The United States Court of Appeals for the Second Circuit (covering New York, Connecticut and Vermont) recently held that without the approval of the district court or the Department of Labor, parties are not permitted to settle claims under the Fair Labor Standards Act ("FLSA") by a dismissal with prejudice under Federal Rule of Civil Procedure 41. By its holding, the Court has effectively imposed substantial legal and economic burdens on all parties when seeking to settle wage and hour cases. At the same time, the ruling means that most proposed wage and hour settlements will need to be filed publicly, which employers often seek to avoid.
In Cheeks v. Freeport Pancake House, Inc. and W.P.S. Industries, plaintiff Cheeks was a restaurant server and manager who filed claims for, among other things, overtime wages, liquidated damages and attorneys' fees under the FLSA and New York state law. After discovery, the parties reached a settlement and filed a joint stipulation and order of dismissal with prejudice under Rule 41. The district court refused to accept the stipulation and found that plaintiff could not reach a private settlement of his claims without approval of the court or supervision of the DOL. Therefore, the court ordered the parties to file the settlement agreement on the public docket, and explain why it reflected "a reasonable compromise of disputed issues rather than a mere waiver of statutory rights brought about by an employer's overreaching[,]" and why it is a "fair and reasonable" settlement. Instead of filing publicly the terms of the proposed settlement, the parties appealed to the Second Circuit.
In most cases, parties may enter private settlements and voluntarily dismiss lawsuits with prejudice without a court order under Rule 41. However, the rule provides that the right to file a stipulation of dismissal is subject to "any applicable federal statute." Therefore, the question was whether the FLSA fell within this exception. The FLSA does not address Rule 41, and the Supreme Court has not ruled on the exact issue presented by Cheeks. After examining the holdings and rationale of similar cases, the Second Circuit affirmed the district court and concluded that under Rule 41, stipulated dismissals of FLSA claims with prejudice must be approved by the court or the DOL to take effect.
The Court noted that according to at least one lower court, "the vast majority of FLSA cases ... are simply too small, and the employer's finances too marginal, to have the parties take further action if the Court is not satisfied with the settlement." But after weighing the policy considerations behind the FLSA, as well as the potential for abuse in FLSA settlements, the Court concluded that judicial approval was necessary. The Court cited examples of past rejected settlements such as overbroad releases and restrictive covenants, agreements by plaintiff's attorneys not to represent clients with respect to similar claims against the employer, and nominal payments to plaintiffs who accepted the money because they were unemployed and desperate. These types of settlements are antithetical to the primary remedial purpose of the FLSA – "to prevent abuses by unscrupulous employers, and remedy the disparate bargaining power between employers and employees."
What does all of this mean for future FLSA litigants? First, it will be more difficult for the parties to keep FLSA settlements in the Second Circuit confidential. Confidentiality is typically an essential settlement term for employers – simply put, they often do not want other employees learning the amounts paid to settle these cases. Now, the settlement agreement may need to be part of the submissions to the court. Some federal courts do not require the settlement agreement to be filed publicly, but Cheeks does not resolve whether a public filing is necessary. The holding of the case is limited to requiring court approval of FLSA settlements. Therefore, until we receive further judicial guidance, there is no guarantee of confidentiality. As a result, clients should factor the potential public filing of the settlement agreement into their analysis of whether to settle and, if so, for what amount.
Second, settling FLSA cases will now be more expensive, time-consuming and difficult. Submitting a proposed settlement for court approval will require assembling papers to demonstrate that the settlement is fair and reasonable, and a reasonable compromise of disputed issues (assuming this is the standard to be applied by the courts). In some cases, the court might ask for a conference or oral argument, thereby adding another layer of time and expense.
Last, language in Cheeks indicated that the Court disapproved of "overbroad" releases pursuant to which plaintiffs waived all claims against an employer, even if it was unrelated to wage and hour issues. Thus, employers might find themselves settling wage and hour claims but remaining exposed to different claims by the same employee.
Cheeks is an unwelcome development in wage and hour practice in the Second Circuit. But it remains to be seen how the district courts handle proposed settlements in terms of the procedure and standard for approving settlements, required documentation and confidentiality.
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