On December 6, 2019, the U.S. Court of Appeals for the Second Circuit held in Yu v. Hasaki Restaurant, Inc., No. 17-3388, that judicial approval is not required to settle Fair Labor Standards Act (FLSA) claims via a Federal Rule of Civil Procedure 68(a) offer of judgment. In so doing, the court resolved a question left open by Cheeks v. Freeport Pancake House, Inc. and authorized a potentially expedient way for employers to resolve FLSA claims.
In 2015, the Second Circuit held in Cheeks that judicial approval was required for stipulated dismissals of FLSA claims under Federal Rule of Civil Procedure 41. Since then, the question had remained open as to whether such approval was needed for resolution of FLSA claims via a Rule 68(a) offer of judgment.
Yu presented this scenario for the Second Circuit's review. In Yu, a sushi chef had filed FLSA claims against his employer. The employer made an offer of judgment to settle the claims, and the plaintiff, Yu, accepted it. The parties then entered their offer and notice of acceptance pursuant to Rule 68, but the district court, relying on Cheeks, ordered the parties to submit the settlement agreement to the court for a fairness review and approval. The parties challenged the district court's order, and the district court certified an interlocutory appeal.
Majority Opinion: Congress Did Not "Hide Elephants in Mouseholes"
The Second Circuit reversed the district court. The majority began by analyzing the plain language of Rule 68(a), noting that the rule's command that the clerk enter judgment was "mandatory and absolute" and labeling the district court's role in entering Rule 68(a) judgments as "ministerial rather than discretionary."
The court then considered and rejected four arguments in support of the district court's order. First, the court reasoned that Supreme Court of the United States precedent did not control this precise issue. The court distinguished two Supreme Court cases on the basis that publicly filed, stipulated judgments were different from "private, back-room compromises" that could result in the exploitation of workers and the release of their rights.
Second, the court interpreted the language of the FLSA and found that it was unambiguous with respect to whether it required judicial approval of offers of judgment. The court noted that subsection 216(b) of the FLSA pays "painstaking attention to procedural requirements" and declined to assume that Congress "[hid] elephants in mouseholes" by intentionally omitting requirements concerning judicial approval of Rule 68 offers of judgment from the text of the FLSA.
Third, the court distinguished Cheeks, noting that unlike Rule 68(a), Rule 41(a)(1)(A)(ii) explicitly requires judicial approval if a federal statute, such as the FLSA, applies to the claims. The court also likened Rule 41 stipulations, in which a settlement amount is not publicly filed, to private, secret settlements.
Finally, the court disputed the dissent's assertion that the FLSA's "remedial and humanitarian goals" served as justification for requiring judicial approval of Rule 68(a) settlements. The court reasoned that a delay created by requiring judicial approval would frustrate the congressional policy of timely entry of judgment upon acceptance of a Rule 68(a) offer.
Judge Calabresi "Strongly" Dissents
In dissent, Judge Guido Calabresi emphatically disagreed with the majority, calling the decision an "absurd outcome" and opining that the majority was "guided by broad policy notions concerning the desirability of Rule 68 settlements in FLSA cases and the delays that prohibiting such unsupervised settlements might bring."
Suggesting that the decision should be reviewed by the Supreme Court, Judge Calabresi determined that the majority had failed to "consider the statute as a whole." Because the FLSA's wage and hour requirements are mandatory, he concluded that they represented Congress's intent to prohibit private settlements whose monetary value dipped below the statutory directives. He further noted that subsection 216(c) of the FLSA specifies that private settlement agreements are valid if supervised by the secretary of the U.S. Department of Labor, thereby begging the question of why Congress had enacted subsection 216(c) to require agreements to be supervised if private agreements under Rule 68 were already enforceable. Judge Calabresi also reasoned that, in Cheeks, the Second Circuit—in line with numerous other circuit courts—had stated that FLSA claims requiring stipulations of dismissal with prejudice generally could not be settled through private agreements without judicial approval.
In light of Yu, employers in the Second Circuit might find a clearer path to settling FLSA claims, provided that such settlement amounts are publicly filed. The Second Circuit's sanctioning of the Rule 68 approach might also affect strategy with respect to litigating FLSA claims. For example, employers may consider serving Rule 68 offers of judgment earlier on in litigation to force opposing parties to take a hard look at their claims and decide whether pursuing litigation makes sense when a resolution exists that does not require judicial approval. It remains to be seen how litigants might attempt to expand and apply the Yu holding to other FLSA settlement scenarios.
Watch for if, and when, the Supreme Court reviews this issue.
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