By Robert Whitman

Seyfarth Synopsis: The Second Circuit held that attorneys’ fee awards in FLSA settlements are not limited by principles of “proportionality” between the fees and the amount of the settlement or subject to a 1/3 cap.

In the Second Circuit, settlements in FLSA lawsuits are subject to strict court scrutiny to ensure that the terms, including the amount of attorneys’ fees, are fair and reasonable. Many District Courts within the Circuit have applied a rule of “proportionality” and refused to approve fee amounts greater than one-third of the total settlement.

No more, according to the Circuit. In Fisher v. SD Protection Inc., it held that such a rule is at odds with the purpose of the FLSA and could discourage competent lawyers from taking on cases for low-wage workers.

The Fisher case arose from an otherwise-ordinary wage dispute brought by a $10/hour employee. He sued under the FLSA and New York Labor Law based on the employer’s alleged failure to pay required overtime and provide mandatory wage statements.

Although the case was pled as a putative class and collective action, the parties reached a settlement for the named plaintiff only. The total settlement amount was $25,000, inclusive of fees and costs. In papers submitted to the court for approval of the settlement, the parties disclosed that the plaintiff would be paid only $2,000 of that amount, with the remaining $23,000 going to his attorney. Stated differently, the attorney’s share of the settlement proceeds was 92%.

District Judge Richard Berman cried foul. While approving the total settlement amount as fair and reasonable, he sua sponte reduced the attorneys’ fee award to $8,250 – one-third of the total settlement amount – plus $1,695 in costs, leaving the plaintiff with $15,055. He reasoned that, as “a matter of policy, 33% of the total settlement amount – or less – is generally the maximum fee percentage which is typical and approved in FLSA cases.”

The plaintiff appealed to the Second Circuit. (In a procedural oddity, the defendant did not participate in the appeal since, according to the court, the appeal only “involves the split of the settlement funds between plaintiff and his counsel.”) In a detailed decision, the court reversed and remanded, emphatically disapproving of Judge Berman’s requirement of “proportionality” between the amount of the settlement and the size of the fee award.

Although noting that “district courts in FLSA actions in this Circuit routinely apply a proportionality limit on attorneys’ fees in FLSA actions,” the Second Circuit held that such a rule is not mandated by either the text or the purpose of the statute. While acknowledging that the proposed split of $23,000 to counsel and $2,000 to the plaintiff “understandably gave the district court pause,” the court rejected an “explicit percentage cap” on fee awards. In its view, requiring proportionality would “impede Congress’s goals by discouraging plaintiffs’ attorneys from taking on ‘run of the mill’ FLSA cases where the potential damages are low and the risk of protracted litigation high.”

It followed from the court’s analysis that a strict one-third rule was not permissible. “In most FLSA cases, it does not make sense to limit fees to 33% of the total settlement. FLSA cases often involve ordinary, everyday workers who are paid hourly wages and favorable outcomes frequently result in limited recoveries.” The facts of the plaintiff’s potential claim illustrated the conundrum: he was apparently entitled, at most, to $585 in unpaid overtime, $585 in liquidated damages, $5,000 for wage notice violations, and $5,000 for wage statement violations, for a total of $11,170. Yet under the District Court’s order, he received more than $15,000.

Finally, the Second Circuit took Judge Berman to task for rewriting the settlement agreement rather than sending it back to the parties to correct the terms of which he disapproved. “If a district court concludes … that a proposed settlement is unreasonable in whole or in part, the court cannot simply rewrite the agreement – it must reject the agreement or give the parties an opportunity to revise it,” the court said. But a court “exceeds its authority when it simply rewrites the agreement by imposing terms on the parties to which they did not agree.”

It would be easy for employers to conclude, like the defendant in Fisher that chose not to participate in the appeal, that this ruling only concerns matters between plaintiffs and their lawyers and has nothing to do with defendants. But the practical effect may be greater than that. Any employer that has engaged in settlement negotiations with employees and their counsel in FLSA matters quickly comes to understand that the plaintiffs’ attorneys’ fees are a significant driver of the bargaining, sometimes to the point of taking over the negotiations entirely. To the extent that Fisher frees plaintiffs’ lawyers from fears that they will be held to a one-third share of the settlement fund and not receive a sufficient payday for themselves, it may loosen some of the constraints on negotiating, and thereby foster settlements overall, perhaps at lower gross numbers. Hope springs eternal.