Generic, All-Encompassing Employment Releases May Not Actually Release All Employment-Related Claims, Including FLSA Claims

The Fifth Circuit Court of Appeals, which includes federal courts sitting in Texas, recently held that a generic, broad state court settlement release did not bar two former employees’ subsequent unpaid overtime compensation claims against their former employer, even though the parties discussed the topic of unpaid wages during settlement negotiations and the release specifically included all claims arising from the former employees’ employments with their former employer.

This case actually involves two lawsuits between the employees and their former employer. In the first lawsuit – filed by the employer in Texas state court – the employer sued the employees for breaching their non-competition agreements. Several months later, the employees and the employer entered into a settlement agreement wherein the employees released the employer from “all claims and causes of action related to or in any way arising from [the employees’] employment[s] with [the employer], whether based in … any federal, state or local law, statute or regulation.”

That same day, the employees filed a Fair Labor Standards Act (the “FLSA”) lawsuit against the employer in federal district court, alleging the employer failed to compensate them for overtime work as required by Section 207 of the FLSA. The employer sought to dismiss the lawsuit, arguing that the settlement agreements signed by the employees in connection with the state court lawsuit were valid and enforceable waivers of the employees’ FLSA claims.

The district court agreed with the employer because, among other reasons, the topic of unpaid wages for the employees’ commissions and salaries arose during the negotiations of the settlement agreement, yet the employees did not say anything about the amount they were entitled to under the FLSA. Therefore, the district court concluded the employees were aware of their FLSA claim and chose to release them by signing the settlement agreement.

On appeal, the Fifth Circuit reversed the district court’s opinion, recognizing that, while an exception exists to the general rule that FLSA claims cannot be waived, that exception did not apply to this lawsuit. The exception is set forth Martin v. Spring Break ’83 Productions, L.L.C., 688 F.3d 247 (5th Cir. 2012). In Martin, the court concluded that an unsupervised settlement that was reached due to a bona fide FLSA dispute over hours worked or compensation owed constituted a valid FLSA waiver.

The Fifth Circuit, however, did not find the Martin exception applicable to the instant lawsuit because the prior state court lawsuit did not involve the FLSA (i.e., it was a non-compete lawsuit) and the parties did not – before signing the settlement agreement – negotiate the amount of overtime pay that the employer owed the employees. For these reasons, the Fifth Circuit concluded that the state court settlement agreement was not reached due to a bona fide FLSA dispute. Therefore, the state court settlement agreement did not constitute a valid and enforceable FLSA waiver.

The practical effect of this case is that generic, all-encompassing employment releases will not likely be enforceable against FLSA claims, unless there is a bona-fide dispute about a claim for wages under the FLSA and the parties specifically negotiate the amounts due, if any, under the FLSA. In addition, to make certain FLSA claims have actually been released, the parties should obtain appropriate court approval of their settlement.

The case is Bodle v. TXL Mortg. Corp., No. 14-20224, 2015 WL 3478146 (5th Cir. June 1, 2015).