United States: Second Circuit Requires Court Approval Of All FLSA Settlements

Settlement of wage and hour actions just got harder in New York, Connecticut, and Vermont. On Aug. 7, 2015, in Cheeks v. Freeport Pancake House, the U.S. Court of Appeals for the Second Circuit, which covers New York, Connecticut, and Vermont, issued a decision that prevents parties from stipulating to the dismissal of a case in which there are claims alleging violations of the Fair Labor Standards Act (FLSA).

Generally, when parties settle a federal court action, they simply file a stipulation pursuant to Rule 41(a)(1)(A) of the Federal Rules of Civil Procedure that dismisses the case with prejudice. By filing such a stipulation, the parties do not have to provide the court with a copy of their settlement agreement and the terms of any such agreement can remain private and confidential. In Cheeks, the Second Circuit held that parties cannot use Rule 41(a)(1)(A) to dismiss FLSA cases with prejudice and instead the parties must submit their settlement agreement to the District Court for review so that the District Court can determine whether the settlement is fair and equitable.

Case Background

In Cheeks, the plaintiff, Dorian Cheeks, had worked for the defendant, Freeport Pancake House, Inc., as a restaurant server and manager. In August 2012, she filed a complaint in the U.S. District Court for the Eastern District of New York alleging that Freeport Pancake House did not properly pay her overtime in violation of the FLSA and New York Labor Law. Plaintiff sought to recover overtime wages, liquidated damages, attorney fees, and costs. The complaint was filed as a single-plaintiff action; it was not filed as a class or collective action.

During discovery, the parties privately settled the matter. As part of their settlement, they submitted to the District Court a stipulation of dismissal with prejudice pursuant to Rule 41(a)(1)(A). The District Court rejected the stipulation holding that the parties could not agree to a private settlement of an FLSA claim absent court or U.S. Department of Labor approval. As such, the District Court directed the parties to file a copy of the settlement agreement on the public docket and explain to the court why the settlement was fair and reasonable.

The parties refused and requested that the District Court stay the proceedings and certify the action for interlocutory appeal to address whether FLSA claims could be dismissed by stipulation under Rule 41(a) (1(A). The District Court did so, and the appeal followed.

Decision Rationale

The Second Circuit in Cheeks had to address whether Rule 41(a)(1)(A) permits parties to dismiss an FLSA suit by stipulation. Rule 41(a)(1)(A) states in relevant part that:

Subject to Rules 23(e), 23.1(c), 23.2, and 66 and any applicable federal statute, the plaintiff may dismiss an action without court order by filing:

(i) a notice of dismissal before the opposing party serves either an answer or a motion for summary judgment; or

(ii) a stipulation of dismissal signed by all parties who have appeared.

Thus, the issue before the Second Circuit was whether the FLSA is an "applicable federal statute" preventing parties from dismissing actions by stipulation under Rule 41(a)(1)(A).

The Second Circuit acknowledged that the FLSA itself was silent on the issue of whether it is an "applicable federal statute" under Rule 41 as were the Advisory Committee notes to the rule itself. The Second Circuit also conceded that neither the Supreme Court nor any circuit court had ever addressed the issue. However, the Second Circuit noted that district courts that have confronted the issue start by reviewing three key cases.

The first case is Brooklyn Savings Bank v. O'Neil, 324 U.S. 697 (1945). In Brooklyn Savings Bank, a night watchman claimed that he was not paid overtime. The parties agreed that the night watchman was owed $423.16, which the employer paid, and the night watchman signed a release. The night watchman then sued Brooklyn Savings Bank for liquidated damages. The Supreme Court held that employees could not waive their right to recover liquidated damages under the FLSA if there was no bona fide dispute and since there was no dispute that the night watchman was owed overtime the case could proceed. See id. at 704.

In reaching its decision, the Supreme Court noted that the FLSA's legislative history "shows an intent on the part of Congress to protect certain groups of the population from substandard wages and excessive hours which endangered the national health and well-being and the free flow of goods in interstate commerce." Id. at 706. Further, the FLSA "was a recognition of the fact that due to unequal bargaining power as between employer and employee, certain segments of the population required federal compulsory legislation to prevent private contracts on their part which endangered national health and efficiency and as a result the free movement of goods in interstate commerce." Id. at 706-07.

The second case, D.A. Schulte v. Gangi, 328 U.S. 108 (1946), was issued by the Supreme Court a year after Brooklyn Savings Bank. In D.A. Schulte, the Supreme Court held that parties could not privately settle the issue of whether an employer is covered under the FLSA. See id. at 114. Again, in reaching its decision, the Supreme Court highlighted the fact that the FLSA was implemented to protect employees who are the most susceptible to reaching unfair agreements with their employers because of their unequal bargaining power and limited resources. See id. at 116.

The third case was a 1982 decision from the U.S. Court of Appeals for the Eleventh Circuit, Lynn's Food Stores v. U.S. Dept.. of Labor, 679 F.2d 1350 (11th Cir. 1982). In Lynn's Foods, an employer sought a declaratory judgment that a private settlement reached when there was a bona fide dispute was enforceable and absolved the employer of FLSA liability. See id. at 1351-52.

The Eleventh Circuit rejected the settlements and held that parties could only settle FLSA claims if there was a bona fide dispute and the settlement was overseen by a court or the Department of Labor. As in Brooklyn Savings BankandD.A. Schulte, in reaching its decision, the Eleventh Circuit noted that the great disparity in bargaining power between employees and employers requires oversight of FLSA settlement agreements by the judicial branch or the Department of Labor.

Based on these cases, the Second Circuit concluded that the FLSA has unique policy considerations and goals, namely to protect low-wage employees with unequal bargaining power who are more susceptible to coercion and more apt to accept unreasonable, discounted settlements. Thus, the Second Circuit held that the FLSA is different from all other employment statutes. In fact, the Second Circuit noted that many district courts had rejected FLSA settlements because of such alleged coercion and abuse.

Examples that the Second Circuit cited include "a battery of highly restrictive confidentiality provisions," overly broad release provisions that would waive all possible claims against the defendants including claims that have no relationship to wage and hour issues, and attorney fees provisions that allow plaintiffs' attorneys to recover a substantial percentage of the recovery. Accordingly, the Second Circuit held that the FLSA is an "applicable federal statute" under Rule 41 and therefore parties cannot dismiss FLSA cases with prejudice pursuant to stipulation. Instead, they must submit their settlement agreements to the district court for review.

However, the Second Circuit left open the question for another day of whether parties could dismiss FLSA actions without prejudice by stipulation. In addition, the Second Circuit did not address whether, if the parties have privately settled an FLSA action, the district court has constitutional jurisdiction to continue to oversee the matter as it would seem that upon settlement no case or controversy exists. SeePowell v. McCormack, 395 U.S. 486, 496 (1969) (When the issues in dispute between the parties "are no longer 'live,'" a case becomes moot and the federal court lacks jurisdiction);Lillbask ex rel. Mauclaire v. Conn. Dept. of Educ., 397 F.3d 77, 84 (2d Cir. 2005) ("[A]t all times, the dispute before the court must be real and live, not feigned, academic, or conjectural. When the issues in dispute between the parties are no longer live, a case becomes moot, and the court—whether trial, appellate, or Supreme—loses jurisdiction over the suit, which therefore must be dismissed.") (internal citations and quotation marks omitted)

Implications of 'Cheeks'

AfterCheeks, FLSA cases within the Second Circuit will be more difficult to resolve for a number of reasons. First, no matter how frivolous the allegations, parties will no longer be able to quickly resolve their differences if the plaintiff alleges a violation of the FLSA. Instead they will have to submit their settlement to a court for its approval. This would be required even if the defendant has not appeared in the action because the settlement was reached before the defendant responded to the complaint.

Second, it will be very difficult to make any FLSA settlement confidential. One of the main provisions that most defendants seek in resolving any lawsuit, including an FLSA lawsuit, is that the settlement will be confidential. Currently, many district courts permit parties to settle FLSA cases without submitting the settlement agreement to the court for review. When district courts have reviewed settlement agreements prior to dismissing the action, the courts have rejected the parties' attempts to have the settlements placed under seal, and thus, the settlement agreements become part of the public record. This problem will now be exacerbated because, if parties are now going to be required to submit all FLSA settlements to a court for approval, the settlement agreement will be on the public docket where anyone can review its terms. This will nullify any confidentiality provisions contained in FLSA settlements.

Third, in holding that FLSA cases cannot be dismissed by stipulation, the Second Circuit noted that there have been "abuses" in FLSA settlement agreements. Among the "abuses" noted by the Second Circuit are overly broad releases that go beyond wage and hour matters. This is a significant problem for defendants. While it was dicta, the Second Circuit clearly disapproved of general releases contained in FLSA settlements. Thus, defendants now risk courts rejecting settlement agreements because they contain general releases, and if a settlement agreement contains a release limited to wage and hour matters only, defendants risk paying a settlement and having the plaintiff file a claim for non-wage and hour violations. Thus, defendants will not have security that once the settlement is finalized all issues between the parties will be resolved.

Cheeks is a problematic decision for employers as it will make it harder to resolve FLSA claims. Because courts will scrutinize FLSA settlement agreements before they will dismiss an FLSA case, defendant-employers will find it difficult to include confidentiality and other provisions in an agreement that are normally contained in settlement agreements. Further, defendant-employers run the risk of settling an FLSA case and exposing themselves to other lawsuits. As such, employers must be vigilant in ensuring their continued compliance with the FLSA.

Previously published in the April 6 issue of the New York Law Journal

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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