Settlement agreements in Fair Labor Standards Act (FLSA) cases may soon receive a makeover. On February 4, 2020, the Second Circuit Court of Appeals rejected the "proportionality rule," under which federal trial courts often cap plaintiff's attorney fees at one-third of the total settlement payment. Now, the proportionality rule may be a thing of the past.
Unlike settlements in most cases, settlements in FLSA cases require approval by either a judge or the U.S. Department of Labor. See Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015). The standard for approval is fairness. Whether a settlement agreement is fair has historically depended upon, among other things, the proportion of settlement funds paid to the plaintiff's attorneys.
Not anymore, said the Second Circuit in Fisher v. SD Protection Inc. The case involved a total settlement payment of $25,000, with $2,000 going to the plaintiff and $23,000 going to the plaintiff's lawyers. The District Judge assigned to the case cited the proportionality rule for determining that the settlement agreement was unfair. He ordered the modification of the settlement agreement so that the plaintiff received approximately $15,000 and the plaintiff's attorneys received the balance of the settlement funds.
The Second Circuit reversed. Fisher reasoned that the proportionality rule discourages attorneys from taking lower-value, "run of the mill" FLSA cases with relatively low damages ceilings. The Second Circuit also warned that District Courts do not have the authority to rewrite objectionable settlement terms in FLSA cases. Instead, says Fisher, District Courts should return an unfair settlement agreement to the parties for renegotiation.
Fisher may change FLSA litigation as we know it today. With the proportionality rule gone, plaintiffs' attorneys may be more willing to take on less lucrative cases, which could lead to more FLSA lawsuits. In addition, District Courts may become less inclined to reject settlements with disproportionately high attorneys' fee awards.
Employers should consider the effects of Fisher before their next FLSA case. Among other things, the timing of settlement may now become critical. A settlement agreement involving a FLSA plaintiff may look very different depending upon when the parties reach settlement during the course of their litigation. Fisher may open the door for large attorneys' fee awards after substantial discovery or motion practice, even where the settlement payment to the plaintiff is relatively modest.
While FLSA litigation may soon change, one thing remains the same – the best way an employer can avoid paying a plaintiff's attorneys' fees is to prevent a FLSA violation in the first place. In light of Fisher, employers should evaluate their overtime exemptions and other wage and hour practices to ensure FLSA compliance. Employers with questions about Fisher or wage and hour requirements may contact Nicholas M. Reiter at nmreiter@Venable.com or Allison B. Gotfried at abgotfried@Venable.com.