By Robert S. Whitman, Howard M. Wexler, and Thomas F. Howley

Seyfarth Synopsis: The Second Circuit held that FLSA settlements pursuant to Rule 68 Offers of Judgment do not require judicial approval.  The Court distinguished such settlements from Rule 41 stipulated dismissals, which still require approval under Cheeks v. Freeport Pancake House.

Wage and hour practitioners have long understood that settlements of FLSA claims require formal approval from a court or the Department of Labor.  The Second Circuit has been especially firm in applying this rule, holding in Cheeks v. Freeport Pancake House that the statute imposes a host of significant restrictions on otherwise-standard settlement provisions like general releases and confidentiality clauses.

In a decision issued on December 6, 2019, however, a divided Second Circuit panel approved a potentially important carve-out.  It held that FLSA settlements pursuant to a Rule 68 Offer of Judgment do not require court approval.  Instead, based on the language of the rule, the court said that when a Rule 68 offer is accepted, the case must be dismissed with prejudice, with no role for the court other than the ministerial act of entering the dismissal and closing the case.

As soon as the appeal in the case was filed, it promised to delight wage and hour geeks, and the decision does not disappoint.  It was a battle of statutory interpretation between the panel’s two-judge majority, which held that the text of Rule 68 requires dismissal when an offer is accepted, with no court review of the settlement terms, and the “emphatically” dissenting judge, who wrote that the rule does not overcome the FLSA’s longstanding requirement of judicial oversight of settlements to ensure fairness and procedural regularity.

The decision, Yu v. Hasaki, involved a claim by a sushi chef for unpaid overtime under the FLSA.  Soon after the complaint was filed, the restaurant sent a Rule 68 Offer of Judgment for $20,000 plus attorneys’ fees.  Yu accepted the offer, and the parties filed a notice with court.  But before the Clerk could enter judgment, the District Judge ordered the parties to submit the settlement agreement to the court for a fairness review and judicial approval, which he believed to be required by Cheeks.

Both parties disputed the District Court’s interpretation of the FLSA, Rule 68, and Cheeks, and filed an interlocutory appeal.  The Second Circuit accepted the case to address what it described as a “straightforward” question: “whether acceptance of a Rule 68(a) offer of judgment that disposes of an FLSA claim in litigation needs to be reviewed by a district court or the DOL for fairness before the clerk of the court can enter the judgment.”

The Second Circuit majority relied primarily on language in Rule 68 that, when an offer is accepted, the clerk “must” enter the parties’ stipulated judgment, and held that the FLSA does not contain a “clear expression of congressional intent” to exempt the FLSA from the rule’s coverage.  Putting a fine point on its conclusions, the judges emphasized that the term “must” is an explicit textual command in Rule 68 to enter judgment without discretion, while the language of the FLSA fails to provide “a scintilla of textual support” that Congress intended the statute to create an exception.

Judge Guido Calabresi was equally pointed in dissent.  He castigated the majority for a holding that he said “has no basis in the text, history, design, or purpose of the FLSA, nor indeed in common sense.”  And he tantalized the wage-and-hour-verse with this bold prediction:  “I do not believe the majority’s holding can–or will–withstand Supreme Court scrutiny.”

Before making its way to SCOTUS, however, the case may first draw the attention of the full Second Circuit in a possible en banc rehearing.  While such rehearings are rare in that court, a split panel decision increases the odds.  And if en banc review happens, then it may open the door to a full reconsideration of the merits of the Cheeks rule entirely.  While that issue was not before the panel in Yu, the majority opinion includes statements suggesting that the judges are not entirely comfortable with the strictures of mandatory review of FLSA settlements even outside the Rule 68 context.  For example:

[T]he fact that a judicial approval requirement might further the broad, remedial policy goals of the FLSA does not necessarily mean that Congress would have enacted such a requirement if it had considered the question, for it is quite mistaken to assume … that whatever might appear to further the statute’s primary objective must be the law.  Were that the case, we would be a short step away from requiring judicial approval of a variety of settlements that involve vulnerable citizens, such as discrimination suits under Title VII of the Civil Rights Act and § 1983 claims of serious police misconduct.

That is an argument that many opponents of the requirement of court review of FLSA settlements have been making for a long time.  Does this passage means it is gaining traction?  Stay tuned.

In the meantime, from a practical perspective, the takeaway of Yu is simple: parties within the Second Circuit can use Rule 68 offers of judgment to settle FLSA claims without having to go through the process of court review.  That is a welcome new tool for resolving FLSA cases without the costs, public disclosures and delays of the judicial approval process.