Before the Second Circuit’s recent ruling in Cheeks v. Freeport Pancake House Inc., 796 F.3d 199 (2015), it was unclear whether a privately-negotiated general release could be effective with respect to wage and hour claims asserted under the Fair Labor Standards Act (“FLSA”). In Cheeks, the Second Circuit affirmed the decision of the United States District Court for the Eastern District of New York and held that releases of FLSA claims, and dismissals of actions asserting such claims, must be submitted to a court or the Department of Labor for review to determine whether they are fair and reasonable. On January 11, 2016, the U.S. Supreme Court denied a petition for writ of certiorari, leaving the Second Circuit’s decision intact.
In Cheeks, a restaurant employee alleged that the defendants violated the FLSA and the New York Labor Law when they failed to pay him overtime wages and retaliated against him after he complained internally about improper wage practices. The parties reached a settlement agreement out of court and asked the district court to “so order” their agreement and dismiss the action with prejudice pursuant to Rule 41(a)(1)(A)(ii) of the Federal Rules of Civil Procedure, which permits parties to stipulate to the dismissal of an action without the involvement of the court subject to certain requirements or “any applicable federal statute.” Instead of “so ordering” the agreement, the court determined that the FLSA falls within the “applicable federal statute” exception to Rule 41(a)(1)(A)(ii) and ordered that the parties (a) file a copy of the settlement agreement on the court’s public docket, (b) demonstrate why their agreement reflected a reasonable compromise of the disputed issues, and (c) provide the court with additional information to explain why the proposed settlement was fair and reasonable. Instead of making their settlement agreement public, the parties sought interlocutory review by the Second Circuit.
As to the specific issue presented, the Second Circuit’s analysis turned on whether the FLSA constituted an “applicable federal statute” under Rule 41(a)(1)(A)(ii). Neither the United States Supreme Court nor any other circuit court had addressed this precise issue. In deciding that the FLSA constitutes an “applicable federal statute,” the court considered public policy implications and reasoned that requiring judicial or Department of Labor approval of settlement agreements is consistent with the FLSA’s purpose – to “prevent abuses by unscrupulous employers, and remedy the disparate bargaining power between employers and employees.” In discussing why judicial approval of such agreements is necessary, the Second Circuit noted what it perceived as “the potential for abuse in such settlements,” including overly broad confidentiality provisions, the use of general releases where narrower releases might be appropriate, and the setting of plaintiffs’ attorneys’ fees at inappropriately high rates.
While the precise issue before the court concerned the application of Rule 41, the import of Cheeks appears to be far broader. After reviewing various district court decisions concerning the enforceability of privately negotiated releases of FLSA claims, the court ultimately concluded that “[r]equiring judicial or DOL approval of such settlements is consistent with what both the Supreme Court and our Court have long recognized as the FLSA’s underlying purpose: ‘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.’” Id. at 206 (quoting A.H. Phillips, Inc. v. Walling, 324 U.S. 490 (1945)). In the wake of this decision, it must be assumed that privately-negotiated releases of FLSA claims will not be effective unless the terms of the settlement are presented to and approved by a court or the Department of Labor.