On August 7, 2015, in Dorain Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015), the United States Court of Appeals for the Second Circuit held that the Fair Labor Standards Act (“FLSA”) is an “applicable federal statute” within the meaning of Federal Rule of Civil Procedure 41(a)(1)(A)(ii) (“Rule 41”). The practical import of this decision, at least within the jurisdiction of the Second Circuit, is that private parties cannot settle FLSA claims through a Rule 41 stipulation of dismissal with prejudice, but rather must obtain approval of the terms of the settlement from either a court or the U.S. Department of Labor (“DOL”).
In 2012, Cheeks filed a lawsuit against Freeport Pancake House under the FLSA and New York Labor Laws seeking overtime wages and alleging retaliation. After a period of discovery, the parties agreed on a private settlement and filed with the district court a joint stipulation and order of dismissal with prejudice pursuant to Rule 41. The court rejected the stipulation, holding that the parties could not enter into a private settlement of FLSA claims without obtaining approval from either the district court or the DOL. It therefore ordered the parties to “file a copy of the settlement agreement on the public docket,” and “show cause why the proposed settlement reflects a reasonable compromise of disputed issues….” To avoid disclosing the details of their settlement, the parties filed an interlocutory appeal to the Court of Appeals for the Second Circuit, arguing that FLSA claims could be privately settled pursuant to a Rule 41 stipulation without filing the settlement agreement with the court or obtaining court approval of its terms.
On appeal, the Second Circuit first noted that neither the U.S. Supreme Court nor any other federal Circuit Court of Appeals had addressed the precise issue before it. It then surveyed the applicable precedent among the district courts within the Second Circuit. Although those district courts were divided, most held that FLSA settlements required approval by the court or the DOL. The Second Circuit sided with the majority of its district courts, holding that the FLSA was an “applicable federal statute” under Rule 41 and therefore FLSA claims could not be settled without court or DOL approval. In reaching this holding, the Court noted the “unique policy considerations underlying the FLSA,” the primary purpose of which is to ensure fair pay for employees. According to the Court, this purpose would be frustrated by the absence of judicial (or DOL) oversight of FLSA settlements due to the inherent power imbalance in the employer-employee relationship.
In light of this decision, employers (especially those within the jurisdiction of the Second Circuit – New York, Connecticut and Vermont) should take note that settlement agreements resolving FLSA litigations may require court approval, the parties may therefore have to file the agreement with the court, and the agreement will thereby become available to the public. Employers should consult with experienced labor counsel not only to ensure that their wage-and-hour practices comply with FLSA guidelines, but also to effectively manage the settlement of FLSA claims.