A recent Fifth Circuit Court of Appeals decision reinforces the Fifth Circuit’s willingness to enforce private settlements of Fair Labor Standards Act (“FLSA”) claims while simultaneously making clear that there are limits to such enforcement. To constitute a valid FLSA release, the employer and employee must have discussed the employee’s claim for unpaid overtime as part of settlement negotiations and the release and settlement must be designed to resolve that bona fide dispute as to FLSA liability.

In Bodle, et al. v. TXL Mortgage Corporation, et al., decided on June 1, 2015, the Fifth Circuit refused to extend its holding in Martin v. Spring Break ’83 Productions, L.L.C., 688 F.3d 247 (5th Cir. 2012), on the enforceability of private settlements of FLSA claims to a generic, broad release obtained through the private settlement of a state court lawsuit not involving FLSA or unpaid wage claims. In Bodle, the Fifth Circuit held that the generic, broad state court settlement release at issue did not result from a bona fide dispute regarding overtime wages and, therefore, did not bar the plaintiffs’ subsequent FLSA claims.

The case originated in the Southern District of Texas when two former employees sued their former employer and its president under the FLSA for unpaid overtime. The defendants moved for summary judgment, arguing, among other defenses, that the plaintiffs executed a valid and enforceable waiver in a prior state court action releasing all claims against the defendants arising from their employment. The employer defendant filed the prior state court action against the plaintiffs, asserting several state law causes of action arising from the plaintiffs’ alleged violations of non-disclosure, non-solicitation, and non-competition covenants. Applying Martin, the federal district court granted the defendants summary judgment, finding that the release in the state court action settlement agreement barred the plaintiffs’ subsequent FLSA claims because the settlement negotiations in the state court action involved a bona fide dispute as to wages owed to the plaintiffs. The district court reached this conclusion because the plaintiffs raised the issue of unpaid commissions and salary (but not unpaid overtime) during their settlement negotiations and were aware of their claims for unpaid overtime compensation prior to signing the settlement agreement, yet chose not to carve them out of the release.

The Fifth Circuit disagreed with the decision of the Texas district court, finding that its decision in Martin did not apply and should not be extended. In Martin, the Court held that a private settlement reached over a bona fide dispute regarding FLSA claims was enforceable despite the general prohibition against the waiver of FLSA claims. The Martin Court adopted the reasoning of a Texas federal district court, which held that parties may privately settle FLSA claims where there is a bona fide dispute as to hours worked or compensation owed. The Martin decision made the Fifth Circuit the first federal appellate court to enforce a private FLSA settlement, breaking from the long-standing precedent that settlements and/or waivers of FLSA claims must be approved by a court or the U.S. Department of Labor.

In Bodle, the Fifth Circuit determined that the Martin exception did not apply because the parties never discussed overtime compensation or the FLSA in their settlement negotiations and, thus, no bona fide dispute arose between the parties over the number of unpaid overtime hours or compensation due for unpaid overtime. The Court noted that the purpose of the FLSA would be subverted if it were to deem the plaintiffs as having fairly waived overtime claims based on a settlement that involved a compromise over wages due for commissions and salary.

While fact-specific, the Bodle decision reinforces the Fifth Circuit’s willingness to enforce private settlements of FLSA claims and provides further clarification on what the Fifth Circuit deems to be a bona fide dispute over hours worked or compensation due. A broad general release of claims obtained from an employee upon his or her separation of employment or as part of a settlement involving a non-FLSA matter will not suffice. Rather, there must be some discussion between the employer and employee regarding a claim of unpaid overtime and the release and settlement must be designed to resolve that bona fide dispute as to FLSA liability. To ensure maximum enforcement of their private settlements, employers would be wise to: (1) document their discussions with employees concerning the purported number of overtime hours worked and/or compensation owed for unpaid overtime; (2) recite the existence of the bona fide dispute in the release or settlement agreement; and (3) delineate in the release or settlement agreement the monetary portion being paid to the employee to resolve the bona fide dispute.