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Court approval not required for pre-litigation settlement to release FLSA claims

By Robert Margolis, J.D.

A federal district court in New York has held that a pre-litigation settlement purporting to release an employer “from any and all claims and rights of any nature whatsoever” effects the release of FLSA claims even without district court or DOL approval. The court held that Cheeks v. Freeport Pancake House, Inc., which required court approval of a settlement releasing FLSA claims, does not apply to pre-litigation settlements that are not subject to Federal Rule of Civil Procedure 41. The court thus dismissed FLSA and state law claims by a former paralegal against her employer, holding that they were released pursuant to the parties’ prior pre-litigation settlement (Gaughan v. Rubenstein, July 11, 2017, Engelmayer, P.).

Payments below minimum wage. Before coming to work for the attorney, the employee had retained him to represent her in post-judgment proceedings after her divorce. He later hired the employee as a paralegal at the agreed rate of $17.50 per hour, with overtime at $26.50. However, she claimed he paid substantially below minimum wage. She also alleged that she worked on federal holidays without compensation, was not paid for overtime, and was denied requests for sick time and time off during certain holidays. The employee is a cancer patient who suffers from an autoimmune disease and, despite her difficulty performing strenuous tasks in cold weather, the employer allegedly assigned her tasks in a snowstorm or in “hurricane like” weather on several occasions. The parties ultimately had an argument that concluded with the employer firing her.

The settlement and release. The employee subsequently retained a law firm that negotiated a settlement on her behalf with the employer. The firm sent a demand letter seeking $34,847 in unpaid wages and liquidated damages, after which it negotiated an agreement with the employer to settle the employee’s claims for $18,000 and the forgiveness of unpaid legal fees from the divorce-related retention. The settlement agreement included a release by both parties of “any and all claims and rights of any nature whatsoever … that either could have asserted in any action ….”As the court summarized, the employee “thus agreed to release any and all claims against [employer], including any claims relating to her employment.”

The lawsuit. The employee nonetheless filed a pro se complaint, bringing FLSA, New York Labor Law, and state common law claims, which the employer moved to dismiss, asserting the settlement and release.

Applicability of Cheeks. According to the court, the viability of the employee’s claims turned on the applicability of the settlement and release. The employee argued that under Cheeks a settlement agreement that resolves FLSA claims pre-litigation cannot bind the parties unless a court or the DOL approves the settlement. After analyzing Cheeks and precedent outside of the Second Circuit, the court rejected that argument.

In Cheeks, the parties reached a settlement after litigation was filed, unlike in this case, where the employee and employer reached the $18,000 settlement before she filed suit. The Second Circuit in Cheeks held that Rule 41, which makes the ability of parties to dismiss litigation by stipulated agreement “[s]ubject to … any applicable federal statute,” applies to FLSA claims. Thus, “in light of the unique policy considerations underlying the FLSA,” the FLSA fits “within Rule 41’s ‘applicable federal statute exception.’” Cheeks, 796 F.3d at 306. Thus, the settlement of FLSA claims once a lawsuit is commenced, requires court approval, the Second Circuit held. Id.

The court interpreted Cheeks to apply “only to settlement agreements that occur within the context of Rule 41,” which does not apply to settlements “entered into entirely outside the litigation context, like the Agreement at issue here.” Thus, the employee could not rely on Cheeks to avoid dismissal, the court held.

The court noted that the Second Circuit has not considered whether court or DOL approval is required for pre-litigation settlements, and looked at cases from other circuits. The Fifth Circuit, in Martin v. Spring Break ’83 Prods., LLC, held that when a pre-litigation settlement results from negotiations between plaintiffs represented by counsel and their employer, FLSA claims may be released without approval. The Eleventh Circuit, in Lynn’s Food Stores, Inc. v. United States By & Through U.S. Dep’t of Labor, Employment Standards Admin., Wage & Hour Div., held that where plaintiffs were unrepresented, a pre-litigation settlement purporting to release FLSA claims was invalid. Though the outcomes of Martin and Lynn’s were different, the court here reconciled them by noting their “vastly different facts,” including that the Martin plaintiffs were “ably represented” when they settled and Lynn’s employees were not. In fact, Martin drew a distinction between settlements entered into by “counseled disputants” and potentially exploitative agreements imposed by employers on unrepresented plaintiffs.

Because in this case the employee was represented by counsel, the court found Martin to be more relevant than Lynn’s and upheld the employee’s settlement with her employer as effecting a valid release of her FLSA claims.

Duress. The employee also claimed that the settlement should not bar her claims because she executed it under duress—her lawyer did not discuss the agreement with her and pressured her to sign it within a matter of days under threat of withdrawing as her counsel. This created duress, she claimed, because she needed the money. The court held that those circumstances fail to constitute duress sufficient to void the settlement.