But We Cut a Settlement and They Agreed to It!?!

As we have previously noted, employers are increasingly resorting to arbitration agreements, waivers and releases  and other strategies in an attempt to limit liability in employment matters and reduce or eliminate the risk and cost of litigation. With the explosion of litigation being brought under the Fair Labor Standards Act (“FLSA”), employers may be similarly tempted to “cut deals” to eliminate and reduce the risk of an FLSA claim. Similarly, with increased attention being paid to raising the minimum wage as well as President Obama’s recent Executive Order instructing the Secretary of Labor to re-examine exemptions, employers may be tempted to cut corners by striking private deals with employees. However, the FLSA is a different animal and employers must understand that unlike most other employment laws, the ability to obtain valid waivers and releases are severely limited under this law.

Since as far back as 1945, the U.S. Supreme Court has taken a dim view of employers’ private FLSA settlements. In the case of Brooklyn Savings Bank v. O’Neill, the U.S. Supreme Court invalidated a waiver signed by two employees after the employer paid them for their claimed unpaid overtime wages. After signing a waiver and receiving the settlement amounts, the employees turned around and sued for liquidated damages and attorney’s fees pursuant to the FLSA. The employers argued that the signed waivers barred a lawsuit on the employees’ FLSA claims. The Court rejected the waiver’s provisions, stating that waivers of private rights guaranteed by FLSA contradicted public policy and were void.

How then can an employer ever settle an FLSA claim? A 1982 appellate court decision known as Lynn’s Food Stores, which has been followed by most federal courts addressing the issue, says that FLSA claims can be settled in only one of two ways: (1) through payment by the employer to employees – under the supervision of the Secretary of Labor – of back wages owed them as determined by the Secretary, or (2) by means of a stipulated judgment entered by a court after the court first makes a determination that the terms of the parties’ proposed settlement are fair. This means that when settling FLSA cases already in litigation, the judge must be presented the full terms of the settlement and must conclude that under all the circumstances the proposed settlement is fair and equitable.

But what if a dispute is not already in litigation? Most employers will be legitimately hesitant (to say the least) to pick up the phone and call in the U.S. Department of Labor to ask them to supervise the settlement they are working out with their current or former employee. There has been some movement in a handful of recent court decisions suggesting confidential private settlements of FLSA claims should be enforceable, but so far they seem to remain the exception, not the rule.  If you find yourself needing to settle pre-suit FLSA claims, you should seek advice from an attorney who is well versed in the nuances of the FLSA.

Many state laws are no more helpful in this area. By way of example, the Massachusetts Wage Act specifically states “No person shall by a special contract with an employee or by any other means exempt himself from this section.” Essentially this means you can never pay an employee anything less than what the law provides. An employer who discovers wage and hour violations and wants to resolve them before a lawsuit is filed has some options, but most of them are not without risk. When faced with such a dilemma, employers should seek competent legal advice and not try to fix things on their own.