Mediating Wage-Hour Collective and Class Actions: Special Factors to Keep in Mind

Tue, Dec 5th, 2023 | by Miles Mediation and Arbitration | Article | Social Share

By Donna V. Smith

While there are certain elements present in every mediation, some types of cases are unique. A wage-hour collective or class action breaks the typical mediation paradigm. In most employment law-based mediations one expects:

• At least four participants with adverse or at least non-aligned interests – plaintiff, plaintiff’s counsel, defendant, and defendant’s counsel.
• Limited concern over “opening the floodgates” to similar claims.
• Creative “value-adding” resolutions.
• A deep well of fact-intensive case law driving risk and valuation analysis.
• A settlement contract fully enforceable by the courts without oversight by the court as to the terms of that settlement.

And then there is the wage-and-hour collective/class action mediation. It’s a different type of case, and as mediator of wage-and-hour collective class action cases, I’d like to share some of the unique aspects of these types of cases.

The Reason Why There are Only Three Participants (Not Four) at Mediation

As a practical matter, defendant, its counsel, and the counsel for the class participate in a wage-hour class or collective mediation. Plaintiffs themselves (including the named representatives) are largely absent from the negotiation altogether and are typically absent physically from the mediation sessions.

In theory, a fairness hearing, or court approval of a collective resolution, is designed to oversee or gut-check the boundaries on the settlement for the protection of the plaintiffs. Nonetheless, the absence of the plaintiffs themselves is significant. The court is not, in any sense, a substitute negotiator for the plaintiffs. It simply either approves or rejects the settlement agreement, in accordance with reasonably well-established standards, after the settlement has been negotiated by plaintiffs’ counsel and the defense team.

The actual negotiators have a common interest in avoiding agreements so extreme that they will be either rejected by the court or undermined by excessive “opt-outs” from the plaintiffs themselves. But subject to these outside limits, the three players at the negotiating table have an interest in maximizing two things: the portion of the settlement funds that goes to plaintiffs’ counsel as approved fees; and the portion of the settlement funds available to be returned or otherwise used by the defendants.

Plaintiff’s counsel seek, and usually get, one-third of the settlement funds as fees; amounts unclaimed by class members may revert to the defendant to the extent the court permits; and the stated settlement amounts include the resulting social security and FICA charges the company will have to bear as a consequence of the settlement of the total paid to the class members. These terms are easily arrived at because those at the negotiating table can “give” each other these benefits, without cost to themselves.

The absence of the plaintiff also eliminates one of the most common challenges a mediator must face in “ordinary” litigation – the challenge of plaintiffs resisting facially reasonable economic proposals because of a desire to achieve non-economic benefits such as “the opportunity to be heard”, an opportunity to do “justice,” or even vindication or public punishment of the alleged wrongdoer.

In the wage-hour action, the tables are often turned, and it is the defense side which is grappling with non-economic issues. The defendant offers “principled” resistance to a fairly rigid statutory scheme that may strike the defendant as inconsistent with the statutory purpose and with common sense. Specifically, those rationally thought to be managers cannot be treated as exempt if the time they spend in identified categories of non-exempt functions (e.g., sales/service) happens to take up more of their time. Or the gig workers who wanted flexibility and cut a deal to gain that benefit are in fact misclassified as independent contractor. There will be exposure if the former is paid like a manager, or the latter paid on a 1099, and that “injustice” is a hard-to-swallow surprise for many companies.

The Challenges of Settling for Defendants

Defendants also resist otherwise attractive settlement opportunities because of a genuine dilemma. For example, company culture depends on managers being “managers” and not exempt lead-persons or foremen, often because of perceived rank and earned respect. Or the massive restructuring and price adjustments the defendant would have to take to assimilate those once treated as contractors into the regular workforce.

Defendants often balk at being perceived as “buying off” the class action claim through settlement as a sign of weakness or vulnerability. Mediations need to focus on creative solutions to this dilemma and focus on effective messaging in terms of communication of settlement terms to the impacted employees and business.

Considering Bargaining Opportunities

While there is a need to find creative techniques to address the potential deterrence of company culture shifts, what options exist for resolutions to a wage-hour dispute? Non-monetary exchanges, where parties give what’s cheap to get what’s dear, can optimize the likelihood, as well as the quality, of the resolution are relatively rare in this arena.

The reason is not that negotiators in this specialty are not creative, but simply that the inherent nature of class or collective actions virtually eliminates any prospect that the form of any exchange will be anything other than money. Specifically, one cornerstone of class actions is that similarly situated class members be treated uniformly, and the only uniform needs the members have is the presumptively universal need for money. Although, opportunities for “in-kind” offers (i.e., products, gift certificates, training enhancements, equipment) may present in some circumstances, these options may not be feasible. As noted by plaintiff’s counsel in at least one case, how does one calculate 33% of the laptop given to each employee as a part of the settlement?

Risk-Based Claims Valuation Analysis

Historically, few wage-hour cases go to trial due to the inherent risk of fees assessments which dwarf the class recovery or significantly inflate that fund. Actual outcomes at trial in analogous cases provide realistic assessments of the actual risk of trial, and therefore the reasonable settlement value of a release.

In the absence of that evidence, the following guide the negotiations. First, the statutory scheme in this area is fairly administrable. Second, statistics relative to actual class/collective certification decisions reveal a high likelihood a class/collective action will be certified, at least conditionally, and thus is a key litigation reality.

Third, some narrowing of the range of potential settlement is achieved by the fact that extreme “low-ball” offers typically are not made, even preliminarily, because both sides know (or can be reminded) that there is a certain threshold that will not survive a fairness hearing, nor sustain the plaintiff’s counsels basic need to preserve reputation in the context of a settlement record that (unlike the settlement of individual claims) is always public.

Finally, and perhaps most importantly, parties tend to be guided by a kind of “market price” for these claims – settlements tend to fall within a fairly well-defined band established by publicly available information of what other cases have settled for relative to the total potential exposure in the case.

What is notable is that, given the relatively strict standards of liability set forth in the statutes, the market price of the claims is probably materially below the amounts that a standard risk-based discounted claims valuation analysis would yield. This probably makes sense in light of the various incentives of the participants. Defendants need attractive offers (relative to exposure) to overcome both non-economic resistance factors as well as the lack of extensive palpable evidence of trial results. Defense counsel, paid hourly, have, if anything, an economic advantage to honor the client’s resistance, as well as reputational and self-fulfillment benefits to keeping at least some quota of cases to try.

On the other hand, plaintiffs’ counsel, particularly specialists in demand, reach a certain threshold where the economically optimal course is to declare the offered amount to be enough and free up their time to slay another lion. The court is dependent on most large cases settling in any event. Finally, plaintiffs, themselves, are, for all practical purposes, absent from the process. They can opt out, and thereby preserve the right to bring claims on an individual basis, but the value of individual claims is rarely enough to warrant the transaction costs.

The Importance of the Mediator’s Role

The mediator of a wage-hour class or collective action should have substantive familiarity with the rhythms and restrictions of class/collective actions generally, and specific familiarity with the rights and duties of employers regarding wage-and-hour matters. Practically speaking, however, the mediator’s primary contributions come from the use of more general “process skills” to anticipate, analyze and avert impasse in the negotiation process, skills that are not unique to wage-and-hour mediations.

These strategies include:

• Establishing “ballpark” figures and calculations.
• Identifying where the parties reach net benefits from settlement, considering the discounted value of a release and class action bar and the litigation cost savings.
• Exploring the outer limit of the parties’ comfort zone in pure position bargaining. The bottom line is that if you ask the other side in a position bargaining context whether his or her bottom line is “X,” you will always get the answer “no,” regardless of what the truth is. Moreover, cases almost always settle for amounts below the amount the plaintiff would have said his bottom line was if asked.
• Examining true authority limits subject to adjustment, even marginally, in response to new information. Have authority limits been set on improbable or incorrect assumptions and information? Perhaps the “X v. Y” case is not analogous to the case at hand. Note there is a discernable difference between big cases and little cases on an amount-per-class-member basis and class actions are not the same as private settlements where a confidentiality clause or non-intervention may save the day. There are also special risks to a defendant in a wage-and-hour class action case as well as the inherent risks of jury trials.
• Considering the possible value of a short hiatus in mediation. Not every case resolves on day one of mediation. Impasse is only one option at the end of the day … consider the progress made and tee it up for success via renewed efforts with new calculations and information in hand.

Understanding the unique challenges of wage-hour collective and class actions can help you prepare for a successful mediation, whether you’re representing the plaintiffs or the defendant. As with any mediation, preparing ahead of time and staying engaged in the process will also help increase your odds of a successful resolution.

**Originally published in the Daily Report; reprinted with permission.

About Donna V. Smith

Donna Smith is a highly effective mediator and arbitrator who has enjoyed a 35 year-long career in the field of labor, employment, and business law.

As an attorney, Donna represented both employers and employees at highly acclaimed law firms. Her vast experience on both sides of the table uniquely impacts the dialogue between parties who are navigating solutions to resolve their disputes. As a mediator, her clients praise her demeanor, patience, and commitment to roll up her sleeves to keep working through even the most unusual challenges.