Eleventh Circuit Reaffirms Necessity of Judicial Approval of FLSA Settlements

The Eleventh Circuit recently reaffirmed its stance that claims under the Fair Labor Standards Act (FLSA) cannot be settled without court or U.S. Department of Labor (DOL) approval. This decision comes in the wake of several recent decisions suggesting that a private settlement of FLSA claims is allowable in some circumstances. 

In Nall v. Mal-Motels, Inc., the Eleventh Circuit overturned a district court order upholding the private settlement of Nall's claim for unpaid overtime. The decision adopts the logic of Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982), which held that judicial or DOL approval was necessary for a lawful settlement of FLSA claims brought by then current employees. Nall extends this requirement to cover FLSA claims of former employees. In light of Nall, employers considering private settlement of FLSA claims in reliance on an emerging trend in the case law should reassess their approach to their settlement strategy. 

Nall worked for Mal-Motels as a front desk clerk and night auditor for 15 months when she quit after not being paid overtime. She hired an attorney who filed a lawsuit against the hotel and its owner claiming a violation of the FLSA and seeking payment for her unpaid overtime, liquidated damages, and attorneys' fees. The owner contacted Nall two months later and asked her to meet him without her attorney present to discuss a possible settlement. At that meeting, he offered Nall a check for $1000 and another $1000-2000 in cash if she would sign two documents he presented to her. They included a voluntary dismissal of her case and a letter to her attorney telling him the case had settled. No separate settlement agreement was signed. Nall testified later that she felt pressured to sign the documents and was in desperate need of the money as she was homeless at the time.

The voluntary dismissal was filed with the district court, which issued an order sua sponte disallowing the voluntary dismissal, because Nall was represented by counsel and had not received permission to appear without an attorney. The owner then hired a lawyer who filed a motion to enforce the settlement. After holding an evidentiary hearing, the magistrate judge issued a report recommending enforcement of the settlement, finding that the parties had reached a fair and reasonable resolution of their dispute. The district court adopted the report over Nall's objections and dismissed her claims with prejudice.

The Eleventh Circuit overturned that order. The appellate court concluded that the underlying reasons supporting the requirement of judicial approval outlined in Lynn's Food Stores also apply to settlements with former employees. The court cited the Supreme Court's decision in Brooklyn Savings Bank v. O'Neil, 324 U.S. 697 (1945) and stressed the importance of ensuring that the deterrent effect of the FLSA's liquidated damages provision is not circumvented by unscrupulous employers who take advantage of an employee (whether current or former) by settling FLSA claims privately for less than the employer would be liable for in court. 

The Court then concluded that, under the Lynn's Food Stores analysis, the settlement could not be viewed as a "stipulated judgment," particularly since the magistrate judge had approved the settlement agreement over the objections of Nall's attorneys. Accordingly, the Eleventh Circuit held that the district court should not have enforced the agreement, vacated the district court's order doing so, and remanded the case.

Nall runs counter to a trend in the case law illustrated by the Fifth Circuit's decision last year in Martin v. Spring Break '83 Productions, LLC, 688 F.3d 247 (5th Cir 2012). Martin upheld the privately-negotiated settlement of FLSA claims brought as part of a grievance filed under a collective bargaining agreement. The union negotiated the settlement with the employer after the employees had separately filed a lawsuit alleging FLSA violations. The Fifth Circuit upheld the lower court's grant of summary judgment to the employer on the basis of the settlement agreement for which judicial approval had not been sought. 

A recent Eastern District of New York decision, Picerni v. Bilingual Seit & Preschool, Inc., No. 12-cv-4938, 2013 WL 646649 (E.D.N.Y. Feb. 22, 2013), is another example of this trend. There, Judge Cogan vacated his prior order requiring plaintiff to file a motion to approve the settlement proposed in the plaintiff's prior notice of acceptance of offer of judgment under Federal Rule of Civil Procedure 68. The court accepted the parties' settlement of the matter without judicial scrutiny of the fairness of the settlement. In both Martin and Picerni, the courts limited Lynn's Food Stores to its "rather egregious facts" in which the employer had settled with unrepresented employees, many of whom did not speak English, for much less than warranted by the DOL investigation that was ongoing at the time, and which had uncovered numerous FLSA violations. One of the many open questions following Nall is whether courts will give a similarly restrictive interpretation of Nall, given its unusual fact pattern. 

The cases summarized above suggest that employers may want to reassess their strategy towards settlement of FLSA claims. Nall raises several legal and practical issues for employers wishing to arrange for private settlements of FLSA claims that have been negotiated at arm's-length with represented parties.  First, even in the Eleventh Circuit, seeking judicial approval is not a uniform requirement. For example, in cases where there is a bona fide dispute as to the amount owed the plaintiffs and the employer is not prepared to pay the plaintiff's full demand, courts in the Eleventh Circuit are likely to require judicial approval of any settlement of an FLSA claim, regardless of whether the plaintiff is a current or former employee. However, where the employer pays the entire amount demanded as wages and liquidated damages, but no attorneys' fees, the Eleventh Circuit has endorsed dismissal of the claim under Fed. R. Civ. P. 12(h)(3) without requiring judicial approval of the payment. Dionne v. Floormasters Enterprises, Inc., 667 F.3d 1199 (11th Cir. 2012). Nothing in Nall undermines this approach, which may be attractive to employers where the amount demanded is low and confidentiality of the payment is not important to the employer.

Nall is problematic for employers principally concerned about maintaining confidentiality of an FLSA settlement. At least in the Eleventh Circuit, Nall teaches that employers act at their peril in reaching a private settlement of an FLSA case with the stipulation that plaintiff's counsel will file a notice of voluntary dismissal under Fed. R. Civ. P. 41.    

Employers considering this approach in other jurisdictions should be mindful that the settlement agreement may not be enforceable in a later filed action by the employee. Some companies, after a careful risk assessment, may conclude that such an outcome is exceedingly remote and decide to pursue a private settlement, relying on the trend summarized above. This approach may be particularly appealing to employers operating in jurisdictions where courts typically refuse to place FLSA settlement documents under seal. In those jurisdictions, employers should be prepared to cite to the Martin and Picerni line of cases in the event of a sua sponte challenge from the court. The logic of these decisions may convince the court that judicial approval is unnecessary, thereby protecting the confidentiality of the settlement.

While the facts of Nall are unusual, the underlying issue is not. Employers increasingly face situations in which they have negotiated an arm's-length fair compromise of an FLSA claim with an employee who is represented by competent counsel. As some courts have recognized, the policy considerations underlying the rule announced in Lynn's Food Stores are typically not applicable in such situations. In our experience, lawyers on both sides of bona fide settlements often question the need to seek judicial approval. The Supreme Court recently denied a petition for certiorari in the Martin case, ensuring continued litigation over the question of whether to allow private settlement of FLSA claims without judicial approval in more conventional circumstances. A broad reading of Nall to impose a rigid rule requiring court approval in every case would be unfortunate. Such rules complicate the ability of parties to settle litigation through a reasonable compromise of the parties' positions.