FLSA by failing to properly pay employees for work performed during meal breaks.  The district court dismissed the collective action allegations based on a related case that had previously been decided, and dismissed the opt-in plaintiffs’ claims without prejudice to re-filing individual actions.  After the named plaintiff subsequently settled his individual claim, three opt-in plaintiffs sought to appeal the district court’s decision.

The Third Circuit held the opt-in plaintiffs lacked the right to appeal, because they were no longer “parties” after the collective action claims were dismissed. The opt-in plaintiffs retained the right to pursue their own individual claims, but they had no right to pursue an appeal from the named plaintiff’s individual final judgment.  The court held that, “[b]y consenting to join Halle’s collective action, these opt-in plaintiffs ceded to Halle the ability to act on their behalf in all matters, including the ability to pursue this appeal.”

In reaching this decision, the Third Circuit engaged in an extensive analysis of the “fundamental question arising from the procedural history of this case: just what is a ‘collective action’ under the FLSA?” Unlike a class action brought under Federal Rule of Civil Procedure 23, where all putative class members are bound by the court’s ruling unless they affirmatively “opt out” of the case, “the existence of a collective action depends upon the affirmative participation of opt-in plaintiffs.”  As the Third Circuit noted, “[t]his difference means that every plaintiff who opts in to a collective action has party status, whereas unnamed class members in Rule 23 class actions do not,” prompting “the as-yet unanswered question of what ‘party status’ means in a collective action.”

The court’s analysis of this issue, while tangential to Halle’s holding, highlights the tension inherent in the language of FLSA § 216(b), which, according to the Third Circuit, “raises more questions than it provides answers.  While the first sentence [of § 216(b)] sounds in representational terms (to proceed ‘in behalf of’ others ‘similarly situated’), the second sentence refers to those who file consents as ‘party plaintiffs,’ seeming to imply that all who affirmatively choose to become participants have an equal, individual stake in the proceeding.”  This tension is particularly significant with regard to defendants’ discovery rights in a collective action.

Under Rule 33 and Rule 34 of the Federal Rules of Civil Procedure, in the absence of any court-imposed limits, a party may serve interrogatories and document requests “on any other party.”  Based on this language, and FLSA § 216(b)’s designation of individuals who opt in to a collective action as “party plaintiffs,” arguably a defendant in a collective action should be entitled to serve discovery requests on each individual who opts in to the litigation, unless the court orders otherwise.  Despite this fact, the Third Circuit noted that, “[f]requently,” discovery in collective actions “focuses on the named plaintiffs and a subset of the collective group,” a limitation that may hinder defendants’ ability to present individualized defenses that may not be applicable to all opt-in plaintiffs.

While the Third Circuit did not fully resolve the question of what it means to be a “party plaintiff,” two aspects of the Halle decision may prove helpful to defendants seeking to assert their right to obtain discovery from all opt-in plaintiffs in a collective action.  First, as noted above, the Third Circuit emphasized that each opt-in plaintiff “has party status.”  This language, when read in conjunction with the Federal Rules of Civil Procedure regarding the scope of discovery, should support defendants’ right to seek discovery from “any other party,” including all opt-in plaintiffs.

Second, in holding that the opt-in plaintiffs had no right to appeal a final judgment involving the named plaintiff, the court emphasized the importance of “the language of their opt-in consent forms, which handed over all litigation authority to named plaintiff.” The Third Circuit noted that courts often rely on the language of the opt-in consent form “to determine which rights opt-in plaintiffs delegated to the named plaintiffs.”  Based on this guidance, defendants may wish to propose including language in the opt-in consent form stating that individuals who join the collective action may be required to provide documents and information, sit for depositions, and/or testify at trial.  Such language may help demonstrate that the opt-in plaintiffs were meant to be treated as active parties to the litigation, with the same rights and obligations as named plaintiffs.

While a court may ultimately exercise its discretion to impose limits on the scope of discovery, particularly in collective actions with a large putative class, the Third Circuit’s analysis in Halle may prove useful to defendants seeking support for their argument that they should be entitled to obtain discovery from each opt-in plaintiff.

On October 15, 2015, Epstein Becker Green hosted its 34th Annual Workforce Management Briefing, which featured senior officials from the U.S. Department of Labor and the Equal Employment Opportunity Commission.  This year’s briefing boasted a record setting attendance, including industry leaders, general counsel and senior human resources professionals, many of whom attended the briefing workshop, Wage and Hour Compliance: You Are Not Exempt.

The Wage and Hour workshop featured three of Epstein Becker Green’s wage and hour practice attorneys — Michael Kun, Patrick Brady and Jeffrey Ruzal — who addressed pressing wage and hour issues that face workforce management today.

Much of the program was dedicated to a discussion of two recent U.S. Department of Labor initiatives.  On July 6, 2015, the DOL published a Notice of Proposed Rulemaking that, when finalized, would extend overtime protection to approximately five million white-collar workers who are currently not entitled to overtime pay because they are exempt from the FLSA.  Shortly thereafter, on July 15, 2015, the DOL’s Wage and Hour Administrator David Weil issued Administrator’s Interpretation No. 2015-1, concluding that many employers throughout the country are improperly classifying workers as independent contractors.  Mike, Pat and Jeff discussed the DOL’s initiatives at length by dissecting the interpretation and proposed regulations, explaining the potential ramifications of non-compliance, and offering potential business-friendly solutions.

In addition to the DOL’s recent initiatives, the program focused on other significant wage and hour issues, including intern misclassification, tip-related issues, and bonus classification.  You can access the workshop’s slide presentation here.

Judging by the rampant increase in the number of wage and hour lawsuits and investigations being brought by the government and private plaintiffs, we expect that we will be reprising our program at the workforce management briefing next year.

 

34th Annual Workforce Management Briefing Banner

When:  Thursday, October 15, 2015    8:00 a.m. – 3:00 p.m.

Where:  New York Hilton Midtown, 1335 Avenue of the Americas, New York, NY 10019

This year, Epstein Becker Green’s Annual Workforce Management Briefing focuses on the latest developments that impact employers nationwide, featuring senior officials from the U.S. Department of Labor and the Equal Employment Opportunity Commission. We will also take a close look at the 25th anniversary of the Americans with Disabilities Act and its growing impact on the workplace.

In addition, we are excited to welcome our keynote speaker Neil Cavuto, Senior Vice President, Managing Editor, and Anchor for both FOX News Channel and FOX Business Network.

Our industry-focused breakout sessions will feature panels composed of Epstein Becker Green attorneys and senior executives from major companies, discussing issues that keep employers awake at night.  From the latest National Labor Relations Board developments to data privacy and security concerns, each workshop will offer insight on how to mitigate risk and avoid costly litigation.

View the full briefing agenda here. Contact Kiirsten Lederer or Elizabeth Gannon for more information and to register.   Seats are limited.