Scrutiny of Wage Settlements Reshapes Litigation Strategy

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By Gayle Cinquegrani

Courts seem to be scrutinizing wage settlements more closely as the number of Fair Labor Standards Act cases and collective actions has skyrocketed, almost doubling during the past decade.

The extra oversight is influencing litigation strategy in FLSA cases, pressuring some employers into paying workers off before they file suit and making employees’ lawyers more cautious in calculating their fees.

“It used to be the courts were thrilled when parties reached a settlement,” Laurent Drogin, a partner at Tarter Krinsky & Drogin in New York, told Bloomberg Law. They were thinking “everybody wants closure,” he said. “Now there’s substantially greater scrutiny.”

The heightened judicial attention, which Drogin started noticing about three years ago, is “really reshaping the process,” he said. “Now, achieving settlement among the parties is only half the battle because lawyers have to get it approved” by the court.

The FLSA requires either a court or the Labor Department to approve a settlement before a wage and hour claim can be resolved fully.

More Demand Letters From Workers

The heavier scrutiny “creates an incentive for both sides” to settle a case before it gets to court, Drogin said. Lawyers increasingly are using demand letters to notify employers of the steps they must take to stave off an impending lawsuit. Employers who receive such letters are often willing to pay employees something to ward off a lawsuit, and employees are happy to get a settlement “in real time,” he said.

The stronger oversight has “been progressing over time,” following the “explosion in the number of cases that have been filed” under the FLSA, Sabrina Shadi, an employment law partner at BakerHostetler in Los Angeles, told Bloomberg Law.

Michael Russell, a partner at Waller Lansden Dortch & Davis in Nashville, Tenn., attributed the growth in FLSA litigation to the use of collective actions. “Around 15 years ago, people realized that it’s a lot easier to pursue a collective action under the FLSA than a class action” under most other federal statutes.

To establish a collective action in an FLSA lawsuit in most federal courts, an attorney need only show that “a potential claimant is similarly situated to the named plaintiff,” a much lower standard than the numerosity and commonality requirements for a class action, Russell said. Once “creative plaintiffs’ lawyers realized” this, FLSA litigation took off, Russell told Bloomberg Law Dec. 6.

In fact, there’s been a 72.6 percent increase in the number of FLSA lawsuits filed in federal district courts from 2007 (when 4,391 were filed) until 2016 (when 7,579 were filed), based on figures from Bloomberg Law and the Federal Judicial Center. From January through November 2017, a total of 5,289 FLSA lawsuits were filed. Perhaps the likely drop in the yearly total for 2017 can be attributed to greater use of pre-litigation settlements.

“More attorneys have turned their focus to these cases” because of the potential for lucrative settlements in collective actions, Shadi said. As a result, “a lot more people on both sides who have taken these cases on” lack employment law expertise.

Some lawyers new to the employment field are “agreeing to terms that somebody more experienced would suspect will present challenges in getting approval” without realizing there “are holes” in the settlement agreement. Judges must do “more work” to “make sure that the interests of the class are being protected,” she said.

Clampdown on Fee Awards

In cases that proceed to court, the judges who evaluate settlement agreements are clamping down on awards of excessive attorneys’ fees and enhanced awards to named plaintiffs in collective actions, who typically put more time and effort into the case.

“Courts are concerned about too big a piece of the pie going to the attorneys or to the named plaintiffs,” Shadi said. “The courts are being more savvy.”

Judges also are examining confidentiality clauses, which Drogin called “a hallmark” of traditional settlement agreements. Employers normally don’t want the public to know that they’re paying out on claims, but courts are “refusing to approve settlements where employees are forbidden to discuss or disclose the terms of the settlement with current or former employees,” he said.

The FLSA “contemplates that the judge will be a gatekeeper to make sure that people who opt in to a lawsuit and are represented by a lawyer in a different part of the country that they’ve had little contact with” get a fair settlement, Russell said.

“If you’ve got a really large class, say 1,000 class members, the ability of a class counsel to communicate the nuances of the settlement is difficult,” he said. Limitations on confidentiality clauses provide “an extra method of protection for the court to know the class members can go to the record at the courthouse and see what happened.”

Courts Catch Up

Now that courts are overseeing FLSA settlements more stringently, “employers’ and employees’ lawyers are negotiating with the recognition that whatever they agree to is going to be public,” Russell said. “I think it probably makes the employer side more cautious.”

Russell estimated that courts usually rule on proposed settlement agreements within two weeks, so a court’s rejection of a settlement proposal means that “maybe the settlement is being slowed down by about 30 days.”

The tougher oversight seems to be here to stay, the attorneys predicted.

“The courts are just catching up” to the growth in FLSA collective actions, Russell said. “Now that they’re seeing more of them, and becoming more familiar with them, and seeing how other judges are handling them, they’re exercising a little more prudence in approving the settlements.”

To contact the reporter on this story: Gayle Cinquegrani in Washington at gcinquegrani@bloomberglaw.com

To contact the editor responsible for this story: Jo-el Meyer at jmeyer@bloomberglaw.com and Tony Harris at tharris@bloomberglaw.com

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