Morgan Stanley and sales assistants in its wealth management branch system who claimed they were owed overtime pay agreed to a $4.2 million settlement.

Three client service associates began their federal class action lawsuit in June 2011 on behalf of current and former Morgan Stanley client service associates, alleging violations of the federal Fair Labor Standards Act and New York state labor laws.

Client service associates, who are often compensated by both Morgan Stanley and brokers on teams where they work, are classified as non-exempt employees, entitling them to overtime pay if they work more than 40 hours a week. The lawsuit was brought against Morgan Stanley & Co and its brokerage subsidiaries, Morgan Stanley Smith Barney LLC and Morgan Stanley.

"Morgan Stanley maintains robust policies to ensure that non-exempt employees are paid for all time worked," a spokeswoman for the firm wrote in an e-mail. "However, with this settlement we will put an end to protracted and expensive litigation that is a distraction from our business."

The lead plaintiffs - Philips Amador, Sylvester Cetina and Joann Sunkett - had earlier dropped claims made under labor laws in Maryland and Illinois.

Morgan Stanley is the world's largest brokerage firm as measured by its more than 16,400 financial advisers.

Settlement papers filed on Wednesday in the U.S. District Court for the Southern District of New York said about 8,300 client service associates were entitled to overtime pay, but that only 865 nationwide who joined the class action are eligible to make claims.

However, any client sales associate who worked in New York state for Morgan Stanley and Morgan Stanley Smith Barney since July 29, 2005 can file. Payments to all claimants will be based on total time employed.

The three lead plaintiffs agreed to settlements of $10,000 each in addition to their individual settlement amounts and five others who joined quickly will receive $7,500.

Lawyers for the plaintiffs from law firms Klafter Olsen & Lesser in Rye Brook, New York, and Shavitz Law Group in Boca Raton, Florida, are entitled to one-third of the $4.2 million settlement, according to court filings.