Settlement of Wage Claims Under FLSA Must Now be Approved by the Court

LR-Calculator_iPadA panel of the United States Court of Appeals for the Second Circuit has ruled that parties may not stipulate to dismiss cases brought under the Fair Labor Standards Act without court approval.  This ruling may make it more difficult to settle such case, and to keep FLSA settlements confidential, often an important objective for employers.

Most federal lawsuits may be voluntarily dismissed under Federal Rule of Civil Procedure 41(a) simply by filing a stipulation signed by the parties to the action.  No court approval is required.  But the Rule contains an exception: it is “subject to … any applicable federal statute.”  The question before the appellate court in Cheeks v. Freeport Pancake House was whether the FLSA is an “applicable federal statute,” so that voluntary dismissals would have to be approved by the court to take effect.  Neither the Supreme Court nor any other Circuit Court of Appeals had ruled on the question before the Second Circuit opinion was issued on August 7, 2015

The U. S. Supreme Court has previously held that  employees may not waive their FLSA rights to liquidated damages where there is no genuine dispute that the employer owes the amount at issue.  The Supreme Court similarly invalidated private settlements where the issue in dispute was whether the employer is covered under the FLSA.

From these cases the Court of Appeals  drew the lesson that the FLSA is intended to secure for the lowest-paid workers a subsistence wage and to protect employees from the consequences of their unequal bargaining power.  The court apparently concluded that it is inconsistent with the statutory purpose to allow a compromise settlement when wages owed to an employee can be definitively determined.  Next, citing a district court case, the appellate court also recognized that low-wage employees’ economic circumstances may make them more susceptible to coercion or more likely to accept unreasonably low settlement offers.  Thus they need the court’s protection to ensure that the statutory purposes are fulfilled.  The court concluded that the FLSA is an “applicable federal statute” under Rule 41(a)(1)(A)(ii).  FLSA cases may not be voluntarily dismissed absent court approval.

What does this mean in practical terms? Most importantly, it means that in this Circuit settlements of FLSA suits will have to be submitted to the court for review and approval if they are to be “with prejudice” – that is, if the plaintiff is to be barred from bringing a new action on the same claim to recover additional amounts he or she may believe to be owed. Even where the employer and employee are both represented by counsel and have agreed to a settlement, the terms of the settlement must satisfy the court, or the case continues.

It remains to be seen whether the district court will review proposed settlements in camera (confidentially) and not require them to be filed with the Clerk.  And it remains to be seen whether, if proposed settlement agreements must be filed, parties will be permitted to file them under seal.  In short, it could become nearly impossible to settle an FLSA suit confidentially and with prejudice.

Moreover, it is unlikely that courts will approve settlements that don’t include liquidated damages and attorney fees, to which employees are statutorily entitled, unless the settling parties can establish to the court’s satisfaction that there is a bona fide dispute concerning the employer’s liability.  Broad releases, which would cover non-FLSA claims, also will not likely be approved, unless there is additional consideration specifically allocated to that aspect of the release.  The Court of Appeals clearly expects district courts to be vigilant “to prevent abuses by unscrupulous employers, and remedy the disparate bargaining power between employers and employees.”

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