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Employer Law Report

Coming Soon to a Jurisdiction Near You (Hopefully), The Fifth Circuit Holds That a Private Settlement Agreement Dismissing FLSA Claims is Enforceable

Posted in Labor Relations

With Martin v. Spring Break ’83 Productions, LLC,, the Fifth Circuit put a much-needed (and 30-year-in-the making) dent in a long line of case law refusing to enforce private Fair Labor Standards Act (FLSA) waivers between employees and employers that are not approved by the Department of Labor (DOL) or by a court during litigation. This case is one that will be well-received by employers and, optimistically, followed by courts outside the Fifth Circuit, which governs Louisiana, Mississippi and Texas. With any luck, FLSA settlements will be increasingly private matters between employer and employee, like other agreements settling employment-related claims, and the requirement that FLSA claims be released only through long protracted and expensive litigation be the exception, not the rule.

The Road to Oscar – The History of FLSA Waivers:
One of the biggest complaints employers have about the FLSA is that the Depression-era piece of legislation has not kept up with the times and is fixed in the past. This is especially true because as the American workplace has undergone quite a facelift since the FLSA was signed into law in 1938, the FLSA has been much slower adapt to changes in technology, worker classifications, etc.

One area of concern is how employee FLSA claims are resolved. Dating back to 1945, the United States Supreme Court, in Brooklyn Sav. Bank v. O’Neill, defined when and how employees could release their FLSA claims. In Brooklyn Sav. Bank, the Court held that in "absence of a bona fide dispute between the employer and the employee as to liability, an employee’s written waiver of his right to liquidated damages under § 16(b) of the [FLSA] does not bar a subsequent action by the employee to recover such liquidated damages." The Court observed that waivers of private rights guaranteed by the FLSA were contrary to the public policies of the FLSA and void. The Court also noted that the rights afforded to employees under the FLSA, e.g., the right to be paid overtime for working more than 40 hours in a workweek, were mandatory and not something an employee could waive.

The next year, in D.A. Schulte, Inc., v. Gangi, an employer argued that his employees were not covered by the FLSA and refused to pay them overtime. After the employees threatened litigation, the employer paid the employees in return for a waiver releasing him of "any other or further obligations in connection [with the FLSA]." The employees later filed suit to recover liquidated damages under the FLSA. The employer argued that the employees’ claims should be thrown out because of the waivers. The Court disagreed and found the waivers invalid and opined that remedies under the FLSA "cannot be bargained away by bona fide settlements of dispute over coverage." The Court went on and noted that waivers of FLSA claims would frustrate the public policy of the FLSA because "the purpose of [the FLSA] which … was to secure for the lowest paid segment of the nation’s worker a sustenance wage, leads to the conclusion that neither wages nor the damages for withholding them are capable of reduction by compromise of controversies over coverage."

While the Court recognized that its decisions created an impediment to resolving FLSA claims short of full litigation, it rejected this practical challenge in favor of the public policies of the FLSA.

So, why such a rigid observation of the public policies in the FLSA? Well, to understand the Court’s reasoning in Brooklyn Sav. Bank and D.A. Schulte, Inc., it is important to look back to 1938 and remember what America looked like. In 1938, the Depression had been going on for nine years, and America was on the brink of World War II. Jobs were scarce, and the jobs that were available were largely manufacturing and dangerous. Because the number of workers far exceeded the number of jobs, employers could mandate dangerous working conditions, long hours and low pay, and employees could not do much about it.

As for legislation, the National Labor Relations Act (NLRA) had been passed in 1935 and allowed for unions, but there was no Equal Pay Act to guarantee equal pay. No Civil Rights Act to prohibit discrimination. No Occupational Safety and Health Administration (OSHA) to provide for workplace safety standards. Thus, the FLSA was passed to help further bridge the gap between the inequality of bargaining power between employer and employee and set standards to guarantee a minimum wage for employees, prohibit oppressive child labor, and provide a maximum work week, among other protections.

In construing the FLSA, courts sought to protect the public policies of the FLSA, especially regarding the inequality of bargaining power, but employers were rightfully hesitant to settle with their employees, or even with the DOL, over claims for backpay because they could never guarantee they would not later be sued for liquidated damages and/or attorneys’ fees. To encourage employers to agree to settlement with the DOL, Congress amended the FLSA in 1947 to allow employees to waive FLSA claims under the supervision of the Secretary of Labor.

Thirty-five years later in the 1982 case of Lynn’s Food Stores v. United States, the Eleventh Circuit recognized that an individual could release an FLSA claim through a court-approved stipulation. Lynn’s Food Stores, however, sent FLSA cases either to the DOL or to court─neither one a place many employers willingly go.

Accordingly, since 1982, most courts have recognized only two ways an employee can validly release FLSA claims. First, when the secretary of labor supervises the payment in full of a settlement reached between the employee and the employer. Second, through a judicially-approved stipulated judgment in which the employee files suit against the employer.

The PlotMartin’s Factual Background:
Well, this was the case until Martin. In Martin, the plaintiffs were employed as lighting and rigging technicians for a company called Spring Break Louisiana (SBL) for the filming of Spring Break ’83a "Coming Of Age Teen Comedy" starring John Goodman, Lee Majors, Erik Estrada, Joe Pantoliano and Downtown Julie Brown, just to name a few.

[Dramatic Pause – Yes, the star power is quite shocking.]

In any event, the movie was filmed from October through December of 2007. Plaintiffs were members of the International Alliance of Theatrical Stage Employees (IATSE), Local 478 (the Union), which had a Collective Bargaining Agreement (CBA) with SBL. Under the CBA, the Union was the exclusive representative of the employees in the bargaining unit, including the plaintiffs.

Toward the end of production, plaintiffs, along with some others, filed a grievance against SBL claiming they had not been fully paid for their work. A Union representative investigated the claims and determined that it would be impossible to determine whether or not plaintiffs worked the days they claimed. In the end, the Union and SBL entered into a settlement agreement regarding the disputed hours.

Before the settlement agreement was signed by the Union on Nov. 3, 2009, however, plaintiffs filed suit on June 16, 2009, against SBL for unpaid wages under the FLSA.

The Eastern District of Louisiana granted defendants’ motion for summary judgment, which the plaintiffs appealed to the United States Fifth Circuit Court of Appeals. The Fifth Circuit agreed with the trial court’s award of summary judgment and here is why.

The settlement agreement between the Union and SBL provided:

The Union on its own behalf and on behalf of the IATSE Employees agrees and acknowledges that the Union has not and will not file any complaints, charges or other proceedings against Producer, its successors, licenses and/or assignees, with any agency, court, administrative body, or in any forum, on the condition that payment in full is made pursuant to the terms of this Settlement Agreement.

The Settlement Agreement also gave the Union “full power and authority to enter into” it on behalf of IATSE employees, who were also bound by its terms.

To get around the Settlement Agreement, the plaintiffs argued that the Settlement Agreement was unenforceable because they did not sign it and did not agree to it. Importantly, plaintiffs never disputed they were paid in full for their claims pursuant to the terms of the Settlement Agreement and cashed their Settlement checks.

The Fifth Circuit held that the Settlement Agreement was enforceable, even though plaintiffs did not sign it, because plaintiffs were members of the Union, the Union had authority to act for the plaintiffs, and plaintiffs received their settlement payments pursuant to the Settlement Agreement and cashed their checks.

This seems like a no brainer, right? Well, as set forth above, case law prohibited this type of private settlement absent DOL or court approval, which plaintiffs relied on to argue that the Settlement Agreement, and thus their release of claims, was invalid because it was privately settled.

The Climax – The Fifth Circuit’s Holding in Martin:
The Fifth Circuit recognized that there is no binding precedent that resolved the issue of whether parties could settle FLSA claims involving a bona fide dispute over whether the plaintiffs worked on days for which they sought unpaid wages and thus sought to distinguish the case from Lynn’s Foods Stores. The district court adopted the holding and logic of Martinez v. Bohls Bearing Equip. Co., a 2005 case out of the Eastern District of Texas that held that “a private compromise of claims under the FLSA is permissible where there exists a bona fide dispute as to liability.”

The Martin court held that the payment offered to and accepted by plaintiffs, pursuant to the Settlement Agreement, was an enforceable resolution of plaintiffs’ FLSA claims predicated on a bona fide dispute about time worked and not as a compromise of guaranteed substantive rights themselves.

In a lengthy footnote, the Fifth Circuit distinguished Lynn’s Foods noting that the dispute in Lynn’s Food Stores arose out of a DOL investigation and “the employees seemed unaware that the DOL had determined that Lynn’s owed them back wages under the FLSA, or that they had any rights at all under the statute. There is no evidence that any of the employees consulted an attorney before signing the agreements. Some of the employees who signed the agreement could not speak English.”

Conversely, in Martin, plaintiffs had counsel and knew of their rights under the FLSA. Also, because the money plaintiffs received and accepted, pursuant to the Settlement Agreement, was to settle their bona fide dispute, which did not occur in the context of a lawsuit, the public policy issues in Lynn’s Food Stores were not implicated.

Lastly, plaintiffs’ argued that the Union could not waive their rights under the FLSA through a CBA, according to Barrentine v. Arkansas-Best Freight, Sys., and accordingly, could not settle their claims. The court disagreed because plaintiffs accepted and cashed their settlement checks, unlike the Barrentine plaintiffs whose FLSA claims were submitted by the Union to a joint grievance committee and rejected without explanation. The concerns noted by the Barrentine court, that FLSA substantive rights would be bargained away, were not at issue. In other words, FLSA rights waived, when an employee’s union does not waive FLSA claims, but instead plaintiffs, with counsel, personally receive and accept compensation for the disputed hours. Thus, a FLSA substantive right may not be waived in the collective bargaining process. However, FLSA claims are not waived, but are instead, validated through a settlement of a bona fide dispute, which plaintiffs accepted and received compensation.

So…Oscar, B-Movie or Razzie? – The Takeaways:
Since 1982, Lynn’s Food Stores has been the only circuit court case touching this issue. Now there is another, and with Martin, the Fifth Circuit has defined instances when court or DOL approval is not required for an enforceable private FLSA settlement. Those instances are as follows:

  • when the settlement between the employee and employer settles a bona fide dispute about time worked and is not a compromise of guaranteed FLSA substantive rights;
  • when there is some indicia that the employee is informed of his or her rights under the FLSA when the settlement agreement is entered into and rights under the FLSA waived, e.g., when the employee is represented by an attorney or union;
  • when the employee receives payment pursuant to the terms of the negotiated settlement agreement; and
  • the employee cashes the settlement check knowing that doing so releases his or her claims under the FLSA.

So, while Martin is the law in the Fifth Circuit, it is unclear what future impact the case will have in other jurisdictions and exactly how far reaching it will be. Until more courts speak on the issue in the context of Martin, employers outside the Fifth Circuit who are brought into court after a release can at least argue that the court should review the circumstances of the settlement as opposed to having the court just render it unenforceable and push for Martin to be accepted in other jurisdictions. Until more courts adopt Martin, however, employers outside the Fifth Circuit should continue to seek DOL or court approval for FLSA settlements or run the risk that they will be deemed unenforceable.

Martin opens up a new door for employers in the Fifth Circuit (and hopefully soon in other jurisdictions) by giving them more options to resolve FLSA claims without being drug through expensive litigation. Employers throughout the country would be well advised to keep their eye on Martin and be ready to argue it if plausibly applicable. This is especially true in districts that have made it increasingly difficult to keep the terms of FLSA settlements confidential, including those in Indiana and Florida.

That’s a wrap.