Cracking the Door? The Eleventh Circuit Again Considers When Out-of-Court FLSA Settlements Are Enforceable

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In 1982, the Eleventh Circuit Court of Appeals held in Lynn’s Food Stores, Inc. v. United States that employers and employees cannot settle claims under the Fair Labor Standards Act (FLSA) unless (1) the settlement is supervised by the U.S. Secretary of Labor, or (2) a court enters a stipulated judgment after “scrutinizing the settlement for fairness.” Since then, most federal district courts (not just those in the Eleventh Circuit) have followed this ruling, routinely holding that out-of-court settlement agreements, to the extent that they purport to waive FLSA claims, are per se unenforceable.

In a previous blog post, “Fifth Circuit Holds Private FLSA Settlement Agreement Is Enforceable,” we wrote about Martin v. Spring Break ’83 Productions, in which the Fifth Circuit Court of Appeals took a more pragmatic approach. The court recognized that Lynn’s Food Stores was based on bad facts and enforced a private settlement agreement of FLSA claims where employees represented by counsel accepted cash payments under an out-of-court settlement agreement negotiated by their union.

In our Martin blog post, we noted that the Fifth Circuit had distinguished Lynn’s Food Stores on its facts, explaining that in the Eleventh Circuit case the plaintiffs had not been represented by counsel when they first agreed to compromise their claims, had not been aware of their rights under the FLSA, and, in some instances, had not understood English when they signed the settlements at issue. In contrast, the plaintiffs in Martin were represented by counsel and the union, and they obviously were aware of their FLSA rights. Overall, the Fifth Circuit seemed persuaded that there was little danger under the circumstances of the plaintiffs being disadvantaged by unequal bargaining power.

In the Martin post, we observed that Martin might usher in a new era in which out-of-court FLSA settlements could be enforced under some circumstances even without prior court approval. Now, in another case presenting apparently egregious facts, Nall v. Mal-Motels, Inc., No. 12-13528 (July 29, 2013), the Eleventh Circuit has elaborated on Lynn’s Food Stores.

Bad Facts . . .

The Mal-Motels case, like the 31-year-old precedent it followed, presented some facts that are troubling on their face. Candace Nall, a former motel employee, sued Mal-Motels and its owner, Mohammad Malik, accusing Malik of inaccurately reporting her time and not paying her one-and-a-half times her regular hourly wage for the hours she worked in excess of 40 in one week. Malik conceded that he owed Nall some unpaid overtime compensation. Two months after Nall sued, Malik called Nall about settling her lawsuit and told Nall not to bring her attorney. Nall and Malik met at the motel without Nall’s attorney. Malik offered Nall a check for $1,000 and another $1,000 or $2,000 in cash—several thousand dollars less than what Nall claimed she was owed. Nall testified she felt pressured by Malik but agreed to his offer because she was homeless and needed money. Malik also had Nall sign a voluntary dismissal of her lawsuit and a letter to her attorney informing him that the case was settled. There was no written settlement agreement.

Malik later hired a lawyer, who filed a motion to enforce this settlement over the objections of Nall’s attorney. After conducting an evidentiary hearing, a magistrate judge recommended that the settlement be approved as a “fair and reasonable resolution of a bona fide dispute under the FLSA.” The district court adopted the recommendation and dismissed the case. Nall appealed.

. . . Lead to An Easily Distinguishable Decision . . .

On appeal, the Eleventh Circuit confirmed its view that there are only two ways to obtain enforceable private settlement agreements of FLSA claims as set out in Lynn’s Food Stores.  Because the agreement between Nall and Malik was not made under the supervision of the Secretary of Labor, it could be valid “only if the district court entered a ‘stipulated judgment’ approving it.” 

The Mal-Motels court observed that Lynn’s Food Stores “did not define the term ‘stipulated judgment.’” Mal-Motels did not define that term either. It did, however, conclude that a “stipulated judgment” could not be one based on a settlement agreement to which one party’s attorney objected because it was “reached without the attorney’s knowledge or participation.”  Because that was the case here, the Mal-Motels court vacated the lower court’s decision enforcing the settlement between Nall and Malik and remanded the case for further proceedings.

Mal-Motels presented apparently egregious facts that strongly suggested that the employer intended to pressure an employee into unfairly surrendering her full FLSA rights behind her attorney’s back. The facts in Mal-Motels are thus far more similar to those in Lynn’s Food Stores than to the facts in Martin, where fully informed and represented employees settled their bona fide disputes under the FLSA outside of court and then sought to renege on the deal.

. . . With A Tantalizing Hint.

Significantly, Mal-Motels does not reject the Fifth Circuit’s pragmatic approach in Martin.  Indeed, Mal-Motels may ultimately be more important for the question that the Eleventh Circuit identified and left open. After noting that the definition of “stipulated judgment” under Lynn’s Food Stores remains unresolved, the court stated in a footnote that it was not deciding “whether a judgment approving an out-of-court agreement entered with the assistance of counsel is a stipulated judgment even if the attorney later objects.” This remark appears to crack open the door to the possibility of enforcing Martin-like settlement agreements under Lynn’s Food Stores

Greater enforceability of out-of-court settlements of bona fide disputes under the FLSA would be a good thing. Invariably requiring prior judicial approval of all FLSA settlements is unnecessary. It causes uncertainty, such as when parties wish to settle claims without filing a lawsuit; discourages amicable settlement of disputes, especially in jurisdictions that prohibit filing confidential settlement agreements under seal; and uses up precious judicial time and resources. One hopes that the Fifth Circuit decision marks the beginning of a trend among Courts of Appeals to revisit the question of whether and when to enforce out-of-court FLSA settlements, especially now that the Supreme Court of the United States has denied the petition for a writ of certiorari in Martin.