174 Litigating CA Wage & Hour Class and PAGA Actions (23rd Edition) Seyfarth Shaw LLP | www.seyfarth.com fealty to ethical obligations, plaintiffs’ counsel—who often have near absolute control over wage and hour class litigation—have a financial interest in maximizing the attorney’s fees they will receive through the settlement. The settling employer’s financial incentive, meanwhile, is to achieve as broad of a release as possible for as little money as possible. Because the plaintiff’s lawyer typically receives an attorney’s fee that is a percentage of the gross value of the class settlement, employers once would commonly agree to a nominally larger gross settlement value on the condition that any unclaimed settlement funds be returned to the employer. These sort of “reversionary” settlements were popular because they allowed an employer the possibility of paying substantially less in settlement than the gross settlement would suggest, particularly in industries where the employer could predict that the claims rate would be low. For example, in particular industries where there is a transient workforce, it is common for only about one-quarter of the class members to make claims—either because they do not receive notice or because the value of individual settlement amounts is too low to attract their attention. When a small percentage of the class submits claims in a reversionary settlement, it may actually result in class counsel receiving significantly more money than the class as a whole. In connection with a settlement of one million dollars, for instance, if class counsel received thirty percent, that would leave no more than $700,000 for the class (actually less, because settlement administration costs are typically paid out of the gross settlement). If the class claims only 25% of the amount set aside for claims, then the class would receive no more than $175,000 versus the $300,000 class counsel would be slated to receive. While this arrangement could be defended on the ground that class counsel secured a potential one million dollar settlement, courts have looked unfavorably on large payouts to class counsel as compared to the payment received by the class. One way courts have addressed this inequity is simply to cut the attorney’s fee and distribute the difference to those members of the class who made claims. In the above example, if class counsel’s fee was reduced to 15% of the gross, then it would result in the lawyers obtaining $150,000, and the class receiving $325,000, an effective contingency of 31%. Of course, this result would be at odds with what class counsel negotiated, so a routine reduction in fees would substantially reduce the willingness of plaintiff’s counsel to agree to reversionary settlements. Courts could also take greater pains to ensure that class members understand that they have claims and make an informed decision whether to make claims. This includes extending the notice period, ordering that the claims administrator send multiple reminders of the need to return a claim form, or even requiring that the administrator (or class counsel) actually telephone class members and encourage them either to make claims or opt out. While such steps would make settlement administration more expensive, they would serve the goal of minimizing the number of situations where class members unwittingly receive no money under a settlement as a result of simple ignorance.
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