Before the Second Circuit's recent ruling in Cheeks v.
Freeport Pancake House Inc., 796 F.3d 199 (2015), it was unclear
whether a privately-negotiated general release could be effective
with respect to wage and hour claims asserted under the Fair Labor
Standards Act ("FLSA"). In Cheeks, the Second Circuit
affirmed the decision of the United States District Court for the
Eastern District of New York and held that releases of FLSA claims,
and dismissals of actions asserting such claims, must be submitted
to a court or the Department of Labor for review to determine
whether they are fair and reasonable. On January 11, 2016, the U.S.
Supreme Court denied a petition for writ of certiorari, leaving the
Second Circuit's decision intact.
In Cheeks, a restaurant employee alleged that the defendants
violated the FLSA and the New York Labor Law when they failed to
pay him overtime wages and retaliated against him after he
complained internally about improper wage practices. The parties
reached a settlement agreement out of court and asked the district
court to "so order" their agreement and dismiss the
action with prejudice pursuant to Rule 41(a)(1)(A)(ii) of the
Federal Rules of Civil Procedure, which permits parties to
stipulate to the dismissal of an action without the involvement of
the court subject to certain requirements or "any applicable
federal statute." Instead of "so ordering" the
agreement, the court determined that the FLSA falls within the
"applicable federal statute" exception to Rule
41(a)(1)(A)(ii) and ordered that the parties (a)file a copy of the
settlement agreement on the court's public docket, (b)
demonstrate why their agreement reflected a reasonable compromise
of the disputed issues, and (c) provide the court with additional
information to explain why the proposed settlement was fair and
reasonable. Instead of making their settlement agreement public,
the parties sought interlocutory review by the Second
Circuit.
As to the specific issue presented, the Second Circuit's
analysis turned on whether the FLSA constituted an "applicable
federal statute" under Rule 41(a)(1)(A)(ii). Neither the
United States Supreme Court nor any other circuit court had
addressed this precise issue. In deciding that the FLSA constitutes
an "applicable federal statute," the court considered
public policy implications and reasoned that requiring judicial or
Department of Labor approval of settlement agreements is consistent
with the FLSA's purpose – to "prevent abuses by
unscrupulous employers, and remedy the disparate bargaining power
between employers and employees." In discussing why judicial
approval of such agreements is necessary, the Second Circuit noted
what it perceived as "the potential for abuse in such
settlements," including overly broad confidentiality
provisions, the use of general releases where narrower releases
might be appropriate, and the setting of plaintiffs'
attorneys' fees at inappropriately high rates.
While the precise issue before the court concerned the application
of Rule 41, the import of Cheeks appears to be far broader. After
reviewing various district court decisions concerning the
enforceability of privately negotiated releases of FLSA claims, the
court ultimately concluded that "[r]equiring judicial or DOL
approval of such settlements is consistent with what both the
Supreme Court and our Court have long recognized as the FLSA's
underlying purpose: 'to extend the frontiers of social progress
by insuring to all our able-bodied working men and women a fair
day's pay for a fair day's work.'"Id. at 206
(quoting A.H. Phillips, Inc. v. Walling, 324 U.S. 490 (1945)). In
the wake of this decision, it must be assumed that
privately-negotiated releases of FLSA claims will not be effective
unless the terms of the settlement are presented to and approved by
a court or the Department of Labor.
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.
