On January 12, 2021, the U.S. Court of Appeals for the Fifth Circuit issued a long-sought opinion on the collective certification process under the Fair Labor Standards Act.  In its opinion, the Fifth Circuit expressly rejected the lenient standard employed by almost every federal district court across the country in deciding whether notice should issue to potential opt-in plaintiffs. While this case binds district courts only in Texas, Mississippi, and Louisiana, the opinion is expected to have far-reaching influence on the defense of these matters going forward and sets up a circuit split that may ultimately be resolved by the United States Supreme Court.

The Lusardi Standard

When analyzing whether a collective action plaintiff-employee is entitled to send court-authorized notice of a case to other employees, courts must consider whether notice of the lawsuit should issue to other “similarly situated” employees of the defendant-employer. In making that determination, the vast majority of courts have been guided by the two-step analysis of Lusardi v. Xerox Corp., 118 F.R.D. 351 (D.N.J. 1987). The first step generally involves only the analysis of the plaintiff’s allegations and presents a very low bar to “conditional certification” of a collective action lawsuit. Notice is issued to all employees who are identified as “similarly situated” after merely alleging they are subject to a common policy or practice that violates the FLSA. At the second stage, typically immediately before trial, the defendant is given the opportunity to seek decertification of the collective by showing that plaintiffs who have since opted in to the case are insufficiently similarly situated such that their claims cannot be tried by common proof.

In Swales v. KLLM Transport Services, L.L.C., the Fifth Circuit explicitly rejected this well-worn standard employed by district courts for almost 35 years. In Swales, the plaintiffs argued they and other truck drivers performing work for KLLM were misclassified as independent contractors. Ultimately, the merits of the case would turn on the “economic realities” test, which courts apply to determine whether a worker is properly classified as an independent contractor.

Fifth Circuit Decision

The issue before the Fifth Circuit was whether the district court correctly concluded that notice of the lawsuit should issue to all truck drivers because, under Lusardi, the district court could not consider the merits of the “economic realities” test at the first stage of the certification analysis. At the time of the district court’s ruling, the parties had already engaged in significant discovery, showing substantial differences among the putative plaintiffs. The district court, however, believed it was bound to overlook such evidence under Lusardi because the evidence concerned ultimate merits issues.

In a rare move, the district court certified its own decision for interlocutory appeal, noting the applicable standard remained an open question in the Fifth Circuit.  The Fifth Circuit panel opinion unequivocally rejected Lusardi, noting that the procedure is not supported by the text of the FLSA or in any U.S. Supreme Court or Fifth Circuit case law interpreting the FLSA’s text. Importantly, the Fifth Circuit recognized that “Lusardi frustrates, rather than facilitates, the notice process” and dispensed with the long-held notion that a district court is bound to disregard evidence related to the merits of the parties’ claims and defenses when considering whether notice should issue because “addressing [merits] issues from the outset aids the district court in deciding whether notice is necessary.”

The Fifth Circuit concluded that the district court in Swales should have examined the evidence related to the threshold question of whether the economic realities test was met in order to determine whether that question could be answered on a collective-wide basis. The Fifth Circuit counseled: “If answering the question requires a highly individualized inquiry into each potential opt-in’s circumstances, the collective action would quickly devolve into a cacophony of individual actions.” In such a scenario, notice should not issue because the opt-in plaintiffs are too diverse to be similarly situated.

After rejecting Lusardi, the Fifth Circuit provided new guidance for certification. To decide whether notice should issue and to whom, district courts within the Fifth Circuit now must “consider all of the available evidence.” After doing so, the district court may conclude that the plaintiff and the putative opt-in plaintiffs are not similarly situated or that the employees are similarly situated and notice should issue. The Fifth Circuit reaffirmed that, in analyzing whether employees are similarly situated, the district court has broad, litigation-management discretion and “is not captive to Lusardi or any ‘certification’ test.”

Going forward, the Fifth Circuit stressed that district courts should rigorously enforce the FLSA’s “similarly situated” requirement at the outset of the litigation, and should allow parties to engage in sufficient early discovery to allow courts to analyze this requirement.  As such, district courts are now empowered to move beyond the bare allegations of the pleadings to consider all evidence presented in ruling on a motion to certify a collective action and issue notice to potential plaintiffs.

What Does This Mean for Employers?

The Swales case, meant to dispense with the “certify now and ask questions later” approach, will undoubtedly have a significant impact on FLSA litigation in the Fifth Circuit. District courts in the Fifth Circuit, previously applying a very lenient standard that resulted in almost every conditional certification motion being granted, are now authorized to consider the underlying merits of the lawsuit before approving court-authorized notice of a case to other employees. Although employers are likely to see an increase in discovery costs earlier in litigation, the heightened standard for conditional certification will almost certainly lead to a decrease in conditional certification orders and a more limited scope to court-authorized notices.  As a result of Swales, employers now can work to limit the scope of a collective action much earlier by presenting evidence that the putative collective action members are not, in fact, similarly situated, rather than being constrained by the Lusardi standard to reserve such arguments for the eve of trial.