The Wage and Hour Litigation Blog

Co-authored by Noah Finkel and Giselle Donado

Parties might be able to privately settle their FLSA disputes without court approval -- and without disclosing the amount -- provided they don’t care if they obtain a valid release.

Finally a court has untangled the web of case law that often mistook the fact that a release of FLSA claims in a purely private settlement of FLSA claims may be void with an outright ban on private settlements.  In Picerni v. Bilingual SEIT & Preschool Inc., Judge Cogan of the federal district court for the Eastern District of New York issued an opinion clarifying that just because a release might be void doesn’t mean parties are not free to privately settle their FLSA claims.  It simply means that such settlements are more risky.  A settlement without a (court-approved) valid release is still a settlement of a lawsuit, and still means that the lawsuit should be dismissed.

What’s changed?  Not much.  Parties often have settled FLSA cases without court approval, and courts frequently have dismissed those cases without much mention.  Some courts, however, have refused to dismiss cases pursuant to settlement unless the parties submit the settlement agreement for review.  That frequently admits that the settlement agreement is no longer confidential.  The Picerni decision is significant because it explains why settlements without court approval are in fact permissible.  Joining the Fifth Circuit, the Picerni Court speaks out against the body of case law stating that plaintiffs cannot accept offers of judgment and that parties cannot even voluntarily dismiss a FLSA case without the court’s approval.  See Martin v. Spring Break ’83 Prods., 688 F.3d 274 (5th Cir. 2012), discussed here.  It expressly recognizes that private settlements are not forbidden simply because they may not be as enforceable as court-approved settlements.  The court used simple logic here:  while a court-approved FLSA settlement includes a valid release of claims and results in dismissal, it does not mean that an unapproved settlement should not result in dismissal.  Private settlements thus are allowed, they just may not be enforceable as to future claims.  But if the parties don’t care, then, according the Picerni court, there’s nothing stopping them.  In other words, the Picerni court is in effect saying, “settle without me if you want, but when the plaintiff sues you again, don’t say I didn’t warn you.”

The Facts:

The Picerni case involved garden variety FLSA claims.  The plaintiff, a teacher, filed suit against her employer, a private education institution, alleging that she (and those similarly situated) was not paid for hours she worked, bringing her below the minimum wage level.  Before the defendant even appeared or filed an answer, the plaintiff filed notice that she accepted defendant’s offer of judgment settling her individual claims.  The court refused to enter judgment, and explained that FLSA settlements must be approved by the court -- the acceptance of an offer of judgment simply won’t do.  Plaintiff filed a motion explaining the settlement, and the court changed its mind.  Unprompted by the parties, the court considered whether, under Federal Rule 41, parties can dismiss an FLSA action without the oversight or approval of the court.  The answer, this time, was yes.  The court accepted the parties’ Rule 68 offer of judgment and allowed the parties to dismiss the case. 

The Opinion:

The court reasoned that, unlike other statutes, the FLSA does not expressly require court approval to dismiss FLSA claims.  Of the body of case law to the contrary, the court stated that those cases should be confined to their facts and suggest only “that the courts will not recognize an unreasonable settlement.”  Those cases did not “expressly preclude private settlements; they simply refused to  recognize releases in subsequent litigation where the settlement was unreasonable or not the result of a bona fide dispute.”  The court admitted that allowing private FLSA settlements is not without its downsides: putative class members may never learn of their potential claims, settlements will be kept confidential, and a plaintiff’s recovery likely will be smaller.  But if this what the parties want, and the employer is willing to risk that the settlement may not be enforceable in the future, then let them have at it.

What are the risks?  The Picerni court emphasized that private FLSA settlements require the employer to roll the dice, and cautioned that such settlements may not be enforceable as to later claims.  This largely will depend on whether there was an actual dispute (probably), and whether the settlement reached reasonably resolved that dispute (that depends).  More practically, it will really just depend on the employee and his or her lawyer -- is the settlement amount enough to cause the employee to not be interested in filing another suit to obtain more money? 

But the Picerni decision provides employers more security than it gives itself credit for.  Indeed, allowing the parties privately settle and dismiss an action with prejudice arms employers with claims preclusion or res judicata defenses to later claims. 

A risk worth taking?  It depends.  An early settlement will save employers the time and cost of prolonged litigation.  And, perhaps even more appealing, private settlements are private.  Unlike the court-approved settlements, these private settlements can remain confidential.  The case can be dismissed without all other employees learning of the plaintiff’s claims and recovery.  An ounce of prevention is a pound of cure here.  Keeping the settlement terms confidential likely will reduce the risk of copycat claims from other employees looking for the same remedial treatment.  The risk, however, is that an employer may pay a plaintiff to dismiss an FLSA case, and then have to face further FLSA litigation from that plaintiff.

This decision makes clear that employers have options other than win, lose, or settle with court approval.  Employers may pursue a confidential settlement with plaintiffs and voluntarily dismiss a case with prejudice without the court’s approval.                                                                                                                                                                                                                                                                                          

Authored by Steve Shardonofsky

As we blogged here earlier this year, the Fifth Circuit in Martin et al. v. Spring Break ’83 Productions, L.L.C. et al.; No. 11-30671 (July 24, 2012) became the first federal appellate court to enforce a private FLSA settlement.  Now, the United States Supreme Court may get a chance to weigh in on this issue for the first time since the 1940s.  That is because on October 22, 2012, the plaintiffs in Martin filed a petition for writ of certiorari seeking review of the Fifth Circuit’s decision, arguing that the case creates a circuit split regarding private FLSA settlements and the standard for individual liability under the FLSA. 

If the Supreme Court takes the case, the result may have important and far-reaching consequences for all employers and practitioners in this area.  For decades, based on Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697 (1945) and D.A. Schulte, Inc. v. Gangi, 328 U.S. 108 (1946), employers have acted on the assumption that private settlements of FLSA claims are unenforceable without DOL supervision or court approval.  As a result, employers cannot obtain a valid release even when they pay their employees all compensation owed for alleged misclassification or off-the-clock work.  In addition, during pending collective action litigation, the requirement for court approval of FLSA settlements means that any settlement agreement will likely be part of the public record and may then be published in blogs and discussed in legal articles.  This information is therefore often available to the plaintiffs’ bar and can sometimes result in negative publicity and copy-cat lawsuits.  But as we blogged here earlier this year, the Fifth Circuit’s decision in Martin could signal a significant change in this area.  Although that case is currently limited to the Fifth Circuit, if the Supreme Court accepts review and affirms, employers across the country could realize significant benefits from private, confidential FLSA settlements.  On the other hand, if the Supreme Court does not accept review or reverses on this issue, employers would not necessarily be worse off than they are right now—since the prevailing best practice all along has been to obtain DOL supervision or court approval for FLSA settlements.

In Martin, four union-represented plaintiffs filed a grievance against Spring Beak ’83 Louisiana, L.L.C. alleging that they had not been paid for all their hours worked.  The International Alliance of Theatrical Stage Employees Local 478 (as exclusive representative of the employees in the bargaining unit) and Spring Beak Louisiana entered into a settlement concerning the disputed hours worked.  The Union and Spring Break Louisiana agreed that the settlement payments were the “amounts due and owing” to the aggrieved employees.  And in exchange for those payments, the plaintiffs waived their right to file any complaints or lawsuits.

Before the settlement agreement was signed by Union representatives, however, the plaintiffs filed a lawsuit against Spring Break Louisiana and several other individual and corporate defendants to recover their unpaid wages.  On appeal, the Fifth Circuit affirmed summary judgment in favor of the defendants, holding that the four plaintiffs had waived their FLSA claims as part of the settlement—even though the settlement was never approved by the DOL or a district court.  The Fifth Circuit also affirmed summary judgment in favor of the individual defendants (several officers and managers), holding that they were not “employers” under the FLSA.

In the cert petition, the plaintiffs argue that Supreme Court review is necessary because Martin created a circuit split with the Eleventh Circuit, which held in Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982) that FLSA claims may be settled only by court approval or DOL supervision.  The Fifth Circuit in Martin had distinguished Lynn’s Food Stores because of the absence of procedural safeguards during the settlement in that case (among other things, the plaintiffs were unaware that the employer owed them back wages, did not consult with an attorney before signing the agreement, and some of them did not speak English) and because the settlement in that case occurred outside the context of a lawsuit.

The plaintiff also argue that Supreme Court review is appropriate because the Fifth Circuit’s ruling conflicts with the Supreme Court’s prior decision in Barrentine v. Arkansas-Best Freight Sys., 450 U.S. 728, 745 (1981), which held that a union cannot waive individual FLSA rights through collective bargaining.  In Martin, the Fifth Circuit also distinguished Barrentine: “Here, Appellants accepted and cashed settlement payments—Appellants’ FLSA rights were adhered to and addressed through the Settlement Agreement, not waived or bargained away.  The concerns the Court in Barrentine expressed, that FLSA substantive rights would be bargained away . . . are not implicated by the situation here where Appellants’ Union did not waive FLSA claims, but instead Appellants, with counsel, personally received and accepted compensation for the disputed hours.”  As the Fifth Circuit further explained in Martin, “FLSA rights were not waived, but instead, validated through settlement of a bona fide dispute, which [plaintiffs] accepted and were compensated for.”

If the Court grants certiorari, this case would resolve the apparent Circuit split between the Fifth and the Eleventh Circuit regarding the effectiveness of private FLSA settlements and would clarify whether or not Barrentine prevents unions from settling of FLSA rights .  The cert petition also asks the Supreme Court to take up the issue of individual liability under the FLSA.  Consequently, if the Court grants the cert petition, it may also provide guidance regarding the proper standard for determining individual liability under the FLSA.  The Supreme Court’s decision on plaintiffs’ cert petition in Martin is not expected until the spring of 2013.

By: Steve Shardonofsky

Federal district and appellate courts historically have refused to enforce settlements and/or waivers of FLSA rights without Department of Labor or court approval.  We recently blogged here, for example, about a recent ruling from the Southern District of New York that rejected a proposed settlement of overtime claims because the proposed agreement contained a confidentiality clause.  In Martin et al. v. Spring Break ’83 Productions, L.L.C. et al.; No. 11-30671 (July 24, 2012), a case involving the filming and production of a soon-to-be-released movie, the Fifth Circuit refused to follow this trend and became the first federal appellate court to enforce a private FLSA settlement.  We are not sure if Spring Break ’83 will captivate moviegoers, but the Fifth Circuit’s ruling could be this summer’s blockbuster.

First, the cast of characters.  The four plaintiffs were employed by Spring Beak ’83 Louisiana, L.L.C. as lighting and rigging technicians for the movie “Spring Break ’83.”  Toward the end of production of the movie, the plaintiffs, who were represented by the International Alliance of Theatrical Stage Employees Local 478 (the “Union), filed a grievance alleging that they had not been paid for all their hours worked.  A Union representative concluded it would be impossible to determine whether or not the plaintiffs had worked on the days they claimed they worked.  Ultimately, on November 3, 2009, the Union (as exclusive representative of the employees in the bargaining unit) and Spring Break Louisiana entered into a settlement concerning the disputed hours worked.  The Union and Spring Break Louisiana agreed that the settlement payments were the “amounts due and owing” to the aggrieved employees.  And in exchange for those payments, the plaintiffs waived their right to file any complaints or lawsuits.

Then the plot thickens… On June 16, 2009, before the settlement agreement was signed by Union representatives, the plaintiffs filed a lawsuit against Spring Break Louisiana and several other individual and corporate defendants to recover their unpaid wages.  On a summary judgment motion, the defendants argued that the plaintiffs had waived their claims as part of the settlement.  In response, the plaintiffs argued that the settlement agreement was invalid because it was not approved by the DOL or by a court of competent jurisdiction.  But the district court rejected this argument.  It noted there was no binding precedent that addressed whether parties may privately settle disputes regarding unpaid waged under the FLSA, and it adopted the holding and logic of Martinez v. Bhols Bearing Equip. Co., 361 F. Supp. 2d 608 (W.D. Tex. 2005), that parties may privately settle FLSA claims where there is a bona fide dispute as to the amount of hours worked or compensation due and that a release or waiver under such circumstances is enforceable.  The Martinez court espoused a “move away from the rigid interpretation of statutory rights of the 1940s to a regime which supports settlement as a favored means of resolving disputes.” Id. at 630.

On appeal, the plaintiffs again argued that the settlement agreement was invalid.  The Fifth Circuit followed the district court, adopted the holding and reasoning in Martinez, and found that “the payment offered to and accepted by [plaintiffs], pursuant to the Settlement Agreement, is an enforceable resolution of those FLSA claims predicated on a bona fide dispute about time worked and not as a compromise of guaranteed FLSA substantive rights themselves.”  In doing so, the Fifth Circuit cited BrooklynSav. Bank v. O’Neil, 324 U.S. 697 (1945) and D.A. Schulte, Inc. v. Gangi, 328 U.S. 108 (1946) for the proposition that the U.S. Supreme Court left open the possibility for private settlements of bona fide disputes regarding hours worked or the rate of compensation.  Regarding the facts, the Fifth Circuit highlighted that the plaintiffs “were already benefiting from legal counsel before the Settlement Agreement was signed in November 2009” and the money plaintiffs received and accepted for the settlement of their bona fide dispute occurred within the context of a lawsuit (because the plaintiff had already filed suit when the settlement agreement was executed).  There was thus little danger of the employees being disadvantaged by unequal bargaining power.

The Fifth Circuit also analyzed and reject the plaintiffs’ contention that Barrentine v. Arkansas-Best Freight Sys., 450 U.S. 728 (1981) invalidated the settlement.  In Barrentine, the Fifth Circuit explained, “the plaintiffs’ grievances based on the FLSA were submitted by the union to a joint grievance committee that rejected them without explanation, a final and binding decision pursuant to the collective bargaining agreement.”  But in Martin, the Fifth Circuit noted, the plaintiffs “accepted and cashed settlement payments—[plaintiffs’] FLSA rights were adhered to and addressed through the Settlement Agreement, not waived or bargained away.”  Thus, the Supreme Court’s concern in Barrentine that FLSA substantive rights would be bargained away are not implicated in this case.  As the Fifth Circuit explained in Martin, “FLSA rights were not waived, but instead, validated through settlement of a bona fide dispute, which [plaintiffs] accepted and were compensated for.”

Will this blockbuster fizzle? Although the Fifth Circuit’s ruling here certainly reverses a strong trend, questions remain regarding its future impact.  Some practitioners and judges may find the Fifth Circuit’s casual rejection of Brooklyn Sav. Bank and Gangiunpersuasive—since those cases -- in the view of many courts -- prohibit employees from waiving their rights to recover liquidated damages, whether or not there is a bona fide dispute.  On the other hand, the Supreme Court’s concern in Brooklyn Sav. Bank and Gangi about unequal bargaining power is absent in cases like Martinwhere the employees are also represented by counsel and the parties reach a mutual compromises of a bona fide dispute regarding hours worked.  Until more courts adopt the reasoning in Martinez and Martin, however, employers should still seek DOL or court approval for FLSA settlements if they wish to ensure that the release is valid.  Otherwise, employers who reach private resolution of FLSA disputes will do so at their peril because the release will remain unenforceable.

Authored by Noah Finkel and Abad Lopez

Last month, a federal district court in Maryland rejected a proposed FLSA settlement as unreasonable based on the amount of the proposed attorney’s fees.  In Gionfriddo v. Zinc, et al., the Court compared the amount the individual plaintiffs were to recover ($15,000.18) to the proposed attorney’s fees ($100,000), and found the disproportionate figures unpalatable.  Review of attorney’s fees provisions in pure-FLSA settlements occurs when settling parties submit their agreement to the court for approval as a “fair and reasonable compromise” of a bona fide dispute.  Without such approval, there is a significant risk that the plaintiff will have been deemed to have never waived their FLSA claims, and thus can sue their employer again even after already having received a payment pursuant to settlement.

In rejecting the proposed settlement, the Court here used the lodestar method to evaluate the plaintiffs’ proposed attorney’s fees.  To determine the reasonable hours expended and a reasonable hourly rate, the Court considered “the amount in controversy and the results obtained in the case.”  In doing so, the Court found that the low recovery for Plaintiffs compared to the high attorney’s fees was improper.  The Court noted that “because the proposed settlement agreement provided a fee award greatly in excess of the amounts to be paid to the individual plaintiffs, that request was likely not reasonable.” 

The Court rejected Plaintiffs’ position that comparing the damages award to the attorney’s fees was improper.  In doing so, the Court adopted the “proportionality” approach to the loadstar analysis.  The Court noted that because Plaintiffs obtained only a partial victory through summary judgment, the proposed fees were unwarranted.  By accepting a small percentage of the maximum available recovery, the Court held that Plaintiffs’ attorney achieved only a limited success.  Therefore, awarding the hours expended for the entire case would be unreasonable.   The Court directed the parties to reassess the proposed fees to account for the degree of success achieved by Plaintiffs or face a hearing on the issue of damages and fees. 

There is good news and bad news for employers in this opinion.  On the one hand, it can help employers negotiate settlements with lower fee amounts -- and thus a lower total payout -- when the plaintiff achieves, or appears headed to achieve, only partial success.  On the other hand, this ruling, if followed by other courts, makes it more difficult to settle FLSA cases because it demonstrates a reluctance to approve relatively early settlements where the payment to the plaintiffs is less than the payments to the attorneys. 

Such reluctance may be misplaced.  Here, the Court applied the stringent standard for approving class action settlements under Federal Rule of Civil Procedure 23.   For class actions under Rule 23, a court may compare the proposed payment to the class with the proposed attorney’s fees.  A disproportionate attorney’s fee award may suggest a “collusive settlement,” which may be rejected.  This serves to protect absent class members.  This concern, however, is nonexistent in FLSA collective actions, because those who did not opt in to the case are not bound by the settlement.  Further, several courts have recognized that whether a compromise of a claim for back pay is a “fair and reasonable” has nothing to do with the amount of attorneys fees in the settlement.  So long as the money received by the plaintiffs is sufficient given the maximum value of their claim and the risks they face, a settlement should be approved as “fair and reasonable,” even if the attorney’s fees are high.

To avoid this situation, employers should ensure that FLSA settlement agreements provide that the underlying agreement is enforceable even if a court rejects or reduces the proposed attorney’s fees, and that plaintiffs’ counsel are obligated to dismiss the case even with a reduced fee amount.  Employers also should consider other creative approaches to avoid a court rejecting settlements due to attorney’s fee agreements that could be considered disproportionate.