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On August 7, 2015 the Second Circuit held that parties cannot enter into private settlements of Fair Labor Standards Act (“FLSA” or the “Act”) claims without  the approval of either the district court or the Department of Labor. Cheeks v. Freeport Pancake House, Inc., No. 14-299 (2nd Cir. 2015).

Although other circuits are split on the issue of whether pre-suit agreements to settle FLSA claims are enforceable, this is the first appellate decision to address the issue of whether judicial approval is required to terminate an FLSA lawsuit once it has been filed. See Lynn’s Food Stores, Inc. v. US., 679 F. 2d 1350 (11th Cir. 1982); Martin v. Spring Break’83 Productions, LLC, 688 F. 3d 247 (5th Cir. 2012). Despite holding that district courts must approve the settlement, the court expressed no opinion regarding “what the district court must consider in deciding whether to approve the putative settlement.”

Unlike most causes of action, which may be settled merely by filing a stipulation of dismissal, courts apply extra scrutiny to FLSA settlements to prevent workers from waiving the protections of the Act. To ensure workers maintain their rights under the FLSA, courts will only enforce FLSA settlements if the settlement amount is for the full amount claimed, or if less, there is “a bona fide dispute between the parties” regarding the amount owed. See Brooklyn Savings Bank v. O’Neil, 324 13 U.S. 697 (1945) and D.A. Schulte, Inc. v. Gangi, 328 U.S. 108 (1946).

The court rested its holding on the argument that judicial approval was necessary to ensure that private settlements furthered the policy goals underlying the Act. The concern is that plaintiffs may agree to compromise settlement amounts that do not achieve the goal of deterring employers from violating the Act.

Plaintiffs in need of immediate cash may value an immediate settlement at a discounted amount over the potential for a larger judgment at some future date. Although this resolution may be agreeable to both parties, it does not achieve the goal of preventing employers from deriving a competitive advantage by violating the Act.

In dicta, the decision went on to add that “to prevent abuses by unscrupulous employers, and remedy the disparate bargaining power between employers and employees” courts must scrutinize settlement agreements to ensure “employee protections, even where the employees are represented by counsel.”

Other than seeking court approval of all settlement agreements resolving cases with FLSA claims, it remains to be seen how this decision will be used in litigation. Employers should pay particular attention as to whether judges reserve their role to ensuring that the settlement resolves a bona fide dispute, or whether they instead use their power to second guess plaintiff’s counsel and demand more favorable settlement terms.

A question that remains unanswered is whether the federal courts will defer to a decision of an arbitrator in resolving FLSA claims.

In Sarceno v. Choi, the defendants operated a supermarket in Washington D.C.  Three of the defendants had previously been sued by different employees in a proposed collective action (“the Munoz suit”) under the FLSA and other statutes. 

The Munoz suit was resolved through settlement decrees approved by the District Court.

At approximately the same time they were settling the Munoz suit, the defendants presented five other employees (who performed activities similar to those of the Munoz plaintiffs) with “settlement agreements” purportedly releasing the defendants from any claims under the FLSA.  The agreements stated that a bona fide dispute existed between the parties with respect to the total hours worked and amounts due.

The employees signed the settlement agreements given to them and received settlement checks, but subsequently filed suit alleging FLSA claims.  The defendants then moved for summary judgment based on the settlement agreements.

The D.C. District Court first cited Lynn’s Food Stores for the proposition that Department of Labor or judicial approval is generally required for the settlement of FLSA claims.

The District Court then cited Martin v. Spring Break ’83 Productions for the proposition that a private settlement of FLSA claims may be enforceable without such approval, when “the agreement resolves a bona fide dispute between the parties and the terms of the settlement are fair and reasonable.”

Based on the circumstances under which the settlement agreements were allegedly entered, the Court found that there were disputed issues of fact as to whether the agreements were fair and reasonable.  For example, the plaintiffs did not have an attorney and had difficulties with English, there were no negotiations over the agreements and the payments were low when compared to those in the Munoz suit. 

More notably, the District Court held that there was no bona fide dispute between the parties because, at the time the settlement agreements were signed, the plaintiffs were not disputing the wages they had been paid.  “This conclusion may seem counter-intuitive in light of the plaintiffs’ initiation of the instant lawsuit, but … the pertinent timeframe for evaluating the agreements is at the time the settlements were reached.”

The plaintiffs claimed that, at the time of the agreements, they were unaware of any dispute and believed that their salaries covered all of the compensation to which they were entitled.  The District Court stated that no bona fide dispute could have existed “when one party to the dispute is unaware of the dispute due to ignorance over his or her legal rights.”

The District Court then concluded that, on that basis alone, the defendants’ motion was denied.

Thus, employers should be mindful of the ruling in Sarceno before attempting to settle FLSA claims outside of litigation.