How to Draft an FLSA-Compliant Settlement Agreement, Part 1

Introduction

The standard agreement templates used for settling discrimination and other types of employment cases routinely include a number of broad-based provisions designed to protect employers from all harms that a settling employee-plaintiff might possibly bring to bear in the future.  Illustrative are the waiver and release provisions in these agreements.  They typically read like an encyclopedia, chronicling and barring every conceivable claim that an employee could conjure up against the employer following settlement.  The nondisclosure provisions in these agreements are comparably all-encompassing. They regularly include kitchen-sink styled definitions of “confidential information” and make all such information off-limits to the settling employees for all future use and disclosure purposes (often with steep penalties in the event of breach).

The obvious pro-employer slant of such agreement clauses notwithstanding, they have become the norm.  Employees voluntarily agree to them as a matter of course. But however acceptable such settlement terms have become in other litigation contexts, they simply do not fly in most cases involving wage claims under the Fair Labor Standards Act (FLSA).[1]  Below we explain why.

Legal Backdrop

Employment law practitioners have long understood that FLSA wage claims may not be included in the waiver and release (hereinafter, “Release”) clauses of settlement agreements used to resolve cases involving employment discrimination and other non-wage-related claims.  The basis for this longstanding rule is the “uniquely protective” nature of the FLSA, under which Congress sought to prevent abuses arising from the inherently unequal bargaining power of employers vis-à-vis their employees.[2] Less well understood, however, have been the standards governing settlement agreements when FLSA wage claims are the very claims being litigated and settled.

The Second Circuit’s Landmark Dorian Cheeks Decision

On August 7, 2015, the Second Circuit Court of Appeals rendered the first Circuit Court-level decision to provide comprehensive guidance in this area in more than three decades:  Dorian Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015) (“Dorian Cheeks”).  The impact of the Dorian Cheeks decision is three-fold:

1. First, the case held, as a matter of first impression among all Circuit Courts, that absent a district court’s official approval, a privately-negotiated settlement agreement between parties to an FLSA wage claim litigation will not support a stipulated dismissal with prejudice of the case under Federal Rule of Civil Procedure (FRCP) 41(a)(1).[3]
2. Second, the decision fortified (and expanded to the Second Circuit) the majority position of Circuit Courts throughout the country: that waivers of FLSA wage claims contained in non-court approved settlement agreements are unenforceable and will not bar settling employee-plaintiff(s) from reasserting their same claims against the employer for additional consideration in the future.[4]
3. Third – and perhaps most significant for practitioners going forward – the Second Circuit’s decision confirmed that a district court must subject a proposed FLSA settlement agreement to “exacting scrutiny” to evaluate whether it represents a “fair and reasonable” resolution of the underlying claims, before the court may properly approve the agreement.[5]

As to this third point, the Second Circuit examined the bases under which several recent district courts had rejected proposed FLSA litigation settlement agreements.  In doing so, the Second Circuit expressly endorsed these courts’ approach and concluded that their rulings “highlight[ed] the potential for abuse in such settlements, and underscore[d] why judicial approval in the FLSA setting [was] necessary.”[6]

A review of these endorsed court rulings reveals two specific settlement agreement clauses that are particularly susceptible to courts’ rejection in the FLSA litigation context:  the Release and the nondisclosure provision.  In Parts 2 and 3 of this series, we will examine recent court cases that have rejected such provisions and offer practical guidance for the drafters of future FLSA settlement agreements that will secure court approval, support a dismissal with prejudice of the underlying FLSA litigation and act as a legally enforceable bar to future FLSA claims by the same settling employee-plaintiffs.

[1] As used herein, the term “wage claims” or “claims” means allegations of unpaid minimum wages and/or overtime under 29 U.S.C. §§ 206 and/or 207, where the claims are asserted under 29 U.S.C. § 216(b) and involve a “bona fide” dispute – meaning a factual dispute, such as over the number of hours worked or the amounts owed for such work.  Beyond the reach of this column are DOL-sponsored wage claim waivers reached pursuant to proceedings under 29 U.S.C. § 216(c) and the additional procedural prerequisites to final litigation dismissal in FLSA collective actions and hybrid FLSA/state wage law class actions, such as notice to collective/class members, opt-in/opt-out consents, and the like – which, in the latter context, implicate Federal Rule of Civil Procedure (FRCP) 23(e) prescriptions, and, in both contexts, would follow courts’ review and preliminary approval of a proposed settlement agreement under the standards discussed herein.

[2] See Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697 (1945); D.A. Schulte, Inc. v. Gangi, 328 U.S. 109 (1946).

[3] FRCP 41(a)(1) provides that, subject to certain exceptions not relevant here, an action may be dismissed “without a court order” by “a stipulation of dismissal signed by all parties.”  The Dorian Cheeks court provided a 1945-to-present, comprehensive chronology and analysis of the lead decisions in this area, found that no Circuit Court had squarely addressed the FRCP 41(a)(1) question and established that an unapproved agreement cannot support a stipulated dismissal with prejudice in any type of FLSA litigation in the Second Circuit.  See 799 F.3d at 201-06.

[4] Dorian Cheeks, 799 F.3d at 201-03 (discussing Lynn’s Food Stores, Inc. v. U.S. Dep’t of Labor, 679 F.2d 1350, 1355 (11th Cir. 1982) (“Lynn’s”)); id., at 203, n.4 (citing Copeland v. ABB, Inc., 521 F.3d 1010, 1014 (8th Cir. 2008); Whiting v. Johns Hopkins Hosp., 680 F. Supp. 2d 750, 753 (D. Md. 2010), aff’d, 416 F. App’x 312 (4th Cir. 2011); Walton v. United Consumers Club, Inc., 786 F.2d 303, 306 (7th Cir. 1986)).   Although there is increasing uniformity among courts in all jurisdictions in this area – in line with the Second Circuit’s Dorian Cheeks decision, a Circuit-by-Circuit survey of all relevant cases is necessarily beyond the scope of this piece.  Employers settling FLSA wage claim cases in non-Second Circuit courts should consult with counsel knowledgeable of the most up-to-date standards in those jurisdictions before proceeding.  The Fifth Circuit has held, for example, that an agreement reached through union negotiations with an employer, involving resolution of both FLSA claims and parallel collective bargaining agreement grievances, is a legally enforceable bar to settling employees’ subsequent court-filed FLSA claims.  See Dorian Cheeks, 799 F.3d at 204 (discussing Martin v. Spring Break ’83 Prods, LLC, 688 F.3d 247 (5th Cir. 2012)).

[5] See Dorian Cheeks, 796 F.3d at 203 (quoting Lynn’s, 679 F.2d at 1355); id., at 206.

[6] Id.