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SECOND CIRCUIT COURT JOINS OTHER APPEAL COURTS IN FINDING NO FLSA, RULE 23 INCOMPATIBILITY IN NEW YORK CASE

September 28, 2011

A federal district court properly exercised supplemental jurisdiction over the New York state labor law claims of waiters who alleged that a Manhattan restaurant impermissibly required them to share tips with ineligible employees and failed to pay them a “spread of hours” premium when they worked more than 10 hours each day, the U.S. Court of Appeals for the Second Circuit ruled Sept. 26 (Shahriar v. Smith & Wollensky Rest. Grp. Inc., d/b/a Park Ave. Rest., 2d Cir., No. 10-1884, 9/26/11)/

According to the Second Circuit, approximately 25 current and former waiters of Smith & Wollensky Restaurant Group Inc. and Fourth Walls Restaurant LLC, which do business as Park Avenue Restaurant, sued the companies in federal court under the Fair Labor Standards Act and New York Labor Law.

In affirming the lower court’s exercise of supplemental jurisdiction over the state law claims, the Second
Circuit held that the FLSA and NYLL claims “derive from a common nucleus of operative fact” because they arise out of the same alleged tip-sharing practices at Park Avenue. The appeals court also found that the NYLL claims raise no “novel or complex issue of state law” and that the state law claims do not “substantially predominate” over the FLSA claims.

The court also found no “compelling reason” to deny supplemental jurisdiction based on Park Avenue’s argument that the FLSA’s opt-in requirement for collective actions inherently conflicts with the opt-out provision for class actions certified under Rule 23 of the Federal Rules of Civil Procedure.

The Second Circuit joined the Seventh, Ninth, and District of Columbia circuits in concluding that any alleged incompatibility between the FLSA and Rule 23 “is not a proper reason” to deny supplemental jurisdiction under 28 U.S.C. § 1367. Nothing in the FLSA’s statutory language or legislative history precludes “joint prosecution of FLSA and state law wage claims in the same federal action,” the court said.

Additionally, the appellate court affirmed the district court’s class certification of the waiters’ NYLL claims,
finding that the employees satisfied Rule 23(a)‘s numerosity, commonality, typicality, and adequacy of representation requirements, as well as Rule 23(b)(3)‘s predominance requirement.

Judge Roger J. Miner wrote the opinion, joined by Judges Jon O. Newman and Gerard E. Lynch.

According to the court, the waiters sued Park Avenue in federal court in January 2008, alleging that the restaurant violated the FLSA’s and NYLL’s tip credit provisions.

Specifically, they claimed the restaurant improperly shared their tips with an individual whom they contended was a manager, as well as employees who did not provide direct customer service, including “expediters,” “dishwashers,” “silver polishers,” and “coffee makers.”

They also claimed the restaurant violated NYLL’s “spread of hours” rule, which requires employers “to pay
servers an extra hour’s pay at the regular minimum wage for each day they work more than ten hours.”

The U.S. District Court for the Southern District of New York in November 2009 retained supplemental
jurisdiction over the waiters’ state law claims pursuant to 28 U.S.C. § 1367, and granted their motion to certify a class of approximately 275 employees under FRCP 23.

On appeal, the Second Circuit ruled that the district court did not abuse its discretion in exercising supplemental jurisdiction over the waiters’ NYLL claims.

Under Section 1367, the court explained, a district court may exercise supplemental jurisdiction over state
law claims if they “are so related to” the federal claims within the lawsuits such that “they form part of the same case or controversy.”

Here, the waiters’ NYLL and FLSA claims form part of the same case or controversy because they “derive from a common nucleus of operative fact” in that they arise “out of the same compensation policies and practices of Park Avenue,” the court said.

Section 1367(c) provides four factors under which a district court may deny supplemental jurisdiction over
state law claims, but none apply in the instant case, the court said.

For example, the waiters’ NYLL claims are “straightforward” and “do not appear to raise a ‘novel or complex issue of [s]tate law,’ ” the court said.

Nor do the state law claims “substantially predominate” over their FLSA claims, the court said, given that “a determination as to the FLSA claims may decide the [waiters’] NYLL claim” since both claims “arise from the same set of operative facts.”

The court rejected Park Avenue’s argument that the NYLL claims would substantially predominate over the FLSA claims simply because the state class action could potentially include more class members than an FLSA collective action. Potential class member disparity, the court said, “is not enough to affect the supplemental jurisdiction analysis.”

Additionally, the Second Circuit found no “compelling reason” for the district court to deny supplemental
jurisdiction under Section 1367(c)(3).

Park Avenue argued that supplemental jurisdiction should have been denied based on the “inherent conflict” between the FLSA’s opt-in requirement for workers seeking to join a collective action and FRCP 23(b)(3)’s automatic inclusion of workers in a class action unless they affirmatively opt out.

Disagreeing with the company, the Second Circuit joined the Seventh, Ninth, and District of Columbia circuits in determining that “supplemental jurisdiction is appropriate over state labor law class claims in an action where the court has federal question jurisdiction over FLSA claims in a collective action.”

The court said nothing in the FLSA’s plain statutory language or legislative history “restrain[s] any remedies
available to employees under state law or as affecting a federal court’s ability to obtain supplemental jurisdiction over state employment actions.”

The FLSA’s “savings clause” at 29 U.S.C. § 218(a), which explicitly permits states to “mandate greater overtime benefits than the FLSA,” also demonstrates that Congress intended for state wage laws to co-exist with the FLSA, the court said.

“We do not view Congress’s creation of the opt-in provision for FLSA collective actions as a choice against, or a rejection of, Rule 23‘s opt-out process for state law class actions,” the Second Circuit said.

The court acknowledged that the Third Circuit in De Asencio v. Tyson Foods Inc., 342 F.3d 301, 8 WH
Cases2d 1729 (3d Cir. 2003), reversed a district court’s exercise of supplemental jurisdiction over poultry workers’ Pennsylvania wage and hour claims in an action that also included FLSA claims. However, the court distinguished the instant case from De Asencio where novel and complex questions of state law predominated over the FLSA claim.

In addition, the Second Circuit ruled that the district court did not abuse its discretion in granting class
certification under FRCP 23.

The appellate court agreed with the district court that a class of approximately 275 waiters satisfied Rule
23(a)(1)‘s numerosity requirement. The district court also properly found “questions of law or fact common to the class,” as required by Rule 23(a)(2), given that the waiters’ NYLL claims “all derive from the same compensation policies and tipping practices of Park Avenue” and the claims “arise” under the same state statutes and regulations, the court said.

Further, a determination that tip-ineligible employees were improperly included in the waiters’ tip pool would “affect every plaintiff” so as to meet Rule 23(a)(3), which requires the “claims or defenses of the representative parties [to be] typical of the claims or defenses of the class,” the court said.

Although the district court made no express finding as to the adequacy of the representative plaintiffs for the class, as required by Rule 23(a)(4), the Second Circuit said “there is nothing in the record to suggest that the class representatives are inadequate.”

Last, the appellate court found that Rule 23(b)(3)‘s requirement that “class-wide issues predominate over
individual issues” was satisfied.

The waiters sufficiently alleged that all were subject to a uniform tip-sharing policy, the court said. If the
waiters succeed in proving that Park Avenue improperly required them to share their tips with tip-ineligible employees, they “will likely prevail on [their NYLL] claims, although class plaintiffs’ individualized damages will vary,” the court said. 09-27-2011. Bureau of National Affairs.