FLSA Claims Require Court or Department of Labor Approval

Second Circuit Requires Court or DOL Approval for Private Settlement of FLSA ClaimsCourt or DOL Approval for Private Settlement of FLSA Claims

Over the last several years there has been some uncertainty among several circuits as to whether private litigants could settle claims under the Fair Labor Standards Act (“FLSA”) without formal court approval or approval by the Department of Labor (“DOL”).  On August 7, 2015, the Second Circuit Court of Appeal (which covers New York) shut the door on such private settlements and ruled that FLSA settlements had to be approved by the Court or the DOL to be effective.

Case Background:

In the case, Cheeks v. Freeport Pancake House, Inc., 797 F.3d 199, the parties appealed from the lower court’s denial of their stipulation to dismiss an action pursuant to their private settlement, which included claims under the FLSA.  Cheeks had been employed at the Freeport Pancake House as a server and manager for several years.  In 2012, he sued seeking to recover overtime wages, liquidated damages and attorney’s fees under both the FLSA and New York labor law.  After more than a year of litigation, the parties agreed to enter into a private settlement of Cheeks’ claims.  Pursuant to that settlement, they filed a joint stipulation with the Court requesting that the federal lawsuit be dismissed with prejudice pursuant to FRCP Rule 41.

The district court refused to accept the stipulation and held that the employee/plaintiff could not agree to a private settlement of his FLSA claims without either court approval or supervision by the DOL.  The trial court ordered the parties to file a copy of the settlement agreement on the public docket and also issued an order to show cause as to how the proposed settlement reflected a reasonable compromise of the disputed issues, which showing could be made with the use of affidavits.

Given that the parties had agreed that the settlement would be confidential between them, they declined to comply with the court’s order and instead asked the court to stay the legal proceedings and allow them to seek an appeal of the order denying their stipulation for a dismissal.  The trial court certified the following issue to the Second Circuit: whether FLSA actions are an exception to [FRCP] Rule 41(a)(1)(A)(ii) general rule that parties may stipulate to the dismissal of an action without the involvement of the court.

Because both of the private litigants took the position that the trial court had erred in rejecting their stipulation, the Second Circuit invited the DOL to submit its views on this issue.  In March 2015, the DOL submitted a letter brief to the Second Circuit taking the position that the FLSA fell within the “applicable federal statute” exception to dismissals under FRCP 41 and that the parties could not stipulate to the dismissal of FLSA claims with prejudice without the involvement of the court or the DOL.

Court’s Analysis:

Under FRCP 41, parties to a federal lawsuit may stipulate to the dismissal of an action without a court order unless the lawsuit is subject to other federal rules of civil procedure and “any applicable federal statute,” which requires court approval.  The Second Circuit noted that the FLSA is silent as to FRCP 41 and its provisions regarding the dismissal of actions.  The Second Circuit rationalized that if the FLSA is an “applicable federal statue” under FRCP 41, then the parties could not stipulate to its dismissal without approval from the court or the DOL.

The Second Circuit recognized that the issue presented was “a relatively blank slate as neither the Supreme Court nor [its] sister circuits have addressed the precise issue before [it].”

The Second Circuit recognized that for years there had been a general consensus that court or DOL approval was necessary to enforce a settlement of FLSA claims stretching back to a pair of U.S. Supreme Court cases from the 1940’s, Brooklyn Savings Bank v. O’Neil and D.A. Schultie, Inc. v. Gangi.  Both of these cases established that: “(1) employees may not waive the right to recover liquidated damages due under the FLSA; and (2) that employees may not privately settle the issue of whether an employer is covered under the FLSA.”  The Second Circuit continued by noting, however, that these cases left open the issue of whether employees could enter into a private settlement of FLSA claims “where there is a bona fide dispute as to liability, i.e., the number of hours worked or the amount of compensation due.”

Subsequent to these decisions, the Eleventh Circuit in 1982 held that employees could enforce a private settlement of FLSA claims “but only if the DOL or a district court first determines that the proposed settlement `is a fair and reasonable resolution of a bona fide dispute over FLSA provisions’.”  Lynn’s Food Stores, Inc. v. U.S. DOL, 679 F.2d 1350.  The Eleventh Circuit concluded that “FLSA rights cannot be abridged by contract or otherwise waived because this would nullify the purposes of the statute and thwart the legislative policies it was designed to effectuate.”

However, in 2012, the Fifth Circuit (which covers Texas) concluded that a private settlement agreement containing a release of FLSA claims that was entered into between a union and an employer waived the FLSA claims, even without district court approval or DOL supervision.  That court reasoned that “the settlement agreement was a way to resolve a bona fide dispute as to the number of hours worked ….”

The Second Circuit recognized that the above cases all rose in the context as to whether the private settlement of FLSA claims would be enforceable.  That was a bit different from the issue before the Second Circuit as to whether the parties can stipulate to the dismissal of FLSA claims with prejudice without the involvement of the district court or the DOL.  That answer hinged on whether or not the FLSA fell within the language “any applicable federal statute” set forth in FRCP 41.

The Second Circuit recognized that at least one of its district courts in the Eastern District of New York had held that because the FLSA is silent as to FRCP 41, that Congress did not intend it to be an “applicable statute” for purposes of the dismissal rule.  Picerni v. Bilingual Seit & Preschool, Inc., 925 F. Supp.2d 368 (2013).  The Picerni Court had reached this conclusion based upon other things, that most FLSA claims were rather small and that neither party would have the resources to seek court approval or DOL supervision in entering into private settlements, or to litigate the matter further if approval was withheld.

The Second Circuit, however, rejected this reasoning and concluded that “in light of the unique policy considerations underlying the FLSA,” that its provisions fell within FRCP 41’s “applicable federal statute” exception. Thus, parties could stipulate to the dismissal of FLSA claims with prejudice only with the approval of the district court or the DOL.  The Second Circuit reasoned that “requiring 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 ensuring to all our able bodied working men and women a fair days’ pay for  a fair days’ work’.”

While the Second Circuit empathized with the concerns of employers that the employer’s financial resources may not be sufficient to be able to fully litigate FLSA claims, or that proceeding with litigation would make little financial sense, the Second Circuit held that “the FLSA is a uniquely protective statute, the burdens described in Picerni must be balanced against the FLSA’s primary remedial purpose to prevent abuses by unscrupulous employers and remedy the disparate bargaining power between employers and employees.”

Takeaway for Employers:

The primary takeaway from Cheeks is that those employers in the Second Circuit who are litigating in federal court must remember that they will need court and/or DOL approval of any settlements they may enter into with former or current employees for claims brought under the FLSA.  This will likely lead to an increase in the expense of having to defend against such claims given the need for seeking such approval and, in the event such approval is denied, having to litigate the FLSA claims further. Although the Cheeks decision is limited to the Second Circuit, it is likely that other circuits may follow its lead and employers in those jurisdictions are cautioned to keep this decision in mind as well.  Given the split in approaches to this issue between the Second and Fifth Circuits, it is also possible that this issue may eventually land on the U.S. Supreme Court’s docket.

Contributor:  James Kachmar Shareholder | Weintraub Tobin