Court directs application of a more rigorous and more sensible standard.

Much of the current tsunami of wage and hour litigation across the country has been fueled by the use of a two-step procedure in Fair Labor Standards Act (“FLSA”) collective actions that simultaneously facilitates the bringing of such claims and puts unreasonable pressure on defendants to settle them. We’ve commented on this procedure and its effects on several occasions. (Read our August 21, 2019, June 14, 2019, July 31, 2017 blogs). That procedure is fraught with problems, is replete with inaccurate terminology, and feeds rather than streamlines litigation.

For decades, defendants have been hampered in their efforts by procedural hurdles to effective challenges, but on January 12, 2021, in Swales v. KLLM Transport Services, L.L.C., the Fifth Circuit expressly rejected that process. Instead, the Fifth Circuit rejected the two-step process and the lenient standard courts have applied in authorizing notice to the class in  favor of a more “rigorous” one-step standard.

The Two-Step Lusardi Test for Conditional Certification

The two-step process is generally credited to the decision of the New Jersey district court in Lusardi, an ADEA case. (118 F.R.D. 463 D.N.J.1987). The decision became relevant to FLSA cases because, with the exception of the ADEA requirement of the filing of a charge, the two use the same enforcement procedures.

Under the two-step Lusardi approach, the district court first determined whether a putative collective action should be “conditionally certified” by examining whether the named plaintiff and the members of the putative collective were “similarly situated.”  The term “conditional certification” is a misnomer, as what the court is actually doing is ordering the production of a class list and notice to those individuals, followed by the opportunity to opt into the litigation. At this first stage, courts applied a lenient standard, often inconsistently, resulting in most cases being “conditionally certified.” And because, despite the name, there was no actual “certification,” there was no basis to appeal the determination, no matter how slight the supporting evidence.

The second step under Lusardi, assuming it was ever reached, occurred at the conclusion of discovery when the defendant would file a motion to “decertify” the conditionally certified collective action. Again, the term is a misnomer as the first step was not technically a certification order at all. At that time, because the factual record was more fully developed with discovery complete, the court would determine whether the collective members were “similarly situated” for purposes of deciding the merits of their claims based on common proof under a “stricter standard” than that applied at the conditional certification stage. If the court decertified, as was often the case, the court would dismiss the claims of the opt-ins.

This two-step Lusardi test often resulted in notice being given to workers who were ultimately determined not to be “similarly situated” to the named plaintiff under the stricter standard applied at the decertification stage. However, because those individuals had received notice under the more lenient standard at the first stage, they often filed separate, individual lawsuits after their claims were dismissed at decertification. Thus, the two-step process, intended at first to help manage the process, worked to promote litigation and to make FLSA collective actions extremely difficult and expensive to manage unless the defendant bowed under economic pressure and settled.

The Fifth Circuit Determines the Lusardi Approach “Frustrates, Rather than Facilitates,” the FLSA’s Notice Process.

While “conditional certification” orders are not generally viewed as appealable, in Swales the district court simultaneously conditionally certified the case and certified the case for interlocutory appeal, granting the Court of Appeals a unique opportunity to review the process.

Noting that the term “conditional certification” appears nowhere in the FLSA or any Supreme Court precedent interpreting it, the court found no support for the Lusardi two-step conditional certification procedure or any of the various tests that the district courts have used in the first step to determine whether a group of employees should receive notice of a collective action. Relying upon the plain language of FLSA Section 16(b), the court explained that the district court’s job in FLSA collective actions is to ensure that notice is given only to those who are “similarly situated” without ruling on the merits of the case. However, the court observed that the Lusardi test has led to district courts focusing more on the “certification” issues and avoiding addressing the merits of the claims instead of whether the notice would be sent to “similarly situated” individuals.

The court, in strong language, also noted many other problems with the two-step test. For example, Congress had enacted the 1947 Portal-to-Portal Act to stem “excessive litigation”, but the two-step procedure worked to promote it. It found that the “amorphous and ad-hoc test” left district courts with little guidance.

For these reasons, the Fifth Circuit expressly rejected the Lusardi test, instead instructing that district courts “must rigorously scrutinize the realm of ‘similarly situated’ workers. It explained that courts “must do so from the outset of the case, not after a lenient, step-one ‘conditional certification.’” In particular, in connection with its articulated “rigorous” standard, the Fifth Circuit directed district courts to “[c]onsider[], early in the case, whether merits questions can be answered collectively.” And, in doing so, the Fifth Circuit stated that courts must “consider[] all available evidence,” not just the pleadings and affidavits.

To help develop a factual record to assist the court in determining whether the plaintiffs have met their rigorous burden to establish that a lawsuit should be certified as a collective action, the Fifth Circuit instructed that the district court “should identify, at the outset of the case, what facts and legal considerations will be material to determining whether a group of ‘employees’ is ‘similarly situated’” and “authorize preliminary discovery accordingly.”

Moreover, when deciding whether to certify a case as a collective action, the Fifth Circuit stated that courts should examine issues related to the merits of the plaintiff’s claims and whether the members of the putative collective are similarly situated with regard to the factors that will be relevant to determining the merits of the plaintiff’s claims. In fact, the court stated that it is “improper to ignore evidence of … [such] threshold matters,” like whether workers are employees or independent contractors. If such evidence is improperly ignored, the court found, the district court “is likely to send notice to employees who are not potential plaintiffs” and “risks crossing the line from using notice as a case-management tool to using notice as a claims-solicitation tool,” which prior U.S. Supreme Court precedent “flatly forbids.”

The Swales case restores balance in the proof necessary to proceed as a collective.

The use of the two-step procedure, particularly where district courts apply a particularly lenient standard, has resulted in windfalls for plaintiffs. While the process detailed by the Fifth Circuit in Swales may result in increased discovery costs earlier in litigation, the heightened standard is also likely to decrease the number of certification motions that are granted and reduce the scope of court-authorized notices in cases where certification may be appropriate.

Notably, since district court decisions on conditional certification are typically not subject to interlocutory appeal, the Fifth Circuit opinion in Swales is the only Court of Appeals decision so far directly addressing the proper standard for issuing notice to potential plaintiffs in collective actions. Thus, although the Swales decision is only binding on district courts in the Fifth Circuit, it is likely to be powerful precedent for courts throughout the country on certification issues in FLSA collective actions.

As noted above, appellate review of conditional certification decisions is rarely available. Should more courts adopt the Swales standard and a more tailored procedure, more FLSA collective actions are likely to be decided on their merits rather than by litigation expense and risk.

The bottom line: The Fifth Circuit has rejected the two-step procedure for FLSA claims in favor of a more rigorous one using targeted discovery, a commonsense approach more courts should follow.