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“I’m not gatekeeping because everybody should get free money.”
That line stopped me in my tracks while I used to be scrolling through TikTok recently. I watched the video with rapt attention: Speaking in front of a screenshot of a Venmo payment, the creator urged viewers to join any and all class-action lawsuits they qualify for.
Why? To get a settlement, in fact — “your share of the pie,” she promised.
Class-action lawsuits and settlements are particularly hot topics immediately. Some 17 million individuals are resulting from get checks from Facebook once its user privacy settlement clears just a few final legal hurdles. Financial aid recipients who attended a handful of faculties can get a part of a $284 million settlement, and a few Money App users may have the ability to say as much as $2,500 in a case tied to data breaches.
The list goes on and on, but I’m skeptical that taking advantage of this is really so simple as that TikToker claims.
Is joining class-action lawsuits a simple strategy to generate income?
I called Paul M. Vaaler, a business and law professor on the University of Minnesota, to learn more. At its core, he says, a class-action lawsuit is a lawsuit brought on behalf of a bunch of individuals or businesses that suffer common injuries. Typically, one fundamental plaintiff and their attorney(s) take the lead on suing an entity in reference to an even bigger issue that’s affected a big swath of parents.
Class-action lawsuits are popular because plaintiffs are inclined to have more leverage after they band together versus suing individually. Also they are an efficient way for the courts to cope with hundreds of thousands of individuals affected by the identical issue who would otherwise file individual cases.
Vaaler says most class actions involve securities (like when investors sue because a firm does something to make them suffer a financial loss), employment (like when when certain employees suffer discrimination), consumers (like when when a foul business practice harms customers) or personal injury (like when a defective medical device physically harms patients).
The overwhelming majority of class-action lawsuits get settled, meaning the defendant agrees to forgo a trial and pay a large sum in damages. Nevertheless it’s not necessarily a fast process.
Class-action lawsuits involve several stages. After one is filed, it needs to be certified by the court, and potential members of the “class” should be notified. Next, those members must have the chance to opt in (or out). Only then are there settlement negotiations or a trial. This will take months or years — not an instantaneous payday by any means.
It’s also not necessarily an enormous payday. With a settlement, Vaaler says, the law firm is paid out of the pool of cash first, followed by the lead plaintiff. What’s left over is split among the many claimants, either equally or in accordance with certain criteria. (If person A used a faulty product for longer than person B, person A would receives a commission more, etc.)
“I wouldn’t expect to get wealthy on this,” he adds.
Working example: The typical payment in a $15 million settlement from Post Foods cereal just a few years ago was just $14.28. A 2015 Red Bull settlement gave class members the selection between $10 money or $15 price of Red Bull products.
On one hand, all of those small deposits can add up. On the opposite, depending on what style of relief I receive, I’ll owe taxes on it, which makes the financial victory a liiiittle less exciting.
“Unless otherwise excluded under the law, all income is taxable including settlement money from lawsuits — each individual and class-action,” Mark Steber, chief tax information officer for Jackson Hewitt Tax Service, tells me in an email. “But there are just a few exceptions to the taxable rule, including certain discrimination claims, amounts paid for physical injury, amounts paid for private injuries and physical sickness, and certain punitive damages comparable to a wrongful death claim.”
(FYI, Steber says settlements for wages will likely be reported on a W-2, and others will probably be on a 1099-MISC.)
Don’t get me fallacious: Class-action lawsuits and their settlements can still be legit opportunities for individuals who were injured or wronged. So if I get a notice and I actually have to make a decision whether to sign onto a class-action lawsuit, Vaaler suggests I do a little bit of research. I should ensure that the grievance accurately represents my specific situation, and if I select to hitch the category, he says I should stay diligent on any developments.
“If [someone says], ‘Gosh, join a class-action, make some easy money,’ you’ve gotta do your homework,” he adds.
The underside line
Settlements from class-action lawsuits could be profitable for individual people, but they’re not a get-rich-quick life hack.
“It’s gonna take time, and the cash could also be lower than you think that,” Vaaler says.
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