USDCSDNY.jpgCo-authored by Robert S. Whitman and Robert T. Szyba

Experienced practitioners have long understood that very few wage-hour class or collective actions go all the way to trial.  Nearly all cases that are not decided by a dispositive motion are resolved by a settlement.  In a noteworthy recent decision, Wolinsky v Scholastic Inc., Judge Jesse M. Furman of the Southern District of New York rejected a proposed settlement of overtime claims under the Fair Labor Standards Act because the proposed agreement contained a confidentiality clause.  The court’s order left the parties in an unfortunate predicament: continue litigating the case even though they agreed to settle, or make their agreement fully public.

The case had its origins in 2006, when Sarah Wolinsky was hired by Scholastic Inc. as a consultant to provide data analysis services to Scholastic’s Implementation Services and Technical Support Department.  Scholastic formalized the relationship in a written contract, and classified Ms. Wolinsky as an independent contractor.  After her contract was not renewed in 2008, Ms. Wolinsky filed for unemployment benefits.  The New York State Department of Labor determined that she had been an employee of Scholastic, and granted benefits.  Ms. Wolinsky then sued Scholastic in federal court for unpaid wages and overtime, alleging that Scholastic intentionally and willfully misclassified her as an independent contractor.

After nearly a year of litigation, the parties reached an agreement to settle the lawsuit.  As required under federal law, the parties submitted the proposed settlement agreement to the District Judge for approval.  In light of the agreement’s provision that the parties maintain its terms as confidential, they requested that the court review the agreement in camera, or alternately allow them to file it under seal.  The parties informed the court that they specifically desired to keep the settlement confidential because of the substantial monetary amount contained in the agreement and because of their concern that if the details of the settlement were made public, it would expose Scholastic to copycat lawsuits, inquiries from customers and potential customers, and allegations from competitors regarding Scholastic’s business and employment practices that it vehemently disputed.

Despite the parties’ joint request, the court refused to approve the proposed settlement agreement, basing its refusal solely on the confidentiality clause.  The court concluded that settlement agreements in FLSA cases are unique because of the legal requirement that the court approve the terms of the settlement.  The court said it must examine the agreement to ensure that its terms are fair and reasonable in light of the amount and circumstances of the dispute.  This requirement makes them “judicial documents.”  In light of the strong presumption of granting public access to judicial documents, as well as the FLSA’s general policy of informing employees of their rights and ensuring pervasive implementation of the FLSA in the workplace, settlement agreements in FLSA cases are to be filed publicly.

The court was careful to limit this requirement to wage and overtime cases under the FLSA, noting that federal law otherwise generally respects litigants’ wishes to keep settlements confidential.

The court then turned its attention to the parties’ alternate option: that Wolinsky would voluntarily drop the case and settle without the court’s involvement.  Judge Furman recognized that although the federal rules generally allow the parties to agree to withdraw the case, he said he would not allow voluntary withdrawal under these circumstances because it would provide an end-run around the requirement that the court analyze and approve the settlement.

Wolinsky reflects the difficult dilemma faced by employers in wage-hour cases:  even where the parties are able to agree to amicably resolve their dispute (and thereby avoid a public trial), the agreement cannot receive judicial approval without forcing the parties to air those disagreements in public filings.  Although some courts have been willing to approve such settlements on a confidential or in camera basis, this case adds to the line of authority rejecting such a practice.

* Sly & the Family Stone, Only One Way Out of This Mess, on Life (Epic/Legacy 1999) (1968).