Last month, a federal district court in Maryland rejected a proposed FLSA settlement as unreasonable based on the amount of the proposed attorney’s fees.  In Gionfriddo v. Zinc, et al., the Court compared the amount the individual plaintiffs were to recover ($15,000.18) to the proposed attorney’s fees ($100,000), and found the disproportionate figures unpalatable.  Review of attorney’s fees provisions in pure-FLSA settlements occurs when settling parties submit their agreement to the court for approval as a “fair and reasonable compromise” of a bona fide dispute.  Without such approval, there is a significant risk that the plaintiff will have been deemed to have never waived their FLSA claims, and thus can sue their employer again even after already having received a payment pursuant to settlement.

In rejecting the proposed settlement, the Court here used the lodestar method to evaluate the plaintiffs’ proposed attorney’s fees.  To determine the reasonable hours expended and a reasonable hourly rate, the Court considered “the amount in controversy and the results obtained in the case.”  In doing so, the Court found that the low recovery for Plaintiffs compared to the high attorney’s fees was improper.  The Court noted that “because the proposed settlement agreement provided a fee award greatly in excess of the amounts to be paid to the individual plaintiffs, that request was likely not reasonable.” 

The Court rejected Plaintiffs’ position that comparing the damages award to the attorney’s fees was improper.  In doing so, the Court adopted the “proportionality” approach to the loadstar analysis.  The Court noted that because Plaintiffs obtained only a partial victory through summary judgment, the proposed fees were unwarranted.  By accepting a small percentage of the maximum available recovery, the Court held that Plaintiffs’ attorney achieved only a limited success.  Therefore, awarding the hours expended for the entire case would be unreasonable.   The Court directed the parties to reassess the proposed fees to account for the degree of success achieved by Plaintiffs or face a hearing on the issue of damages and fees. 

There is good news and bad news for employers in this opinion.  On the one hand, it can help employers negotiate settlements with lower fee amounts -- and thus a lower total payout -- when the plaintiff achieves, or appears headed to achieve, only partial success.  On the other hand, this ruling, if followed by other courts, makes it more difficult to settle FLSA cases because it demonstrates a reluctance to approve relatively early settlements where the payment to the plaintiffs is less than the payments to the attorneys. 

Such reluctance may be misplaced.  Here, the Court applied the stringent standard for approving class action settlements under Federal Rule of Civil Procedure 23.   For class actions under Rule 23, a court may compare the proposed payment to the class with the proposed attorney’s fees.  A disproportionate attorney’s fee award may suggest a “collusive settlement,” which may be rejected.  This serves to protect absent class members.  This concern, however, is nonexistent in FLSA collective actions, because those who did not opt in to the case are not bound by the settlement.  Further, several courts have recognized that whether a compromise of a claim for back pay is a “fair and reasonable” has nothing to do with the amount of attorneys fees in the settlement.  So long as the money received by the plaintiffs is sufficient given the maximum value of their claim and the risks they face, a settlement should be approved as “fair and reasonable,” even if the attorney’s fees are high.

To avoid this situation, employers should ensure that FLSA settlement agreements provide that the underlying agreement is enforceable even if a court rejects or reduces the proposed attorney’s fees, and that plaintiffs’ counsel are obligated to dismiss the case even with a reduced fee amount.  Employers also should consider other creative approaches to avoid a court rejecting settlements due to attorney’s fee agreements that could be considered disproportionate.