August 20, 2015

Second Circuit Gives a Thumbs-Down to Private Settlement Agreements: What Nonprofits Need to Know Before Settling Federal Wage and Hour Claims

3 min

This article appeared in Association TRENDS on August 27, 2015.

Nonprofit employers sometimes struggle with whether to seek judicial or U.S. Department of Labor approval of their settlement agreements. Quite often, nonprofits and their employees alike prefer private, out-of-court settlements to maintain the confidentiality of their settlement terms and to avoid further motion practice before the court. A recent Second Circuit opinion resolved a conflict among district courts regarding the enforceability of out-of-court settlements for claims under the federal Fair Labor Standards Act (FLSA). Now, nonprofit employers that settle wage and hour claims out of court do so at their peril.

In Cheeks v. Freeport Pancake House, Inc., Case No. 14-299-cv, decided August 7, 2015, the Second Circuit held that settlement agreements for FLSA claims are unenforceable without prior approval from either a judge or the U.S. Department of Labor. The court focused on whether the FLSA constituted an "applicable federal statute" for purposes of Federal Rule of Civil Procedure 41(a)(1)(A). That rule permits parties to voluntarily dismiss a lawsuit by stipulation, subject to several other Federal Rules of Civil Procedure (none of which applied to Cheeks) or "any applicable federal statute."

Cheeks concluded that the FLSA meets Rule 41's definition of an applicable federal statute "in light of the unique policy considerations" for the law. The court cited a 1945 U.S. Supreme Court opinion holding that the FLSA was intended "to extend the frontiers of social progress by insuring to all our able-bodied working men and women a fair day's pay for a fair day's work." It further cited its own precedent, explaining that Congress designed the FLSA "to remedy the evil of overwork by ensuring workers were adequately compensated for long hours, as well as by applying financial pressure on employers to reduce overtime." With these principles in mind, the court determined that prior judicial or U.S. Department of Labor approval of settlement agreements is mandatory for federal wage and hour claims, because the FLSA qualifies as an "applicable federal statute" under Rule 41.

The Cheeks opinion is notable for several reasons. First, both the plaintiff and the defendants in Cheeks sought a private out-of-court settlement agreement, yet the district judge still demanded the parties file their settlement agreement on the court's public docket. Second, the Second Circuit expressly voiced its disapproval of global releases involving "unknown claims and claims that have no relationship whatsoever to wage-and-hour issues." Third, the court offered little guidance, beyond the remedial purpose of the FLSA, on why the law met the definition of "an applicable federal statute" under Rule 41, thereby leaving open the door for applying the same approval requirement to settlement agreements involving non-FLSA claims.

Time will tell whether Cheeks will pave the way for mandatory judicial approval of settlements arising under other federal employment laws, and, if so, whether global release agreements will become a thing of the past. For now, when negotiating settlements of FLSA claims, nonprofit employers should take into account that their settlement agreement will likely be a matter of public record, and they may be prohibited from obtaining a global release of claims. Of course, the best course of action is to avoid the FLSA claim in the first place. Accordingly, Cheeks provides a strong reminder to nonprofits to routinely review their wage and hour policies and practices and to consult with employment/human resource professionals as appropriate.