Parties may now settle federal wage and hour claims under the Fair Labor Standards Act (FLSA) without court review or approval by using the offer and judgment procedure set forth in Rule 68 of the Federal Rules of Civil Procedure, following the recent federal appeals court’s decision in Yu v. Hasaki Rest., Inc., No. 17-3388-cv, 2019 WL 6646618 (2d Cir. Dec. 6, 2019). This represents a significant breakthrough for cases where a court may reject a settlement’s terms or where the parties wish to avoid the time and burden of court review of a settlement agreement resolving FLSA claims.
Background
In 2015, the United States Court of Appeals for the Second Circuit, which covers New York, Connecticut and Vermont, issued a decision in a case called Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015), that has had a disruptive effect on settlement of federal wage and hour claims under the FLSA. (See our previous Alert on Cheeks.) Under Cheeks, parties settling FLSA claims in federal court may not obtain dismissal of the case with prejudice—a basic component of the bargained-for exchange underlying any settlement—without submitting the settlement agreement for review and approval by the district court or the United States Department of Labor (DOL). Judges and the DOL have taken Cheeks several steps farther and have held that certain common settlement provisions, including confidentiality and general releases, will prevent approval. Since Cheeks was issued, attorneys on both sides have sought ways to avoid Cheeks review and thus avoid the procedural hurdles and substantive limitations on settlements of FLSA claims. Enter Yu.
Yu v. Hasaki Rest., Inc.
Yu started out as an ordinary restaurant wage-and-hour case. The plaintiff, a sushi chef, filed a lawsuit in federal court alleging violations of the overtime provisions of FLSA and state law. Soon after the filing of the complaint, the defendants sent the plaintiff a Rule 68 offer of judgment for $20,000 plus reasonable attorneys’ fees, which the plaintiff timely accepted. The parties then notified the district court of the accepted offer, following which the clerk ordinarily “must” enter judgment.
At that point, the case went sideways. The court ordered the parties to submit their settlement agreement for Cheeks review and approval. The parties first submitted a joint letter explaining their position that court approval was unnecessary and later submitted supplemental briefing addressing a 2017 statement by the Secretary of Labor that accepted offers of judgment in FLSA cases require court approval. Perhaps unsurprisingly, the court sided with itself over the parties and held that the accepted offer of judgment required court approval. The court then granted permission to the parties to file an interlocutory appeal, and they appealed to the Second Circuit.
With the plaintiff and the defendants on the same side of this appeal, the Court of Appeals appointed a public interest law firm to defend the district court’s ruling. The Secretary of Labor also submitted briefing.
The Court of Appeals’ Decision
On December 6, 2019, the Court of Appeals issued an opinion holding that Rule 68 offers of judgment settling FLSA claims do not require court approval. The court focused on the specific language of Rule 68(a), which directs that, once a party files the offer of judgment and notice of acceptance with proof of service, “[t]he clerk must then enter judgment.” This language, the court held, is mandatory. Cheeks did not apply because the decision in that case turned on the language of Rule 41(a)(1)(A), under which the parties’ ability to dismiss an action with prejudice is limited by “any applicable statute,” including FLSA. No such limitation appears in Rule 68. One judge dissented from the court’s holding and opinion.
The FLSA Settlement Landscape Post-Yu
Parties are now free to settle FLSA claims through Rule 68’s offer of judgment mechanism without the need to obtain court review or approval of the settlement terms. Defendants will need to decide whether they are willing to allow a judgment to be entered against them publicly, as required under Rule 68, in order to avoid the court review/approval process. Moreover, the Rule 68 offer and judgment procedure cannot be used to settle class or collective action claims, which still require court review and approval under Rule 23.
For parties seeking to settle and then dismiss with prejudice FLSA claims pending in federal court without following Rule 68, Cheeks remains good law. In those instances, review and approval by the court or DOL is still required.
An important question remains as to whether parties can enter in a pre-litigation settlement of FLSA claims and have that settlement, including the release of FLSA claims, be enforced in the event a later federal lawsuit is filed. In 2017, a district court judge in New York enforced a private settlement of FLSA claims, notwithstanding Cheeks, where the plaintiff had been represented by counsel, was aware of her FLSA rights, received significant consideration, and could not otherwise invalidate the settlement under ordinary contract principles (e.g., fraud, duress, etc.). See Gaughan v. Rubenstein, 261 F. Supp. 2d 390 (S.D.N.Y. 2017). As recently as February 2019, another district court judge endorsed the Gaughan approach, holding that private, pre-litigation settlement of FLSA cases should be analyzed on a case-by-case basis before being enforced. See Lee v. New Kang Suh Inc., No. 17-cv-9502 (NSR), 2019 WL 689085 (S.D.N.Y. Feb. 15, 2019). The Second Circuit has yet to weigh in on or approve this approach, but at least one federal court of appeals—the Fifth Circuit, covering Louisiana, Mississippi and Texas—has taken this approach since 2012.
For now, defendants facing FLSA claims, and indeed all legal claims, should consult with counsel before embarking on any settlement strategy.
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