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Third Circuit clarifies FLSA settlements: Employers can include FLSA releases in opt-out class actions

10/27/25

By: Sunshine Fellows

In a closely watched decision at the intersection of wage-and-hour law and class procedure, the U.S. Court of Appeals for the Third Circuit has resolved a question that had long divided district courts: can a Rule 23 opt-out class action settlement include a release of Fair Labor Standards Act (FLSA) claims for employees who never affirmatively “opt in” under § 216(b)? In Lundeen v. 10 West Ferry Street Operations LLC, the Third Circuit held that the FLSA’s opt-in requirement governs how FLSA claims are litigated, not how they may be settled. The court’s opinion, issued October 16, 2025, marks a significant development for employers facing hybrid FLSA/PMWA or other dual-track wage-and-hour claims.

What Happened in Lundeen

The case arose from a New Hope, Pennsylvania, restaurant’s tip-pooling practices. A former bartender alleged that a salaried bar manager improperly received tip distributions in violation of both the FLSA and the Pennsylvania Minimum Wage Act (PMWA). The district court conditionally certified an FLSA collective action and later approved a proposed Rule 23 class for the PMWA claim. When the parties reached a $100,000 class settlement, they sought preliminary approval for a combined resolution: class members who did not opt out would release both their state-law and FLSA claims, even if they had never opted into the FLSA collective.

The district court denied preliminary approval, reasoning that § 216(b)’s opt-in requirement barred the release of FLSA claims through an opt-out mechanism. On interlocutory appeal, the Third Circuit disagreed.

The Third Circuit’s Holding

Writing for a unanimous panel, Judge D. Brooks Smith held that the FLSA’s opt-in language “establishes only the mechanism by which FLSA claims may be litigated, not the conditions under which they may be waived.” The statute, the court emphasized, requires written consent for an employee to join an FLSA action but it says nothing about how unasserted claims may be released in a settlement. Courts may not “enlarge” the statute by adding restrictions Congress never wrote.

In reaching that conclusion, the Third Circuit aligned itself with district courts and the Fifth Circuit’s reasoning in Richardson v. Wells Fargo Bank, recognizing that an FLSA release in a judicially supervised opt-out settlement is not prohibited by statute. The decision vacated the district court’s order and remanded for a traditional fairness analysis under Rule 23(e).

Practical Implications for Employers

This decision gives employers and counsel in the Third Circuit (which covers Pennsylvania, New Jersey, and Delaware) a clearer path for resolving hybrid wage-and-hour cases. Employers may now, in appropriate circumstances, include a release of FLSA claims within a Rule 23 opt-out class settlement, provided that the settlement meets the procedural safeguards of Rule 23.

However, Lundeen does not give employers carte blanche. The court underscored that while § 216(b) does not forbid such releases, judges must still scrutinize whether any proposed settlement is “fair, reasonable and adequate.” Notices must clearly explain that employees who do not opt out will waive their FLSA rights, and employees must have a meaningful opportunity to exclude themselves. Courts will also continue to weigh whether the consideration offered adequately compensates for the scope of the release.

Key Takeaways

• Hybrid Settlements Are Viable: Employers can now structure unified resolutions of FLSA and state wage claims in the Third Circuit without fear that the FLSA’s opt-in provision alone will invalidate the release.
• Transparency Is Essential: Notices must be explicit about what rights are being released and how employees can preserve their claims.
• Fairness Still Controls: Courts retain broad discretion to deny approval if a settlement is lopsided or the release language is unclear.
• Strategic Advantage: This decision may reduce the complexity and cost of parallel proceedings by allowing a single, comprehensive settlement framework.

For employers defending wage-and-hour class or collective actions, Lundeen offers both clarity and opportunity, but also a reminder that well-crafted settlements require precision, transparency and judicial trust.

For more information, please contact Sunshine Fellows at sunshine.fellows@fmglaw.com or your local FMG attorney. 

Information conveyed herein should not be construed as legal advice or represent any specific or binding policy or procedure of any organization. Information provided is for educational purposes only. These materials are written in a general format and not intended to be advice applicable to any specific circumstance. Legal opinions may vary when based on subtle factual distinctions. All rights reserved. No part of this presentation may be reproduced, published or posted without the written permission of Freeman Mathis & Gary, LLP.