Recently, the United States Court of Appeals for the Second Circuit (covering New York, Connecticut and Vermont), ruled that “without the approval of the district court or the Department of Labor, parties are not permitted to settle claims under the Fair Labor Standards Act (“FLSA”) by a dismissal with prejudice under Federal Rule of Civil Procedure 41”. This ruling means that the Court has effectively imposed financial and legal burdens on all people seeking to settle wage and hour cases. Further, it means that most proposed wage and hour settlements need to be filed publicly, something that employers often try to avoid.
In the instigating case, Cheeks v. Freeport Pancake House, Inc. and W.P.S. Industries, plaintiff Cheeks was a restaurant server and manager who filed claims for overtime wages, liquidated damages and attorneys’ fees under the FLSA and New York state law. After the discovery period, the parties reached a settlement and filed a joint stipulation and order of dismissal with prejudice under Rule 41. The district court refused to accept the stipulation and found that plaintiff could not reach a private settlement of his claims without approval of the court or supervision of the DOL. The court ordered both parties to file the settlement agreement on the public docket and explain why it reflected “a reasonable compromise of disputed issues rather than a mere waiver of statutory rights brought about by an employer’s overreaching [,]” and why it is a “fair and reasonable” settlement. Choosing not to publically file the terms of the proposed settlement, the parties instead appealed to the Second Circuit.
Usually, parties can enter private settlements and voluntarily dismiss lawsuits with prejudice without a court order under Rule 41. Rule 41 states that the right to file a stipulation of dismissal is subject to “any applicable federal statute.” So, in this case, the court was deciding whether the FLSA fell within that exception. After examining the rationale of similar cases, the Second Circuit affirmed the district court and concluded that under Rule 41, stipulated dismissals of FLSA claims with prejudice must be approved by the court or the DOL to take effect.
There were initial concerns that many FLSA violation cases are “simply too small, and the employer’s finances too marginal, to have the parties take further action if the Court is not satisfied with the settlement.” Although there were concerns, the potential for abuse in FLSA settlements prompted the court to conclude that judicial approval was necessary. Previous examples of rejected settlements include overbroad releases and restrictive covenants, agreements by plaintiff’s attorneys not to represent clients with respect to similar claims against the employer and nominal payments to plaintiffs who accepted the money because they were unemployed and desperate as the reason for their ruling.
What does this ruling mean for future FLSA plaintiffs of wage and hour lawsuits?
- It will be harder for parties to keep FLSA settlements in the Second Circuit confidential. For employers, confidentiality is usually a critical component of a settlement, as they want to avoid other employees learning how much was paid out in settlements. With the new ruling, the settlement agreement may need to be part of the court submissions. Employers will have to factor in the potential public filing of the settlement agreement when they are deciding to settle or not.
- Settling FLSA cases will be more expensive, take more time and be more difficult. The submission of a proposed settlement to the court for approval will require demonstrating that the settlement is fair and reasonable, and that there is paperwork to prove that there was a reasonable compromise of disputed issues.”
- Employers may find that they settle their wage and hour claims but still remain exposed to different claims by the same plaintiff. The language in the Cheeks settlement indicates that the court disapproved of “overbroad” releases where plaintiffs wave all claims against the employers, even if those claims had nothing to do with wage and hour infractions. This may cause employers to have to address the plaintiff’s accusations one by one, with a settlement for each.
This ruling leaves employers more vulnerable than ever to facing major monetary setbacks and negative press related to wage and hour lawsuits. EPAY’s robust time and attendance system can help prepare you in the case of a wage and hour lawsuit by arming you with an audit trail of exact hours worked and paid, as well as customizable reports that incorporate all applicable wage and hour rules for the states that you operate in. To learn more about our wage and hour compliance safeguards, set up a demonstration today of our Blueforce software today.