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Fifth Circuit Finds Unsupervised FLSA Settlement Enforceable

Following the Supreme Court’s decision in Brooklyn Savings Bank v. O’Neil, 324 U.S. 697 (1945), the rule has been that settlements of claims under the Fair Labor Standards Act (“FLSA”) must be supervised by the Department of Labor (“DOL”) or by the courts. In Brooklyn, the U.S. Supreme Court held that employees could not privately release their rights under the FLSA, reasoning that unequal bargaining power existed between employer and employee. In 1982, the Eleventh Circuit Court of Appeals reaffirmed that private parties could not settle claims under the FLSA except with the supervision of the DOL or the court. See Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982). Based on this line of cases, employers and their lawyers have been left with the option of either obtaining supervision of the release of FLSA claims from the DOL or the courts, or running the risk of further litigation on the same FLSA claims. The recent landmark decision in Martin v. Spring Break ’83 Productions, L.L.C., 688 F.3d 247 (5th Cir. 2012) found an unsupervised FLSA settlement to be enforceable – challenging the supervision requirement in Lynn‘s Food Stores.

Martin v. Spring Break ’83 Productions, L.L.C.

In Martin, the Fifth Circuit determined that the FLSA settlement agreement was enforceable, even though it had not been supervised by the DOL or the courts.

The plaintiffs in Martin were unionized lighting and rigging technicians in the film industry. The Plaintiffs claimed that the defendants failed to pay plaintiffs wages for certain hours worked, and plaintiffs filed a grievance regarding the unpaid wages with their union, the International Alliance of Theatrical Stage Employees, Local 478 (the “Union”). The Union representatives investigated the claims and ultimately concluded that it was impossible to determine whether or not the plaintiffs had actually worked the hours they claimed to have worked. Eventually, the defendants and the Union entered into a settlement agreement regarding the unpaid wages and plaintiffs received settlement payments.

Before the settlement agreement was finalized, however, plaintiffs decided to hire an attorney and file a private lawsuit against the defendants for the unpaid wages under the FLSA. The district court granted summary judgment in favor of the defendants stating the settlement agreement between plaintiffs and defendants as to the settlement of FLSA claims was binding on plaintiffs.

On appeal, plaintiffs argued that the settlement agreement was unenforceable because it was not supervised by either the DOL or the courts. The Fifth Circuit rejected this argument, holding that the FLSA settlement agreement was enforceable. Relying on Martinez, the Fifth Circuit Court held that the FLSA settlement agreement was enforceable because it was a settlement predicated on a bona fide dispute about the time Plaintiffs worked and was not a compromise of guaranteed FLSA substantive rights. See Martinez v. Bohls Bearing Equip. Co., 361 F. Supp. 2d 608, 631 (W.D. Tex. 2005) (“[P]arties may reach private compromises as to FLSA claims where there is a bona fide dispute as to the amount of hours worked or compensation due”). Further, the Fifth Circuit Court reasoned, a private settlement of FLSA claims is enforceable when the settlement gives the employee everything to which the employee is entitled under the FLSA. See Thomas v. Louisiana, 534 F.2d 613, 615 (5th Cir. 1976).

The Fifth Circuit determined that the supervision requirement contained in Lynn’s Food Stores was unnecessary. The Court distinguished Lynn’s Food Stores on the facts, stating that the dispute in Lynn’s Food Stores arose outside of the litigation context, the employees seemed unaware of their rights under the FLSA and had not consulted with an attorney, and did not speak English. See Martin v. Spring Break ’83 Productions, L.L.C. 688 F.3d 247 (5th Cir. 2012). In contrast, the plaintiffs in Martin had hired an attorney, were aware of their rights under the FLSA, and brought a grievance and a lawsuit to recover their unpaid wages.

Eighth Circuit Requires Supervision

The Eighth Circuit, which governs disputes in Minnesota, generally follows the Lynn’s Food Stores approach requiring that FLSA claims be settled with the approval of either the FLSA, or found to be “fair” by the court. See McInnis v. Ecolab Inc., 2012 U.S. Dist. LEXIS 34835 at *2-5 (D. Minn. Feb. 17, 2012). As long as the court is satisfied that a settlement reached in adversarial proceedings represents a fair compromise of a bona fide dispute regarding the wages owed, the court will enter a stipulated judgment after scrutinizing the settlement for fairness. See id. at *4.

Tips for Employers

The Martin case was decided by the Fifth Circuit and is not controlling in Minnesota. As a result, the impact of the Martin decision on Minnesota cases is uncertain unless and until the Eighth Circuit adopts the reasoning in Martin. Accordingly, employers in Minnesota are left with the same question of how to handle the supervision requirement when seeking to settle FLSA claims.

Employers have a few options when negotiating and entering into FLSA settlement agreements:

1. Seek Supervision from the DOL or the Court. Employers who want to make sure that employees cannot later bring claims under the FLSA can seek to have the DOL or a court supervise the settlement. This would mean contacting the DOL or initiating an action in the applicable court. For obvious reasons, this option is not very appealing to employers. While seeking supervision may give an employer the peace of mind of preventing future FLSA claims by the employee(s), the DOL or court may disagree with the fairness of the settlement or even order an investigation or audit of the amounts owed. In addition, this approach will likely cost the employer more in attorney’s fees.

2. Forego Supervision and Obtain Written Assurances from the Employee. In the documents containing a release of FLSA claimss, an employer could require that an employee do any (or all) of the following:
a. Represent that there is a bona fide dispute regarding the validity and amount of the employee’s FLSA claims;
b. Represent that the employee has been paid for all time worked;
c. Represent that the employee did not work any additional time that is not reflected in the settlement payment;
d. Represent that the employee has been paid for all overtime pay owed; and
e. Sign an Affidavit and separate Consent Judgment stating that the settlement amount exceeds the amount of the unpaid wages that can be used by the employer in any subsequent lawsuit;

3. Forego Supervision and Allocate a Portion of Settlement Payment to FLSA Claims. Typically, in a settlement agreement, employers are paying the employee to release all the claims (including any FLSA claims) against the employer. By allocating a specific dollar amount to the FLSA claims, the employer may be able to later use this amount as an offset to any amount deemed owed for unpaid wages in any subsequent FLSA action. The danger of this approach, however, is that a court may later determine that the actual damages are greater than the specific dollar amount listed in the settlement agreement, placing the employer at risk for additional damages and penalties.

If you have questions about settling FLSA claims, please contact any of the Trepanier MacGillis Battina P.A. employment law attorneys.