SECOND CIRCUIT KNOCKS OUT PRIVATE FLSA SETTLEMENTS UNDER RULE 41 WITHOUT COURT OR DOL APPROVAL

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Federal courts have been paying closer attention to the terms of FLSA settlements and have increasingly declined to approve them. Some parties have tried to avoid a judicial KO by entering private settlements and filing a simple stipulation of dismissal with prejudice.

The Second Circuit recently landed a knockout punch to this tactic when, on an issue of first impression among circuit courts, it ruled that a former employee and a restaurant may not stipulate to dismissal of  an FLSA action with prejudice pursuant to Federal Rule of Civil Procedure 41(a)(1)(A) without court or Department of Labor approval of the underlying private settlement. Cheeks v. Freeport Pancake House, 25 WH Cases 2d 138, 2015 BL 254006 (2d Cir. 2015).

Hands Off or On?

A federal district court refused to accept the parties’ private settlement without court approval. Rather than disclose the terms of their settlement, the parties sought an interlocutory appeal of the question of whether FLSA actions are an exception to Rule 41’s general rule that parties may stipulate to the dismissal of an action without involvement of the court.

Rule 41(a)(1)(A) states: “Subject to … any applicable federal statute, the plaintiff may dismiss an action without a court order by filing: … (ii) a stipulation of dismissal signed by all parties who have appeared.”

The Second Circuit noted that although the U.S. Supreme Court and federal appeals courts have previously decided whether private FLSA settlements are enforceable in various contexts, they have not addressed this precise issue. District courts within the Second Circuit “have grappled with the issue to differing results,” the appellate court said.

The Knockout

The Second Circuit sided with the majority of district courts within the circuit that continue to require judicial approval of private FLSA settlements, because without it, “employers may be inclined to offer, and employees, even when represented by counsel, may be more inclined to accept, private settlements that ultimately are cheaper to the employer than compliance” with the act.

The appellate court found that these cases, read in light of the unique policy considerations of the FLSA, place the act within Rule 41’s “applicable federal statute” exception, such that “stipulated dismissals settling FLSA claims with prejudice require the approval of the district court or the DOL to take effect.”

The court discussed decisions that “underscore the need for judicial approval” of FLSA settlements involving highly restrictive confidentiality provisions, global releases, provisions allowing employees’ attorneys to recover a substantial percentage of the recovery without adequate documentation, and pledges not to represent anyone bringing similar claims against the employer.

Aftereffects

The Second Circuit’s ground-breaking decision may have far-reaching effects. Other circuits may similarly knockout the option of settling FLSA cases through stipulations of dismissal with prejudice by requiring court or DOL approval. The decision may open the door for applying the same approval requirement to agreements settling non-FLSA employment claims, based on analysis of the important policy considerations underlying the relevant statute.

Because the Second Circuit left open the question whether parties may settle such an action by entering into a dismissal “without prejudice,” there may be an uptick in litigants within the circuit utilizing this method, even though it would not foreclose a similar future lawsuit.

At least within the Second Circuit, three provisions that most employers seek in resolving an FLSA action—settlement confidentiality, a global release of claims not related to wage/hour issues, and a pledge not to represent anyone bringing similar claims against the employer—will be more difficult to obtain, given the court’s highly critical discussion of them. 

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