What Does the Fifth Circuit’s Newly Announced, More Stringent Standard for Certification of FLSA Collective Actions Mean for Employers?

Earlier this month, the Fifth Circuit Court of Appeals issued a decision likely to significantly change the way FLSA collective actions are litigated in Texas, Mississippi, and Louisiana. In Swales v. KLLM Transport Services, the Court tossed the exceedingly permissive and merits-blind standard for so-called “conditional” certification and substituted in its place a rigorous, single-step standard that allows a court evaluating the appropriateness of certification to take into account “all available evidence” of “similarly situated” status, including the merits of the claims and defenses asserted. While it is too soon to generalize about the impact of this decision, there is good reason to believe it represents a significant win for employers, many of which all too often were forced through abuse of the FLSA’s collective action procedure to settle claims with little, and in some cases almost no, merit simply to avoid the significant litigation costs flowing from near-automatic grants of “conditional” collective treatment.

From Lusardi to Swales

Lusardi. What the named plaintiff in an FLSA collective action gains from an order granting certification is, in practical terms, contact information for potential class members and authorization to send them notice of the action and an invitation to participate. In deciding whether to authorize notice, before Swales, almost all courts across the country applied the two-step standard set forth in Lusardi v. Xerox Corp., 118 F.R.D. 351 (D.N.J. 1987).

Under Lusardi, authorization to distribute notice is routinely granted early in cases and before discovery has been conducted, usually based on nothing more than a named plaintiff’s “substantial allegations” that similarly situated individuals exist and that they are aggrieved. During the notice stage, Lusardi instructs that the court must disregard the employer’s arguments about the merits of the claims and defenses asserted and instead focus on whether the plaintiff has met her minimal burden of showing that there exist individuals with similar job duties subject to similar pay practices.

If notice is authorized, and under Lusardi it almost always is, the court may revisit its first-stage decision, employing a much more rigorous standard of review, on the employer’s decertification motion, typically filed just before trial and after discovery is complete. Decertification should be granted on a showing that the plaintiffs who opted into the case are not similarly situated enough in terms of job duties and pay practices that their claims can be tried effectively on a representative basis.

Swales. In Swales, the Fifth Circuit jettisoned Lusardi, finding the two-step procedure it established without basis in the statutory text or any precedential decisional law. The Court characterized Lusardi’s distinct notice and decertification phases as frustrating, rather than facilitating, the notice process and condemned Lusardi’s prohibition on consideration of the merits of the parties’ claims and defenses as handicapping a court’s ability to evaluate whether notice should issue.

In Lusardi’s place, Swales instructs district courts evaluating certification of FLSA collective actions to rigorously enforce the statute’s similarly situated requirement at all phases of the case. And it confirms that a district court has “broad, litigation-management discretion” to make decisions about certification, cabined by specific requirements of the FLSA, but not by any specific “‘certification’ test.”

How district courts will apply Swales remains to be seen, but the Fifth Circuit makes clear that doing so requires those courts to: (1) look beyond the plaintiff’s allegations and consider “all available evidence” relevant to similarly situated status, (2) order discovery necessary to develop evidence on whether the class proposed is made up of similarly situated individuals, and (3) consider the merits of the claims and defenses asserted when doing so bears on the question of whether certification should be granted. Swales does not explicitly address decertification motions, so for now, it is unclear whether district courts will continue to entertain such motions in the exercise of “broad, litigation-management discretion.”

The bottom line – Likely impacts of Swales

While there is no doubt that Swales will provide some relief in the FLSA arena for employers, particularly those beleaguered by the steady stream of collective actions filed over the past decade or more, it is important to bear in mind that the decision is procedural, rather than substantive. That is, Swales levels the playing field with respect to disputes over the propriety of collective treatment of FLSA claims, but it does not make those claims less challenging, or even necessarily less burdensome or expensive, to defend on the merits.

Even so, we expect the new rules on certification announced by Swales to change the ways in which class counsel and employers approach and litigate collective actions. Here’s a round-up of five developments we may see with respect to FLSA collective actions filed in the Fifth Circuit in the wake of Swales:

  1. Plaintiff-side wage-and-hour lawyers will seek out other venues. Swales has no binding impact on Lusardi’s application outside of Texas, Louisiana, and Mississippi. And while the decision may prove persuasive in other circuits and at least arguably tees up a circuit split on the proper standard for certification that may be of interest to the Supreme Court, for now, Lusardi’s permissive two-step certification standard continues to apply in virtually all courts outside of the Fifth Circuit. Expect plaintiff-side wage-and-hour lawyers to seek out opportunities to file collective actions outside of the Fifth Circuit. Particularly with respect to large, complex collective actions, the wage-and-hour bar operates nationally, and it does not require much effort for enterprising class counsel in Texas, Louisiana, or Mississippi seeking to sue a multi-state employer to identify a plaintiff providing a basis for venue and jurisdiction outside of Swales’s reach. Expect employers, when appropriate, to respond by fighting hard to transfer venue to districts within the Fifth Circuit.
  2. Both sides will push for extensive early discovery. Swales is clear: District courts should not grant certification of a collective action without first authorizing discovery on the appropriateness of collective treatment of claims. The effect of this mandate will be to upend the way most collective actions are litigated. Before Swales, neither plaintiffs nor employers had much incentive to conduct discovery before Lusardi’s first phase was complete—plaintiffs avoided discovery to ensure that they didn’t waive Lusardi’s permissive “conditional” certification standard and employers typically did not seek discovery both to avoid the cost and burden associated and in service of the position that discovery should be limited in scope to those individuals who consented to join the lawsuit as plaintiffs. Post-Swales, expect conferences about certification-related discovery to begin as soon as the employer has appeared, and anticipate that plaintiffs, seeking to the replace the leverage lost through the rejection of Lusardi, will seek at first opportunity wide ranging, burdensome, and expensive discovery on similarly situated status. Employers, buoyed by the Fifth Circuit’s delivery of a fighting chance on the certification issue, may respond in kind. It is this aspect of the change in certification procedure announced by Swales that may render its impact a mixed bag for employers—in reining in a plaintiff’s ability to obtain certification, it is possible that the Fifth Circuit has laid the foundation for plaintiffs to seek no-stone-unturned discovery about broad swaths of an employer’s workforce and to mire the employer’s defense in unnecessary, resource-draining discovery disputes.
  3. Agreed certification of collective actions will become rarer. Because Lusardi made it difficult for employers to successfully oppose conditional certification, over time, many employers stopped devoting time and resources to flatly opposing the authorization of notice and, instead, began to work with class counsel to agree through negotiations to narrow the scope of the class alleged. In certain districts within the Fifth Circuit, agreeing to conditional certification, and reserving the right to move to decertify later, became so common that courts would suggest, sometimes strongly, during Rule 16 conferences that the employer should consider cutting a deal with class counsel to avoid clogging the court’s docket with yet another dispute over conditional certification almost certain to be granted. Under Swales, the defense-strategy drivers that made agreeing to conditional certification make sense have likely disappeared or otherwise been materially diminished. Expect employers to labor mightily to keep the inappropriateness of certification at the forefront of FLSA collective action disputes. Class counsel, for their part, may respond to Swales by curtailing rampant over-pleading—that is, alleging class definitions objectively inappropriate on their face, and if they do, agreed certification may continue to make sense in certain cases.
  4. Employers will place increased focus on early development of arguments and evidence on the merits. Part of the tyranny of Lusardi was the ease by which its permissive conditional certification standard could be used by class counsel to control the focus of the dispute. Before Swales, class counsel would move for conditional certification early, sometimes before the employer had even appeared, requiring the employer to expend much or most of its time and attention on the issue of conditional certification, which under Lusardi, could not touch the merits of the case. In Swales, the Fifth Circuit instructs that the merits of the claims and defenses asserted are, at least in some cases, necessarily part of considering whether certification is appropriate because merits issues may be intertwined with other “threshold matters” such as whether plaintiffs are “employees” (as opposed to independent contractors) who may seek relief under the FLSA. Expect employers to shift defense resources to identifying other merits-related “threshold issues” that may fully or mostly dispose of a collective action as part of the court’s consideration of whether the FLSA’s similarly situated mandate has been satisfied. Look out, too, for the fallout from Swales in cases in which collective independent contractor misclassification claims are alleged—while Swales does not go so far as to say that such cases are inappropriate for collective treatment, it provides a sturdy foothold for employers seeking to argue that this is the case.
  5. Early settlements will become less appealing to employers. Perhaps the most encouraging aspect of Swales for employers is that it, plainly put, takes at least some of the wind out of the sails of overly aggressive plaintiff-side wage-and-hour lawyers. Given that Lusardi afforded employers exceedingly limited early options for quelling misuse of the FLSA’s collective action procedure, many such lawyers filed cases almost certainly destined for decertification. But they did so with the knowledge that conditional certification would be granted and that decertification would come only after months and sometimes years of hard fought litigation and after the employer (potentially on the hook for its own defense fees and those of any plaintiff prevailing even partially on a claim) had incurred in some cases hundreds of thousands of dollars of fees and costs. These difficult realities made early settlements an appealing exit strategy for employers, even in cases in which the claims asserted were of little, or arguably no, merit. Expect Swales to usher in changes to employer settlement strategy in collective actions—some employers doubtless will continue to pursue early resolution, but Swales gives employers inclined to fight significantly more reason to do so.