About Us  |  About Cheetah®  |  Contact Us

Broad release settling spat over noncompete agreement didn’t resolve subsequent FLSA claims

By Lisa Milam-Perez, J.D.

Because it couldn’t be certain that a release of FLSA claims purported to resolve a bona fide dispute over unpaid overtime wages due, the Fifth Circuit refused to find a purported private settlement of those claims enforceable. Concluding that the employer’s res judicata defense lacked merit too, the appeals court reversed a district court’s grant of summary judgment in the employer’s favor on overtime claims brought by two former employees who had signed a broad release in an earlier dispute related to a noncompete agreement (Bodle v. TXL Mortgage Corp., June 1, 2015, Graves, J., Jr.).

The employees had filed suit alleging their former employer failed to compensate them for overtime hours worked. In a motion for summary judgment, the employer raised a res judicata defense and also contended that the employees had waived any and all claims arising from employment when they resolved a prior state court action against the company. The state court litigation had originated when the company sued the employees for violating their noncompete agreements, having resigned a year earlier to work for a competitor. The employees filed a counterclaim seeking a declaration that the noncompetes were unenforceable, and the dust-up ended in a private settlement, which included a broad general release of claims.

Martin not controlling. Although that lawsuit centered on the disputed noncompete agreement, the district court concluded that the resulting release barred the FLSA claims at issue here because the subject of unpaid wages and commissions came up in the course of the settlement negotiations, and yet the plaintiffs remained silent. The court applied the Fifth Circuit’s holding in Martin v. Spring Break ’83 Productions, LLC, which held a private settlement in a bona fide wage dispute amounting to a compromise of employees’ FLSA claims was enforceable despite the general prohibition against the waiver of FLSA claims. Significantly, though, in that case, the union (suing on its members’ behalf) had conceded that it was unable to confirm whether the employees actually worked on the days they claimed to have worked. Because the parties disputed the number of overtime hours allegedly worked by the employees and, consequently, the amount of unpaid wages due them, a compromise of claims was appropriate, the appeals court had found.

Such was not the case here, and the Martin exception did not apply. “Not only did the prior state court action not involve the FLSA, the parties never discussed overtime compensation or the FLSA in their settlement negotiations,” the Fifth Circuit explained. Here, the record was not developed as to the number of overtime hours worked and left uncompensated. “To deem the plaintiffs as having fairly bargained away unmentioned overtime pay based on a settlement that involves a compromise over wages due for commissions and salary would subvert the purpose of the FLSA: namely, in this case, the protection of the right to overtime pay.”

The parties did not specifically negotiate unpaid overtime in settling their noncompete dispute, so there was “no guarantee” that the employees had been compensated for the overtime allegedly due them under the FLSA. Consequently, the appeals court was unable to find that the release resulted from a bona fide dispute over overtime wages, in accordance with Martin. Therefore, the general prohibition against FLSA waivers applied, and the earlier release could not be enforced against the employees’ FLSA claims.

Res judicata defense fails. The employer could not prevail on its res judicata defense either. The state court action revolved around the noncompete agreement: the employer had to establish that there was a valid noncompete agreement and present evidence that the employees breached it. In this case, though, the employees had to prove that they worked overtime for which they were not paid. Because the two cases did not involve the same subject matter, the second suit was not precluded by res judicata.