In Reinig v. RBS Citizens, N.A.,¹ a three-judge panel of the U.S. Court of Appeals for the Third Circuit overturned a district court’s decision certifying a class of mortgage loan officers (“MLOs”) who claimed they were unlawfully denied overtime pay for work performed off-the-clock.  This precedential decision is significant for three reasons:

• the Third Circuit for the first time set forth the elements of proof in an “off-the-clock” case for overtime pay under the Fair Labor Standards Act (FLSA);

• Reinig reemphasizes the point that Rule 23 class certification is not appropriate unless the elements of liability can be proven for all class members on common evidence and the class is clearly defined; and

• the Reining panel took sides in a circuit split concerning whether there is a material difference between the standards for certifying a Rule 23 class action and certifying an FLSA collective action, holding that there is a material difference between the two standards.  The decision left unclear, however, just how great the difference is, and the practical significance of the divergence between the two standards.

Background

Citizens Bank employed MLOs to sell mortgages.  The Bank did not dictate when or where MLOs worked; MLOs had flexibility in structuring their workdays.  MLOs received a base salary of $11.50 per hour and earned monthly commissions based on the number of loans sold.  As “non-exempt” employees under the FLSA and state wage-and-hour law, MLOs were entitled to overtime pay for each hour worked above forty in a given workweek.

The Bank required MLOs to report all hours worked, including hours over 40, via a computerized timekeeping application.  Under the Bank’s policy, MLOs submitted their total hours worked in a particular week every Sunday, and their respective supervisors reviewed their timecards for accuracy and approved the MLOs’ reported hours the following day.  MLOs were required to obtain prior approval from their supervisors for any hours worked over 40 in a particular week.

The MLOs alleged that, despite the Bank’s written policy, the Bank maintained an unofficial policy of: (1) requiring MLOs to work over 40 hours per week; (2) restricting the amount of overtime hours managers could approve; (3) discouraging MLOs from actually reporting their overtime hours; and (4) allowing MLOs to submit fictitious timesheets that did not reflect off-the-clock work.  The MLOs’ shorthand for this alleged scheme was the “policy to violate the policy.”

Based on these allegations, three former MLOs filed a collective- and class-action complaint alleging their employer violated the FLSA and its state analogues by failing to pay them overtime wages for their off-the-clock work.  The MLOs moved for conditional certification of a collective action under the FLSA, which the district court granted.  Thereafter, the district court denied the employer’s motion to decertify the collective action, indicating the court believed the case was suitable for a collective trial. 

In addition, the MLOs moved for class certification under Rule 23 of the Federal Rules of Civil Procedure, seeking certification of ten distinct classes under various state laws.  In the MLOs’ view, the “policy to violate the policy” was the common issue that bound together both the collective and the class, rendering a trial based on common evidence efficient.   

The district court granted the MLOs’ class certification motion. The Bank brought an interlocutory appeal of the class certification ruling under Rule 23(f) and also asserted that the Third Circuit had pendant appellate jurisdiction over the order granting FLSA certification.

The Third Circuit’s Analysis

The Third Circuit reversed the district court’s grant of class certification on two grounds.

First, the Third Circuit held that the district court failed to properly define the class and class claims as required by Rule 23(c)(1)(B).  As the court explained, the certification order failed to provide specific definitions of the various subclasses and class claims, “forc[ing] [the court] to comb through and cross-reference multiple documents in an attempt to cobble together the parameters defining the class and a complete list of the claims, issues, and defenses to be treated on a class basis.”  On this basis, the Third Circuit held that the certification order was deficient.

Second, the Third Circuit held that the district court erred in finding that the MLOs’ evidence satisfied Rule 23’s commonality and predominance requirements.  To clear this threshold, the plaintiffs had to point to common evidence that, if accepted by the factfinder, would establish liability as to each member of the class:  the evidence must be “such that each individual Plaintiff could have relied on [the] sample to establish liability if he or she had brought an individual action.”  To prevail on their unpaid overtime claims, MLOs must prove that “(1) pursuant to [the employer’s] unwritten ‘policy-to-violate-the-policy,’ the class MLOs performed overtime work for which they were not properly compensated; and (2) [the employer] had actual or constructive knowledge of that policy and of the resulting uncompensated work.” 

Because the district court did not point to common evidence that could establish both elements for each class member, the Third Circuit vacated the class-certification order.  As the appellate court explained, the district court’s assertion that MLOs “generally testified” to the existence of the “policy to violate the policy” and that their managers “almost uniformly” instructed MLOs to underreport hours was belied by the MLOs’ inconsistent testimony regarding experiences “confined to interactions with specific managers in distinct offices . . . [and] in many instances nothing more than typical workplace concerns about MLO work ethic and effectiveness.”  The Third Circuit therefore expressed “serious doubts” about whether the MLOs’ evidence was sufficiently representative of the class as a whole to satisfy Rule 23’s commonality and predominance requirements.  Instead, the court concluded that the MLOs’ evidence “[came] not from a similarly situated group of MLOs but from individual employees who worked in distinct offices at various times throughout the relevant class period.”  Accordingly, the court vacated and remanded the district court’s class certification order.

The court also addressed the issue of whether it had pendent appellate jurisdiction to review the district court’s FLSA certification order.  The Third Circuit began with the observation that, for the certification of an FLSA collective to be subject to an interlocutory appeal, that issue had to be “inextricably intertwined” with the Rule 23 certification.  Although other circuits “have treated FLSA and Rule 23 certification as nearly one and the same,” which would imply that the two issues are inextricably intertwined, the Third Circuit rejected this view.  In the court’s view, “Rule 23 class certification and FLSA collective action certification are fundamentally different creatures.”  The court reached this conclusion, in part, by reasoning that an opt-in FLSA collective action may proceed to trial provided that the lead and opt-in plaintiffs are “similarly situated,” whereas a Rule 23 class action may proceed to a classwide trial only if the plaintiffs satisfy the more demanding procedural standards delineated by that rule.    

Lessons for Employers

Reinig presents three lessons for employers.

First, the court’s decision marks the first time the Third Circuit embraced the proposition that, to prevail on unpaid overtime claims in an off-the-clock case, plaintiffs must prove (1) they performed overtime work for which they were not properly compensated; and (2) their employer had actual or constructive knowledge of that uncompensated work.  These two elements provide a clear framework for employers to defend against unpaid overtime claims premised on allegations of uncompensated off-the-clock work.

Second, Reinig reaffirms that Rule 23’s demanding predominance requirement will be met only if plaintiffs present sufficient evidence to convince the court that the essential elements of their class claims are capable of proof through common evidence.  Likewise, Reinig illustrates that the failure to properly define the class, or class claims, will be fatal to a class certification motion.  Amorphous assertions about all class members being the victim of a common policy presumably will not suffice to clear either hurdle. 

Third, employers may need to revisit their approaches to defending hybrid class- and collective- actions in the Third Circuit.   Before Reinig, employers in the Third Circuit sometimes contended that the standards for certifying an FLSA collective action and a Rule 23 class action were functionally equivalent, such that plaintiffs must satisfy the more stringent Rule 23 requirements to proceed collectively under the FLSA. After Reinig, this approach is no longer viable in the Third Circuit.  The Third Circuit explicitly rejected this argument and the Seventh Circuit case upon which it was based—thus creating a circuit split—and held that the standards for certifying a class and collective are different because “Rule 23 class certification and FLSA collective action certification are fundamentally different creatures,” with the former being more demanding than the latter.  Reinig did not resolve questions about how different the two standards are, and the circumstances under which a case may properly proceed to a collective trial but not a class trial.  These issues will be the subject of much debate in district courts, and employers should stay tuned for further developments.