Third Circuit Ruling Makes It Easier for Employers to Settle Hybrid Wage and Hour Actions

Takeaways

• In Lundeen v. 10 W. Ferry St. Operations, the court held that in settling a Rule 23 class action, plaintiffs can waive the FLSA rights not asserted by class members.
• Employers litigating in Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands may be able to settle “hybrid” actions with some assurance that class members who did not opt into the FLSA case cannot later seek further relief for alleged wage and hour violations.
• The holding applies only to settlements in federal courts within the Third Circuit. No other federal appeals court has addressed this issue head-on. Employers should be aware of the jurisdictional landscape and the potential for a different outcome depending on the forum.

Related link

• Lundeen v. 10 W. Ferry St. Operations LLC

Article

Issuing a landmark decision in a case of first impression, the U.S. Court of Appeals for the Third Circuit has clarified the relationship between federal claims brought under the Fair Labor Standards Act (FLSA) and state law claims under Rule 23 of the Federal Rules of Civil Procedure. In an Oct. 16, 2025, decision, the court held that the FLSA’s opt-in provision does not prevent named plaintiffs in a class action from including unasserted FLSA claims of potential class members in a Rule 23(b)(3) opt-out class settlement. Lundeen v. 10 W. Ferry St. Operations LLC, No. 24-3375, 2025 U.S. App. LEXIS 26901 (3d Cir. 2025).

The Third Circuit has jurisdiction over federal courts in Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands.

Hybrid Class/Collective Action

FLSA claims are governed by the “opt-in” mechanism in 29 U.S.C. § 216(b). Parallel state law claims usually proceed under the “opt-out” mechanism in Rule 23, under which class members are included unless they take affirmative steps to exclude themselves from the class. This fundamental procedural difference is at the heart of the legal dispute over whether FLSA claims, which require claimants to affirmatively opt-in, can be released for class members who do not affirmatively opt-out of a Rule 23 settlement.

In this case, a restaurant server sued his former employer on behalf of himself and similarly situated employees alleging that a managerial employee was improperly included in a tip pool of servers and bartenders. His complaint, brought as a “hybrid” action, alleged violations of the FLSA and Pennsylvania Minimum Wage Act (PMWA). He sought to pursue the FLSA claims as a collective under Sec. 216(b) and a PMWA class action under Rule 23. The district court conditionally certified an FLSA collective, and 10 employees opted into the case.

Settlement, Release of Claims

The parties then reached a classwide settlement agreement on the PMWA claims, covering 59 class members. Under the settlement, all class members — except those who explicitly opted out — would release their wage-and-hour claims against the restaurant, including claims under the FLSA.

The proposed notice to class members informed them that by not opting out of the Rule 23 settlement, they would “waive the right to recover both wages and liquidated damages under the FLSA.” Thus, while the 10 class members who had opted in to the FLSA collective would get a share of an additional $5,000 pool for those claims, class members who did not previously opt in to the collective waived their FLSA claims.

The district court rejected the settlement, finding the waiver of unasserted FLSA claims “neither fair nor reasonable.” The district court also concluded that Sec. 216(b) and its opt-in mechanism prohibited the waiver of FLSA claims by individuals who did not join the collective. The court certified this issue for interlocutory appeal.

Unasserted FLSA Claims Can Be Released

A unanimous Third Circuit panel affirmed that, although Sec. 216(b) provides a mechanism for opting into collective actions, it does not prohibit the waiver of unasserted FLSA claims in a court-approved Rule 23 settlement.

Although Sec. 216(b) requires written consent to litigate an FLSA claim, the statute is silent on whether plaintiffs can waive such claims as part of a Rule 23 settlement. The FLSA “creates a private right of action and requires employees to opt in to litigate their claims; it says nothing about releasing claims that have not been asserted,” the court said, declining to infer a waiver requirement that the statute does not expressly include.

Fairness Factors Apply

Rule 23 settlements releasing FLSA claims are not per se unfair, the appeals court held. But, while a federal court may approve a settlement releasing FLSA claims by employees who have not opted in, that does not mean they should. Hybrid settlements are to be analyzed under Rule 23’s rigorous settlement approval procedures, which address whether the settlement is “fair, reasonable, and adequate.” The court stressed the importance of clear notice to class members of the release and a meaningful opportunity to be heard.

Here, because the district court rejected the proposed settlement without analyzing the required Rule 23(e)(2) fairness factors, the appeals court remanded the case for the district court to conduct a fairness hearing.

Beyond the Third Circuit

No other federal appeals court has resolved the specific question whether, when settling a Rule 23 class action, plaintiffs can waive the FLSA claims of employees who have not opted in to the case. At the federal district court level, courts are divided.

The Fifth and Ninth Circuits have addressed a related issue, giving preclusive effect to previously settled Rule 23 class actions that released FLSA claims. Both appeals courts barred plaintiffs from pursuing FLSA collective actions if they had been class members of a settled opt-out class action that released FLSA claims. These courts, however, were not called upon to consider whether the earlier class action settlements were properly approved in the first instance.

What It Means for Employers

Employers in the Third Circuit who settle hybrid class and collective actions partially on a Rule 23 basis should seek a release of the FLSA claims of class members who did not opt into the collective action. Through careful negotiation and drafting of settlements in hybrid cases, employers can achieve greater finality in resolving wage and hour disputes involving both FLSA and state law claims, providing some measure of peace that absent class members will not sue them. Employers can also negotiate “claims-made” provisions in FLSA cases, in which only class members who submit valid claims are entitled to relief, with unclaimed settlement funds returned to the defendant employer.

Judges have discretion to decide whether to approve hybrid class action settlements and will grant approval only if they determine the settlement is “fair, reasonable, and adequate.” That means ensuring class members have clear notice that they are releasing both state-law and FLSA claims, and a meaningful opportunity to opt out if they wish to preserve their federal claims.

Contact your Jackson Lewis attorney if you have any questions about this decision and its impact on your organization or defense strategies.