In an interesting case, the Fifth Circuit has addressed the issue of whether an employer may take, as an offset, severance payments that were given to an employee under a severance agreement, against an allegation that the employee is due overtime pay.  The Court rejected the employer’s attempt for offset, holding explicitly that such attempts, or other counterclaims, are not allowable in the context of an FLSA lawsuit.  Therefore, the Court reversed the federal district court, which had held that the employee’s potential overtime claim (even including liquidated damages) was not equal to the aggregate compensation she received in the severance package.  The case is entitled Martin v. Pepsi Americas, Incorporated.

The employee was a Route Settlement Clerk, an hourly job and was entitled to overtime pay.  When she was promoted into a supervisory position, she was changed over to salary and did not then receive overtime.  A layoff ensued two years later and she agreed to accept a severance package.  In exchange, the employee signed a Release in which she agreed to waive her rights to sue under a number of laws as well as agreeing not to file any lawsuits/actions related to her employment.  Notwithstanding the agreement or the compensation that she enjoyed receiving under it, the employee filed an overtime action under the FLSA, as well as state law claims for fraudulent misrepresentation.

The Company moved quickly to dismiss, asserting an offset theory.  The Company showed that the severance benefits aggregated to almost $24,000, while the total theoretical claim for the overtime, plus the liquidated damages, would be approximately $19,000.  On that basis, the district court dismissed the case.  Plaintiff appealed.

The Fifth Circuit found that the offset was illegal under the statute.  The Court stated that “generally speaking, courts have been hesitant to permit an employer to file counterclaims in FLSA suits for money the employer claims the employee owes it, or for damages the employee’s tortuous conduct allegedly caused.”  Although not outcome determinative, the Company had claimed the offset as an affirmative defense, rather than a counterclaim.

In sum, the Court held that the severance monies were not given as wage payments, whether in advance or in any other form, but were for a releases of claims.  The Court found that the issue of whether the employee breached her agreement with the Company to not sue was for another court or forum to determine, but did not affect her FLSA claims.

This is a dangerous precedent for employers, but one which they must be keenly cognizant of. It is not sufficient to “merely” secure a Release which includes the FLSA; such settlements.  Releasing FLSA claims, must be first approved by a court to be legally sustainable.  An ordinary Release will not bar future FLSA claims.