A unanimous federal appeals court ruled on Oct. 16, 2025, that employees who never opted into an FLSA collective action can still have their unasserted federal wage claims released through a Rule 23 opt-out class settlement. The decision by the U.S. Court of Appeals for the Third Circuit in Lundeen v. 10 W. Ferry St. Operations LLC, No. 24-3375, gives employers litigating hybrid class and collective actions in Delaware, New Jersey, Pennsylvania and the U.S. Virgin Islands a path to broader finality — one that no other federal appeals court has yet endorsed.

The ruling directly affects how employers in those four jurisdictions structure settlements in hybrid cases, which combine federal FLSA claims with parallel state wage-and-hour claims. It touches decisions on settlement drafting, class notice design and the allocation of settlement funds between opt-in collective members and absent class members.

The Procedural Divide at the Heart of the Case

The dispute stems from a fundamental procedural difference in wage-and-hour litigation. FLSA claims operate under an opt-in mechanism in 29 U.S.C. § 216(b): employees must affirmatively consent in writing to join a collective action. State-law claims typically proceed under Rule 23's opt-out mechanism, where class members are bound unless they actively exclude themselves.

That difference has long created uncertainty over whether FLSA claims — which require affirmative opt-ins to litigate — can be released on behalf of class members who simply failed to opt out of a Rule 23 settlement. The Third Circuit became the first federal appeals court to answer the question directly: yes, they can.

What Happened in Lundeen

A restaurant server sued his former employer on behalf of himself and similarly situated employees, alleging a manager was improperly included in a tip pool of servers and bartenders. He brought a hybrid action alleging violations of both the FLSA and the Pennsylvania Minimum Wage Act. The district court conditionally certified an FLSA collective, and 10 employees opted in.

The parties then reached a classwide settlement on the state-law claims covering 59 class members. Under its terms, every class member except those who explicitly opted out would release all wage-and-hour claims — including FLSA claims. The 10 collective opt-ins would share an additional $5,000 pool for their FLSA claims; everyone else would waive federal claims simply by not opting out. The proposed notice told class members they would "waive the right to recover both wages and liquidated damages under the FLSA."

The district court rejected the deal. It called the waiver of unasserted FLSA claims "neither fair nor reasonable" and concluded that § 216(b)'s opt-in mechanism prohibited such waivers by people who never joined the collective. The court certified the issue for interlocutory appeal.

What the Third Circuit Held

The appeals court reversed course. Although § 216(b) requires written consent to litigate an FLSA claim, the statute says nothing about releasing claims that were never asserted. The FLSA "creates a private right of action and requires employees to opt in to litigate their claims; it says nothing about releasing claims that have not been asserted," the court said. It declined to infer a waiver requirement the statute does not contain.

But the court drew a distinction with real consequences for settlement practice: a federal court may approve such a release, but that does not mean it should. Hybrid settlements are not per se unfair, yet they remain subject to Rule 23's rigorous approval procedures and the "fair, reasonable, and adequate" standard. The panel stressed clear notice to class members about what they are releasing and a meaningful opportunity to be heard.

Because the district court rejected the settlement without analyzing the required Rule 23(e)(2) fairness factors, the Third Circuit remanded for a fairness hearing — meaning the Lundeen settlement itself is not yet approved.

The Split Landscape Outside the Third Circuit

No other federal appeals court has resolved this question head-on, and district courts remain divided. The Fifth and Ninth Circuits have addressed a related issue, giving preclusive effect to previously settled Rule 23 class actions that released FLSA claims. Both barred plaintiffs from pursuing FLSA collective actions when they had been class members in a settled opt-out action that released federal claims. Neither court, however, examined whether those earlier settlements were properly approved in the first instance.

Employers litigating outside Delaware, New Jersey, Pennsylvania and the U.S. Virgin Islands should expect continued uncertainty — and the possibility of a different outcome depending on the forum.

Practical Implications for HR and Legal Teams

For employers in the Third Circuit settling hybrid actions partially on a Rule 23 basis, the ruling creates a clear playbook: negotiate for a release of FLSA claims held by class members who did not opt into the collective. Careful drafting can deliver greater finality — reasonable assurance that absent class members will not later sue over the same wage-and-hour practices.

Employers can also negotiate claims-made provisions in FLSA cases, under which only class members who submit valid claims receive relief and unclaimed funds revert to the employer.

The gatekeeping role belongs to the trial judge. Approval depends on a finding that the settlement is fair, reasonable and adequate — which in practice means class members need unmistakably clear notice that they are releasing both state-law and FLSA claims, plus a genuine opportunity to opt out and preserve their federal claims. HR teams involved in settlement communication and notice distribution should treat that clarity as a compliance requirement, not a stylistic preference.

The remand in Lundeen will give district courts in the circuit their first chance to apply the new framework, and how rigorously judges apply the Rule 23(e)(2) factors to FLSA releases will determine how much finality employers actually gain.