FLSA Settlements: Is DOL or Court Approval Required?

After decades of relative clarity, one area of complex employment litigation that has seen some change — and potentially significant change — is the case law surrounding settlement of  Fair Labor Standards Act (FLSA) collective actions. For approximately 30 years, the prevailing wisdom has been that FLSA settlements must be approved by the U.S. Department of Labor (DOL) or a court; otherwise they are unenforceable. As one court put it:

[A]n employer undertakes the private resolution of an FLSA dispute at his peril. If the employer pays the employee in full, including all wages owed and liquidated damages, the employee retains no uncompensated FLSA claim and the peril dissipates. However, if the employer extracts a compromise, the release of an FLSA claim approved by neither the Department of Labor nor the district court remains unenforceable.

Dees v. Hydradry, Inc., 706 F. Supp. 2d 1277, 1237-38 (M.D. Fla. 2010). Thus, an employer wishing to keep its settlement quiet and confidential is often forced to submit it to a court, publicly, in order to be assured that the agreement will be enforceable if the settling employee later tries to reassert the same FLSA claims. While employers still settle FLSA collective actions without court approval at their own risk, recent federal court decisions suggest that private settlements may have greater likelihood of being enforced than in years past, and at least one case holds that court approval is not necessary for FLSA cases to be dismissed under Federal Rule of Civil Procedure 41(a). 

A. The Leading Case: Lynn's Food Stores, Inc. v. United States.

Until recently, the only court of appeals to consider the requirements for settling FLSA cases was the Eleventh Circuit, in the oft-cited Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982). Lynn's Food was a declaratory judgment action by Lynn's Food Stores, which filed the case to obtain judicial approval of a private settlement and release of FLSA back wages due its employees. Prior to the lawsuit, the DOL investigated Lynn's Food and determined that it was liable to its employees for back wages and liquidated damages. When negotiations with the DOL were unsuccessful, Lynn's Food offered a settlement and release directly to its employees. The employees had not brought suit under the FLSA, were not aware of the DOL investigation in particular or of their FLSA rights in general, did not consult attorneys, and some of the employees who signed the agreement did not speak English.

After considering the language of the statute (29 U.S.C. § 216) and related Supreme Court precedent, the Lynn's Food court stated that there are only two ways to settle or compromise FLSA claims. The first is under the supervision of the DOL pursuant to Section 216(c), which was not applicable in that case because the DOL was not involved in the settlement in question.  The second is through a private action under Section 216(b), where any settlement must be approved by the court:

Other than a section 216(c) payment supervised by the Department of Labor, there is only one context in which compromises of FLSA back wage or liquidated damage claims may be allowed: a stipulated judgment entered by a court which has determined that a settlement proposed by an employer and employees, in a suit brought by the employees under the FLSA, is a fair and reasonable resulution [sic] of a bona fide dispute over FLSA provisions.

Id. at 1355. Considering the unequal bargaining power and the employer's "invidious practices" in that case, the court ruled that the settlement did not meet any of the required criteria and was therefore unenforceable.

Over the next 30 years, Lynn's Food was cited by district courts in every federal circuit, with the vast majority of courts agreeing that FLSA settlements required either DOL or court approval. The court approval requirement during this period has been so strong that some courts even held sua sponte fairness hearings when the parties sought a voluntary or stipulated dismissal of the case. While specific factors and analysis vary from case to case and court to court, federal courts generally apply a multi-factor test to determine whether an FLSA settlement is a fair and reasonable resolution of a bona fide dispute. Such factors often track along Rule 23 fairness factors and may include: the stage of the proceedings and status of discovery; complexity and likely duration of the litigation; fraud or collusion in the settlement; representation of counsel; absent class members; and amount of the settlement relative to potential recovery. 

B. Martinez and Martin Break From the Majority.

The landscape began to shift with the district court decision of Martinez v. Bohls Bearing Equipment Co., 361 F. Supp. 2d 608 (W.D. Tex. 2005). In Martinez, the plaintiff had signed an agreement accepting "full payment" for unpaid overtime and releasing the employer from further claims. After Martinez subsequently brought an FLSA claim, the employer moved for summary judgment based on the settlement and release, posing the question of "whether purely private compromises of claims under the FLSA involving bona fide disputes as to liability are prohibited or permitted." Id. at 618. After a detailed and thorough analysis of the FLSA and its amendments, legislative history, and related Supreme Court and federal precedent (including Lynn's Food), the Martinez court broke from the majority of courts and determined that private settlements without court approval may be enforceable in some circumstances. The court held: "[P]arties may reach private compromises as to FLSA claims where there is a bona fide dispute as to the amount of hours worked or compensation due. A release of a party's rights under the FLSA is enforceable under such circumstances."

Under the Martinez holding, a court's analysis of a settlement agreement is limited to simply whether there was a bona fide dispute over the hours worked or wages due or whether anything else would invalidate the agreement. In such cases, the bona fide dispute requirement is likely to be satisfied by the simple fact that employer and employee disagree over the wages due. In Martinez itself, for example, the court only considered whether there was a dispute over wages due, whether the release actually included the FLSA claims, and whether the agreement was unenforceable for any other reason, such as fraud or duress. After the court concluded there was a bona fide dispute, that the agreement covered FLSA claims, and that it was otherwise enforceable, the inquiry was over and the employer was entitled to summary judgment on the FLSA claims.

The Fifth Circuit become the second court of appeals to directly address court approval of FLSA settlements when it approved of the Martinez court's reasoning in Martin v. Spring Break '83 Productions, L.L.C., 688 F.3d 247 (5th Cir. 2012). Martin involved the FLSA claims of unionized film employees of Spring Break Louisiana. When the employees filed a wage grievance, the union sent a representative to investigate the claims. The representative concluded it would be impossible to determine if the plaintiffs worked on the days they claimed, after which, the union and employer entered into a settlement agreement pertaining to the disputed hours. The district court below had relied on and adopted the Martinez holding, so the Fifth Circuit also analyzed the Martinez case and approved of its rationale. Like the Martinez case, Martin involved a bona fide dispute over the number of unpaid hours worked and the Fifth Circuit held that a 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." Id. at 255.

The Martin court distinguished Lynn's Food on the facts, highlighting how, in contrast to the Lynn's Food plaintiffs, the film workers in Martin had the benefit of legal counsel, knew about their FLSA rights, and the agreement was not outside the context of a lawsuit because the workers had filed a complaint four months before the settlement. Id. at 256 n.10. Like the Martinez case, the only inquiry was whether there was a bona fide dispute over hours or wages and, finding such a dispute, the court upheld the agreement as enforceable.

Martin and Martinez have been cited a handful of times with approval, including one court in the Southern District of Florida, where Lynn's Food is controlling precedent. E.g., Lliguichuzcha v. Cinema 60, LLC, ___ F. Supp. 2d ___, No. 11 Civ. 4486(GWG), 2013 WL 2436526, at *1 (S.D.N.Y. June 5, 2013) (citing cases); Fernandez v. A-1 Duran Roofing, Inc., No. 12-CV-20757, at *1 (S.D. Fla. Feb. 25, 2013) ("Therefore, the court finds that approval is not necessary."). Many of those cases involved motions to approve a settlement agreement, and while the courts noted that approval may be unnecessary, the posture of the cases led the courts to approve the agreement nonetheless.

C. Two Bonus Cases: Picerni and Nall.

Two other recent cases addressing FLSA settlement agreements are worth noting. The primary question at issue in Picerni v. Bilingual Seit & Preschool Inc. was under what circumstances FLSA plaintiffs can dismiss their cases without court approval. Under Federal Rule of Civil Procedure 41(a), plaintiffs can normally dismiss their cases voluntarily — alone if early enough or with the defendant's stipulation later on — except as limited by class action rules or "any applicable federal statute." Picerni considered whether the FLSA is one of the "applicable federal statutes" that preclude parties from dismissing a case voluntarily under Rule 41(a).  ___ F. Supp. 2d ___, No. 12 CIV. 4938 BMC, 2013 WL 646649 (E.D.N.Y. Feb. 22, 2013). The Picerni court recognized that some of the progeny of the Lynn's Food rationale, including cases before the same judge, had gone so far as to require a fairness determination before a case could be voluntarily dismissed. The court then distinguished Lynn's Food on its "rather egregious facts" and hewed toward the Martin case, saying, "[i]t is hard to conceive of any reason why, if a court is presented with an eminently reasonable, albeit after-the-fact, settlement, it is precluded from giving it legal effect." Id. at *6. More importantly, said the court, Lynn's Food is silent on whether plaintiffs can voluntarily dismiss their FLSA cases. In the end, Picerni concluded that whether an agreement is enforceable is a more different question than whether a plaintiff may voluntarily withdraw a case, and therefore the FLSA is not one of the statutes that limit Rule 41(a) dismissals. 

Picerni does not represent a sea change regarding FLSA settlements, as it clearly warns defendants that an unapproved settlement may be unenforceable; however, in combination with its favorable citation of Martin, the holding represents at least a small loosening of courts' grip over FLSA collective actions, and, if widely adopted, at least allows employers to take the risk of an unenforceable settlement as they see fit, rather than forcing them to present settlement agreements to the court.

Finally, the Eleventh Circuit recently added to its own jurisprudence in Nall v. Mal-Motels, Inc., ___ F.3d ___, No. 12-13528, 2013 WL 3871011 (11th Cir. July 29, 2013). In Nall, the court held that Lynn's Food applies to former employees in addition to and rather than just current employees and also addressed the meaning of a "stipulated judgment" approving a settlement. The plaintiff in Nall had signed a settlement agreement that the employer later sought to enforce.  Nall subsequently hired counsel, and at the fairness hearing the attorney argued against the settlement as unfair and unreasonable but the lower court entered judgment anyway. In a question of first impression for the Eleventh Circuit, the court said that it (obviously) takes two or more to stipulate, and a judgment to which one side objects is not stipulated. Because Nall's attorney objected to the settlement, the court of appeals held that the judgment was not stipulated and therefore the decision approving it was vacated.

D. Considerations for Future FLSA Settlements.

Although there has been some movement toward less judicial supervision of FLSA settlements, two things remains clear: (1) settlements must be in resolution of a bona fide dispute and where there is no dispute about what is owed, settlements are not enforceable, Picerni, 2013 WL 646649 at *3; and (2) employers that settle FLSA claims without DOL or court approval do so at their own risk. Even if courts follow the most employer-friendly cases like Martinez and Martin, employers seeking to enforce an unapproved FLSA settlement agreement will still face scrutiny. At the least, employers must be prepared to show the existence of a bona fide dispute over hours worked or wages due, that the agreement actually releases FLSA claims, and that there is not some other reason to disregard the agreement like fraud or duress. Considering the long history of judicial scrutiny of FLSA settlements, buttressed by the FLSA's reputation as a nonwaivable statute, there is ample room for a court to disregard a settlement it finds to be unfair or unreasonable. 

Of course, there may be reasons employers choose to risk an unenforceable settlement. For example, many courts require parties to file the terms of their settlement publicly when seeking judicial approval. Employers may wish to keep the financial and other details of settlements confidential for any number of reasons, not least of which is guarding against other employees learning of the settlement amount. If such considerations outweigh the risk of an unenforceable settlement, employers may be more comfortable proceeding without judicial approval. However, the safest route in terms of enforceable settlements is to submit the settlement for approval.