Settlement Talk Over Sushi: The Second Circuit Set to Decide Key FLSA Settlement Issue

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Pat Ryan

Executive Summary:    Earlier this week, the Second Circuit Court of Appeals heard oral arguments regarding whether judicial review of a Fair Labor Standards Act (“FLSA”) settlement is required before entry of an offer of judgment pursuant to Rule 68 of the Federal Rules of Civil Procedure (“FRCP”).  While there is longstanding history mandating court approval of FLSA settlements, the majority of district courts in the Second Circuit—unlike most other Circuits—have allowed Rule 68 settlements absent judicial approval.  As such, employers in this Circuit have increasingly tried to use Rule 68 to avoid judicial scrutiny of settlement agreements.  After hearing oral arguments in Yu v. Hasaki Restaurant, Inc., 319 F.R.D. 111 (S.D.N.Y. 2017) this week, the Second Circuit appears primed to weigh in on this unsettled and controversial issue—which will determine whether judicial review or a system resembling private party contracting will govern in the Second Circuit. 

Background:    The Second Circuit’s consideration of this issue arises from Yu v. Hasaki Restaurant, Inc., a suit filed by a sushi chef against his previous employer for alleged underpayment of wages in violation of the FLSA.  To settle the case, Defendants offered $20,000, which Plaintiff accepted.  Plaintiff’s counsel notified the court that an offer of judgement had been accepted, but the district court ordered the parties to submit the agreement for court approval and to submit letters explaining why the settlement was fair and reasonable.  In response, Defendants’ counsel objected, arguing that the court lacked authority to review the offer of judgment because a Rule 68 judgment is mandatory, meaning the court is precluded from reviewing the agreement’s terms.  On April 10, 2017, the Southern District Court of New York, rejected Defendants’ argument and ruled that judicial review of an FLSA claim is required before entry of a Rule 68 judgment.

Judge Furman, writing on behalf of the Southern District Court of New York, relied heavily on the Second Circuit’s decision in Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015) to reach his conclusion.  In Cheeks, the court held that, absent court approval, parties cannot settle claims under the FLSA through a private stipulated dismissal with prejudice pursuant to Rule 41 of the FRCP.  In Yu, Defendants argued that the case was distinguishable from Cheeks because unlike Rule 41, the language of Rule 68 explicitly states that if a plaintiff accepts an offer, the clerk “must then enter judgment.” (emphasis added).  The court, however, emphasized that the FLSA was enacted to eliminate the often great inequalities in bargaining power between employers and employees and that Defendants cannot use Rule 68 as a means to avoid the protections that courts have set forth to even the playing field.  The Second Circuit, recognizing that there is “substantial ground for difference of opinion” on this issue, accepted the case for review.

On Wednesday, Second Circuit Judges John Walker, Guido Calabresi and Debra Ann Livingston sat for oral arguments in this case.  Defendants’ counsel argued that, since Rule 68 is not in conflict with the FLSA, the district court must enter the parties’ accepted Rule 68 offer of judgment.  The judges expressed skepticism, inquiring, “haven’t there been a number of exceptions made [in applying the plain language of Rule 68] with class actions and various things, so we haven’t interpreted [Rule] 68(a) as being that absolute, have we?” and “why shouldn’t this be treated in the way we have treated other such things [like] under Rule 41(a), for instance?”  Nonetheless, the judges showed equal scrutiny to an attorney for Public Citizen Litigation Group, who argued on behalf of the Plaintiff in support of the lower court ruling.  Counsel argued in favor of the longstanding principle that employees cannot waive their rights under the FLSA and that the FLSA protects employees by providing mechanisms which limit the parties’ ability to settle or compromise claims.  In response, the judges stated, “the text [of Rule 68] is pretty clear” and sharply asked, “[Why not] simply read policy into every situation that is compromised under Rule 68 and then simply require judge made approval in every case?”  Quite simply, the Second Circuit did not definitively tip their hand one way or the other.

Bottom Line:    The issue of whether an employer may settle employee FLSA claims without court interference remains an open question.  As noted in the Second Circuit’s decision in Cheeks and the Southern District of New York’s decision in Yu, the FLSA was enacted to provide protections to employees, and one of the longstanding protections has been judicial review of proposed settlement agreements.  On the other hand, Rule 68 was enacted to foster settlement and efficiency in the settlement process.  With the two underlying policies in conflict, the plain language of Rule 68 may be the catalyst that eliminates the judicial review requirement for FLSA settlements, at least in the Second Circuit.  If the Second Circuit overturns the Southern District’s decision in Yu, it will have a major impact on the landscape of FLSA settlements in the Second Circuit (and perhaps nationally).

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