Employer's Back Door Settlement Of FLSA Claim Backfires

by Akerman LLP - HR Defense

An employer's settlement of a Fair Labor Standards Act claim directly with a former employee rather than with the former employee's attorney was invalid and should not have been approved by the federal district court, according to a recent decision by the Eleventh Circuit Court of Appeals, Nall v. Mal-Motels, Inc. (11th Cir., July 29, 2013). 

Candace Nall worked for Mal-Motels, which is owned by Mohammad Malik.  Nall quit her job because she was not being paid overtime.  She then hired an attorney and filed suit against Mal-Motels and Malik. Malik, who apparently did not want to pay an attorney any more than he wanted to pay Nall overtime, filed an answer.  Malik then met with Nall to discuss a settlement of her lawsuit.  Malik told Nall she was "ruining his business" and proposed a settlement of two thousand dollars in exchange for a dismissal of the lawsuit.  Nall, who was homeless and needed the money, accepted the settlement and filed a voluntary dismissal of the case.  The court rejected the dismissal because it had not been filed by her lawyer.  Malik then hired a lawyer, who moved to enforce the parties' settlement.  At the hearing on the motion to enforce the settlement, Nall's attorney objected to the settlement, presumably because it did not provide the attorney a fee. Nevertheless, the court approved the settlement as "a fair and reasonable resolution of a bona fide dispute under the FLSA" and dismissed her complaint. 

On appeal, the Eleventh Circuit reversed.  The court began by reaffirming the rule stated in Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982) that back wage claims arising under the FLSA can be settled or compromised only by the Department of Labor or by a court-supervised settlement that results in a "stipulated judgment" after the court has scrutinized the settlement for fairness.  The settlement did not meet the Lynn's Food Stores requirement of a stipulated judgment because "it takes two (or more) to stipulate," the court wrote, "and a judgment to which one side objects is not a stipulated one."  Although Nall had agreed to the settlement, the fact that Nall's attorney objected to the settlement was significant: 

When a plaintiff's attorney asks the district court to reject a settlement agreement that was reached without the attorney's knowledge or participation, whatever else the judgment approving the agreement may be, it is not a "stipulated judgment" within the meaning of Lynn's Food.

Employers should take a couple of lessons from the Nall decision.  First, hire a lawyer if your company is sued under the FLSA.  A non-lawyer cannot represent a corporation and is probably unqualified to understand the rules regarding the settlement of FLSA cases.  Second, if the plaintiff is represented by an attorney, do not attempt a "back door" settlement directly with the plaintiff.  Cutting out the plaintiff's attorney may seem like a clever idea, but the plaintiff's attorney will not simply go away.  The attorney will fight for his fee even if it means objecting to his client's proposed settlement.  In the long run, you will pay more by doing what Malik did than by defending the case the right way.  But you don't have to take my word for it. The Eleventh Circuit's opinion in Nall begins with this observation:

This appeal grew out of an effort by two people to settle an FLSA lawsuit involving an overtime claim.  They attempted to settle the litigation without the advice and assistance of attorneys, which only led to the involvement of attorneys and more litigation.  The case presents issues about how a lawsuit involving an FLSA claim can be settled, and it demonstrates how a few dollars saved can lead to a lot more dollars spent.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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