Waiving Goodbye to Class Actions - A Potential Way Out

By Michael C. Schmidt Partner, Cozen O'Connor | March 14, 2010

It is no secret by now that employers, including those in the hotel- and hospitality-related industry, continue to be hit with the legal tsunami that are class action lawsuits. Hotel employers are especially vulnerable, with limited defenses, when it comes to wage and hour lawsuits, where a large class of employees allege that their employer failed to pay minimum wage or overtime compensation. That vulnerability has been increased recently by the current economic climate, where employers look for ways to cut certain employee-related costs, and by advances in technology (e.g., the use of Blackberries) that make it more difficult to monitor working hours and activities.

One way to reduce potential exposure for alleged wage and hour violations is to review management's internal policies and practices to determine whether there are any compliance issues that should and can be addressed before a lawsuit is filed, or before a government agency commences an audit. Another option has been re-affirmed by a federal district court within the Second Circuit, which permitted an employer to obtain a written waiver prohibiting its employees from pursuing employment-related claims on a class-wide basis in court. Such a "class action waiver" may be a valuable strategy for limiting the significant exposure, and leverage, that is presented with class action lawsuits in this context.

The Class Action Dilemma

Wage and hour obligations are generally found in the federal Fair Labor Standards Act ("FLSA"), and in similar state and local laws. These statutes provide significant remedies for aggrieved employees, including compensatory damages equal to the amount of the unpaid wages, as well as additional statutory damages in certain cases equal to 100% of the unpaid wages (under federal law), attorneys' fees, interest, and costs. The potential monetary exposure increases exponentially because the federal and state wage and hour laws permit aggrieved individuals to bring these cases on behalf of themselves, and as representatives of a proposed class of other similarly situated employees.

For example, the FLSA authorizes multiple-plaintiff lawsuits as "collective actions." A collective action under the FLSA is procedurally different from a traditional class action under Rule 23 of the Federal Rules of Civil Procedure (the procedural vehicle for prosecuting class-wide claims under state wage and hour laws). While members of a state Rule 23 class are bound by the outcome unless they choose to "opt out" of an action, potential parties to an FLSA collective action are instead required to "opt in." Whether styled as a collective action or a class action, the impact is the same. Thus, because of the sheer number of individuals who can either opt in for federal collective action purposes, or who are included in a state class action merely by falling within the definition of a broad class of allegedly aggrieved workers, these collective and class actions generally increase the parties' litigation costs and present unique case management challenges for Judges.

The Arbitration Dilemma

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