Editors’ Note: This article has been updated to reflect a Correction.

Wage and hour law practitioners who negotiate settlements of filed claims often consider the ramifications of a court-supervised settlement. While a supervised settlement helps to ensure enforceability, it opens up the terms of the agreement to judicial scrutiny and possible rejection. A recent federal case from New York may encourage a growing trend to reach private, non-supervised settlements. Considerations must be given to the risks associated with private settlements, including subsequent judicial rejection of the parties’ agreement.

Statutory Background

Enacted in 1938, the Fair Labor Standards Act (FLSA) requires covered employers to pay “non-exempt” employees a minimum wage for all hours and overtime for all hours worked in excess of 40 in a single workweek. In recent years, litigation under the FLSA has skyrocketed. In 2012, 8,152 FLSA cases were filed in the U.S. district courts—a 28.7 percent increase from 2011. The nature of claims often include violations for off-the-clock work, meal break deprivation, non-payment for preliminary and postliminary tasks, failure to pay overtime and misclassifications. The plaintiffs are employees and purported contractors on all ends of the spectrum from entry-level wage earners in the restaurant industry to well-paid workers in financial services and the pharmaceutical industry. In New York, there has also been a recent rash of litigation by interns.

Congress intended the FLSA to promote “the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers.” 29 U.S.C. §202(a). The U.S. Supreme Court has noted Congress’ intention “to protect certain groups of the population from sub-standard wages and excessive hours which endangered the national health and well being and the free flow of goods in interstate commerce.” Brooklyn Savings Bank v. O’Neil, 324 U.S. 697, 706 (1945) (footnote omitted). In light of the statutes’ mission to promote the “minimum standard of living,” courts historically have regulated private settlements of FLSA claims, largely to protect employees from settlements in which they give up wages to which they are entitled. Thus, most federal district and appellate courts have refused to enforce private settlement agreements for back wage claims under the FLSA absent supervision by the Secretary of Labor or the courts. See Lynn’s Food Stores v. United States, 679 F.2d 1350, 1353 (11th Cir. 1982); see also Wolinsky v. Scholastic, 900 F.Supp.2d 332, 335 (S.D.N.Y. 2012) and Moreno v. Nassau County Country Club, No. 12 CV 5324, (E.D.N.Y. Sept. 26, 2013).

The ‘Picerni’ Decision

However, a more recent decision by the U.S. District Court for the Eastern District of New York in Picerni v. Bilingual SEIT & Preschool, 925 F.Supp.2d 368 (E.D.N.Y. 2013) offers a different view of the mechanics to reach federal wage and hour law settlements, one more closely aligned with New York state law, which does not require judicial or agency supervision of settlements of wage and hour claims brought under the New York Labor Law (Section 190 et seq.). See Wright v. Brae Burn Country Club, No. 08 Civ. 3172, 2009 U.S. Dist. LEXIS 26492, *11 (S.D.N.Y. March 20, 2009). According to the court in Picerni, the mere possibility of waiving future claims without court approval, i.e., the protection recognized in Brooklyn Savings Bank, does not automatically foreclose the parties’ ability to privately settle their FLSA claims, and litigants may settle an FLSA claim without Department of Labor supervision or judicial approval. 925 F.Supp.2d at 373.

The plaintiff in Picerni sued her employer, alleging failure to pay wages for hours worked, thus reducing her hourly rate below the FLSA minimum. Id. at 369. Before answering the complaint, the defendant-employer made an offer of judgment pursuant to Fed. R. Civ. P. 68, which plaintiff accepted. The court initially declined to enter judgment, finding that FLSA settlements must be court-approved absent supervision by the Secretary of Labor. Id. at *3. Yet, after the parties moved for court approval of their settlement, the court reconsidered its prior ruling and concluded: “I believe the parties can voluntarily dismiss an FLSA case without judicial approval—if the defendant is willing to undertake the risk of doing so.” Thus, the court ordered the entry of a judgment in accordance with the accepted offer of judgment under Rule 68.

As with the majority of decisions analyzing private settlements of FLSA claims, the court in Picerni discussed both Brooklyn Savings Bank, noted above, and D.A. Schulte v. Gangi, 328 U.S. 108 (1946), two leading Supreme Court cases (with origins in New York State). In Brooklyn Savings, the Supreme Court held that in the absence of a bona fide dispute between the parties concerning liability, an employee’s written waiver of the right to liquidated damages does not bar subsequent action to recover liquidated damages. 324 U.S. at 704. Then, in Gangi, decided one year later, the Supreme Court extended its ruling in Brooklyn Savings to hold that “the remedy of liquidated damages cannot be bargained away by bona fide settlements of disputes over coverage.” 328 U.S. at 114. Nevertheless, in Picerni, the district court reasoned that neither Brooklyn Savings, Gangi, nor their progeny expressly prohibited voluntary dismissals of FLSA claims under Rule 41 of the Federal Rules of Civil Procedure. 925 F.Supp.2d at 373.

The Picerni court joined the U.S. Court of Appeals for the Fifth Circuit in Martin v. Spring Break ’83 Productions, 688 F.3d 247 (5th Cir. 2012), in rejecting the body of case law which provides that FLSA settlements are unenforceable without Labor Department or judicial approval, that plaintiffs cannot accept offers of judgment and that parties cannot even voluntarily dismiss a FLSA case without court approval.

In Martin, four union-represented plaintiffs filed a grievance against their employer alleging failure to pay wages for work performed. 688 F.3d at 249. After a union representative investigated and determined that the allegations could not be proven, the union and the employer entered into a settlement concerning the disputed hours worked. Id. Before the union representatives executed the settlement agreement, the employees filed a lawsuit against the employer, among others, to recover unpaid wages. Id. at 249-50.

The Fifth Circuit affirmed the district court’s summary judgment for the defendants and held that a settlement entered into between plaintiffs’ union and the defendants was “an enforceable resolution of those FLSA claims predicated on a bona fide dispute about time worked and not as a compromise of guaranteed FLSA substantive rights themselves”—even though the settlement was never approved by the Labor Department or a district court. Id. at 255. Perhaps, the employees’ having a third-party representative participate in the negotiation and settlement enabled the circuit court’s conclusion, the absence of which may have yielded different results. In any event, the court in Picerni, citing to Martin, reasoned that “[i]t is hard to conceive of any reason why, if a court is presented with an eminently reasonable, albeit after-the-fact, settlement, it is precluded from giving it legal effect.” 925 F.Supp.2d at 374.

Prior to Martin, many courts followed Lynn’s Food, supra, for the proposition that private FLSA settlements require Labor Department or judicial approval. See, e.g., Manning v. New York Univ., No. 98 Civ. 3300, 2001 U.S. Dist. Lexis 12697, *35 (S.D.N.Y. Aug. 21, 2001). The facts of Lynn’s Food warrant attention and suggest possibilities of distinction. There, after the Labor Department found the employer to have violated the FLSA, and following the employer’s unsuccessful attempt to negotiate a resolution with the Labor Department, the employer settled with the affected employees for significantly less than the amounts found to be owed. Id. at 1352.

The employees were unaware of the Labor Department determination, none consulted a lawyer, and some who settled did not speak English. Given the procedural concerns surrounding the settlement, the U.S. Court of Appeals for the Eleventh Circuit found the case “illustrative of the many harms which may occur when employers are allowed to ‘bargain’ with their employees over minimum wages and overtime compensation[.]” Id. at 1354-55.

Thus, the circuit court affirmed the district court’s dismissal of the employer’s action seeking a declaratory judgment action against the Labor Department that the employer was absolved from liability pursuant to its written agreements with the employees. 679 F.2d at 1351-52. The court held that compromises of FLSA back wage or liquidated damage claims only are allowed when supervised by the Labor Department under 29 U.S.C. §216(c) or “a stipulated judgment entered by a court which has determined that a settlement…is a fair and reasonable resolution of a bona fide dispute[.]” Id. at 1355. The Picerni court acknowledged the Lynn’s Food decision but confined it “to its rather egregious facts.”

Practical Considerations

Despite the Martin and Picerni decisions, the law remains unsettled regarding whether the FLSA requires either Labor Department or court approval of settlements. Further, the Supreme Court declined to review Martin in December 2012, and Picerni has not been appealed to the U.S. Court of Appeals for the Second Circuit. Guidance for a definitive answer is needed as evidenced by the dicta of several more recent decisions by New York federal district courts. See Lliguichuzhca v. Cinema 60, No. 11 Civ. 4486, 2013 U.S. Dist. Lexis 79543 (S.D.N.Y. June 5, 2013) (“We begin by noting that it is not clear that judicial approval of an FLSA settlement is legally required”); Files v. Federated Payment Systems USA, No. 11-CV-3437, 2013 U.S. Dist. LEXIS 66413 (E.D.N.Y. April 2, 2013) (“It is well settled in this Circuit that judicial approval of, and public access to, FLSA settlements is required”).

Given this uncertainty, employers have typically hesitated to settle claims with employees through any means other than litigation, fearing the risk of a subsequent suit by the same employees, including claims for liquidated damages by the same employees following settlement. Other risks facing employers include the chance a court might later open up the terms of the settlement agreement if the employer seeks to enforce a confidentiality provision breached by the employee. Furthermore, were a court to later reject a private agreement, the settling plaintiff(s) may feel empowered to negotiate more favorable terms using the court’s rejection as leverage.

Until guidance from the Second Circuit or U.S. Supreme Court issues, great caution is needed to consider out of court pre-litigation settlements or private settlements post-filing but pre-answer. Both the risks and rewards to private FLSA settlements should be considered. Specifically, when subsequently litigated—by the plaintiff seeking additional recovery or the employer seeking to enforce a term of the settlement agreement—a court might reject the agreement thus re-entrenching the employee in a negotiating posture.

On the other hand, it is greatly advantageous to an employer to settle a case pre-litigation or at the early stage of litigation. Were a private settlement (not with the Labor Department) reached, the involvement of counsel, and particularly plaintiff’s counsel who is experienced in wage and hour practice, or a third party such as a union representative, might be influential to withstand subsequent court scrutiny. Furthermore, the actual terms of the agreement including “recitals” to establish the pre-settlement background is important. Finally, the level of sophistication of the parties involved also could be a factor affecting enforceability.

Mitchell Boyarsky is a director in the Gibbons employment and labor law department. Lindsay J. Jarusiewicz, an associate at the firm, assisted in the preparation of this article.