National Litigation Hotline

State Law Claims Not Permitted in FLSA Collective Action Suit

A federal district court has held that a waiter bringing an FLSA collective action for improper wage deductions may not bring a state-law class action involving the same allegations. McClain v. Leona's Pizzeria Inc., 2004 WL 1745750 (N.D. Ill. July 30, 2004).

Shamus McClain brought suit against Leona's, which runs a chain of 17 restaurants in the Chicago area. McClain was challenging two company policies. He alleged that Leona's deducts 3% of each customer tip paid with a credit card, but illegally uses the maximum tip credit allowed under the FLSA to pay its tipped employees less than the minimum wage. He further claimed that Leona's illegally deducted 45 cents per hour from every employee's pay because they are allowed to consume certain food and drinks during working hours, causing them to not be paid the minimum wage. In May 2004, McClain was authorized to send notices to all Leona's employees, enabling them to opt into the FLSA collective action. Subsequently, he moved for class certification under Rule 23 of the Federal Rules of Civil Procedure regarding three state-law claims.

The court denied the motion, determining that collective actions under the FLSA differ from class actions under Rule 23. It held that enabling McClain to bring an opt-out state-law class action against Leona's, in addition to the already approved opt-in FLSA collective action, undermined Congress's intent to limit these types of claims to collective actions. The court held that state-law claims should not be used “as a rake to drag as many members as possible into what would otherwise be a federal collective action.” Consequently, McClain's state law claims under the Illinois Minimum Wage Law, the Illinois Wage Payment and Collection Act, and common law conversion were not certified.

Forfeiture of Compensation Plan Benefits Upheld

A federal district court has determined that a forfeiture-for-competition provision in an independent contractor agreement was valid and enforceable. Fraser v. Nationwide Mutual Ins. Co., 2004 WL 1824361 (E.D. Pa. Aug. 16, 2004).

Plaintiff Richard Fraser signed an independent contractor agreement with Nationwide Mutual, which provided that he would receive deferred compensation benefits if he refrained from competing with it for 1 year. (The benefits were to be a percentage of his original and renewal insurance fee earnings.)

In September 1998, Fraser's independent contractor agreement was terminated. Ten months later, Fraser started working for one of Nationwide Mutual's competitors. Nationwide Mutual informed Fraser that he had forfeited his deferred compensation benefits as a result of the competition (which amounted to more than $350,000). Fraser brought suit under state law arguing that the forfeiture-for-competition provision was unenforceable. The district court ruled in 2001 that it was, and on appeal, the Third Circuit remanded the case to determine whether the provision was enforceable in light of the Pennsylvania Supreme Court's ruling in Hess v. Gebhard & Co., 808 A.2d 912 (Pa. 2002).

The district court reached the same conclusion it had before. In Hess, the court held that, in determining the enforceability of a noncompetition covenant, a court must balance an employer's protectible business interests against the interest of the employee in earning a living in his or her chosen profession. With regard to Fraser, the court determined that his “interest in earning a living, an essential component to the Hess balancing test, is only tangentially implicated by the forfeiture-for-competition provision.” The court held that the forfeiture- for-competition provision in Fraser's Agreement was more like an incentive program than a non-compete clause.

As such, it was enforceable.

State Law Claims Not Permitted in FLSA Collective Action Suit

A federal district court has held that a waiter bringing an FLSA collective action for improper wage deductions may not bring a state-law class action involving the same allegations. McClain v. Leona's Pizzeria Inc., 2004 WL 1745750 (N.D. Ill. July 30, 2004).

Shamus McClain brought suit against Leona's, which runs a chain of 17 restaurants in the Chicago area. McClain was challenging two company policies. He alleged that Leona's deducts 3% of each customer tip paid with a credit card, but illegally uses the maximum tip credit allowed under the FLSA to pay its tipped employees less than the minimum wage. He further claimed that Leona's illegally deducted 45 cents per hour from every employee's pay because they are allowed to consume certain food and drinks during working hours, causing them to not be paid the minimum wage. In May 2004, McClain was authorized to send notices to all Leona's employees, enabling them to opt into the FLSA collective action. Subsequently, he moved for class certification under Rule 23 of the Federal Rules of Civil Procedure regarding three state-law claims.

The court denied the motion, determining that collective actions under the FLSA differ from class actions under Rule 23. It held that enabling McClain to bring an opt-out state-law class action against Leona's, in addition to the already approved opt-in FLSA collective action, undermined Congress's intent to limit these types of claims to collective actions. The court held that state-law claims should not be used “as a rake to drag as many members as possible into what would otherwise be a federal collective action.” Consequently, McClain's state law claims under the Illinois Minimum Wage Law, the Illinois Wage Payment and Collection Act, and common law conversion were not certified.

Forfeiture of Compensation Plan Benefits Upheld

A federal district court has determined that a forfeiture-for-competition provision in an independent contractor agreement was valid and enforceable. Fraser v. Nationwide Mutual Ins. Co., 2004 WL 1824361 (E.D. Pa. Aug. 16, 2004).

Plaintiff Richard Fraser signed an independent contractor agreement with Nationwide Mutual, which provided that he would receive deferred compensation benefits if he refrained from competing with it for 1 year. (The benefits were to be a percentage of his original and renewal insurance fee earnings.)

In September 1998, Fraser's independent contractor agreement was terminated. Ten months later, Fraser started working for one of Nationwide Mutual's competitors. Nationwide Mutual informed Fraser that he had forfeited his deferred compensation benefits as a result of the competition (which amounted to more than $350,000). Fraser brought suit under state law arguing that the forfeiture-for-competition provision was unenforceable. The district court ruled in 2001 that it was, and on appeal, the Third Circuit remanded the case to determine whether the provision was enforceable in light of the Pennsylvania Supreme Court's ruling in Hess v. Gebhard & Co. , 808 A.2d 912 (Pa. 2002).

The district court reached the same conclusion it had before. In Hess, the court held that, in determining the enforceability of a noncompetition covenant, a court must balance an employer's protectible business interests against the interest of the employee in earning a living in his or her chosen profession. With regard to Fraser, the court determined that his “interest in earning a living, an essential component to the Hess balancing test, is only tangentially implicated by the forfeiture-for-competition provision.” The court held that the forfeiture- for-competition provision in Fraser's Agreement was more like an incentive program than a non-compete clause.

As such, it was enforceable.