FLSA Cases Are Different When it Comes to Settlements
The Fair Labor Standards Act allows employees to sue if they believe their employer has not paid them proper wages for the time worked. FLSA claims include those for unpaid overtime, misclassification of an employee as exempt, or failing to meet the required minimum wage. The FLSA specifically requires that any settlement of an FLSA claim be approved by either the federal court or the Department of Labor. The public policy for this is to make sure that the settlement is "fair and reasonable to the employee."
Cheeks and Dismissals
In practice, some parties to an FLSA action get around the court review step by simply settling a case and filing a joint stipulation of dismissal with prejudice instead of filing the entire settlement agreement. In 2015, the Second Circuit issued an opinion that prohibited that practice. In Cheeks v. Freeport Pancake House, the parties negotiated an FLSA settlement and, instead of filing for approval with the district court, they filed a stipulation to dismiss all claims, with prejudice, pursuant to Rule 41(a)(1)(A) of the Federal Rules of Civil Procedure.
The Cheeks court held that FLSA claims fall under Rule 41's federal statute exception, so parties cannot take that simple route instead of seeking court approval for the settlement. The court noted that the FLSA is a "uniquely protective statute" and that the FLSA's public policy of remedying "the disparate bargaining power between employers and employees" mandated review of an FLSA settlement.
Expanding Cheeks
The Cheeks case only dealt with dismissals with prejudice under Rule 41. However, in Samake v. Thunder Lube, Inc., the Second Circuit was presented with a situation in which a plaintiff wanted to dismiss his claim unilaterally without prejudice. Sekouba Samake sued his employer, Thunder Lube, seeking unpaid overtime under the FLSA. Thunder Lube immediately moved to have the case sent to arbitration pursuant to an agreement the parties had signed. Instead of responding to that motion, Samake moved to dismiss his claim without prejudice, so as to avoid ending up in arbitration. The lower court applied Cheeks and asked if the parties had entered into a settlement. Samake notified the court that there was no settlement but requested that the federal court handle the case instead of going to arbitration. The court held that Cheeks prohibited Samake from dismissing his claim without prejudice and ruled that the matter should go to arbitration.
The primary issue for the Second Circuit on appeal was whether Cheeks should apply to a party's attempt to dismiss a case without prejudice. The court held that even an automatic dismissal under Rule 41 must be reviewed by the court. The Cheeks and stated that due to the uniqueness of the FLSA, district courts should review all dismissals to make sure that there is not any abuse in a settlement. The Cheeks opinion listed fears of settlements with highly restrictive confidentiality provisions, overbroad releases, and disproportionate fee awards as the reasons why a court must review FLSA dismissals. The court noted that those types of problems could occur whether the dismissal was with prejudice or without.
Cheeks Moving Forward
Settlements of FLSA claims can be very complicated and employers must handle collective actions and individual actions very deliberately. Employers should remember that a court will be reviewing a wage and hour settlement. Even if you don't operate in the Second Circuit, it is likely that the courts could have the same attitude about review. Although the Cheeks line of cases do not outline any settlement terms that are specifically determined to be improper, it is wise to look at how your local jurisdiction has handled FLSA cases in the past to get a good idea of what will be allowed.
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