Resolving FLSA Claims Without Overpaying the Plaintiff's Attorney

Unlike employment discrimination claims, where back pay and front pay may continue to accrue and compensatory and punitive damages may know no bounds, FLSA claims often have a more defined and limited maximum recovery. The potential liability is often far less than expected litigation fees. For example, two hours of missed overtime each week for two years may only amount to $1,248 for an employee making $8.00 an hour. Even with liquidated damages, this only amounts to $2,496.

Pure FLSA claims quickly become about the recovery of attorneys' fees for the plaintiff's attorney, as these fees often surpass the underlying liability. If the plaintiff succeeds on liability, her attorney fees may be recoverable regardless of how little the plaintiff recovers. Despite the limited nature of liability, the amount of potential recovery increases substantially (in the form of attorney fees) as litigation continues. An hour of unpaid overtime could result in a $12 payment to the employee and a $100,000 payment to the attorney ' an absurd result, and another factor encouraging early resolution.

However, unlike other statutes, the FLSA makes it extremely difficult for employers to resolve these claims early. The FLSA has long been interpreted as prohibiting employees from waiving their rights under the Act. As a result, general or so-called “full” releases of claims often have very little effect on an employee's claims for unpaid overtime or other FLSA violations. In Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982), the Eleventh Circuit stated that claims for lost wages under the FLSA may only be settled or compromised when the Department of Labor (DOL) supervises the payment or when the district court reviews and approves a settlement in a private action for back wages under 29 U.S.C. ' 216(b). This prohibition on private settlement in the absence of full payment or relief makes it very difficult to effectively resolve these matters before incurring litigation-type fees.

Confidentiality of FLSA Settlements May Be
Difficult

An additional wrinkle in resolving FLSA matters is the difficulty that employers may have in requiring that the resolution be confidential. An important aspect of most settlements is confidentiality to avoid “me too” claims from other employees who think they can obtain the same settlement. Because FLSA settlements require DOL or court approval, they often become public record. This creates an additional hurdle to settlement.

Before a district court approves a settlement, it is required to scrutinize the settlement to determine whether it is a fair and reasonable resolution of a bona fide dispute. As a result, the agreement is generally filed with the court, which makes it publicly available. Although a court may allow a confidentiality provision in the agreement, its effectiveness is greatly reduced because of the public nature of court records. Courts are generally hesitant to seal publicly filed documents.

Two Recent Decisions

Confidentiality is not the only hurdle employees face when attempting to resolve FLSA claims. Two recent decisions emphasize other difficulties employers face when trying to settle FLSA claims.

In Martin v. Pepsi Americas Inc., 628 F.3d 738 (5th Cir. 2010), the employer attempted to set off a severance payment made for a release of claims against any liability for FLSA violations.

The employer paid the employee various severance benefits in exchange for which it received a release of all claims. After signing the release and collecting the severance, the employee claimed that she was misclassified as exempt and denied overtime. She claimed that she was owed more than $19,000 in back pay and liquidated damages under the FLSA. The employer argued that the claim should be dismissed because it had more than paid this amount as part of the severance payment. The lower court agreed and dismissed Martin's claim because the maximum recovery was less than the amount Pepsi Americas had paid her. But the Fifth Circuit reversed. The circuit court refused to allow set-offs against FLSA claims. According to the court, only if the money to be set off could be considered wages that the employer prepaid to the employee, would the court allow a set-off.

In Simmons v. United Mortgage & Loan Investment, 2011 WL 184356 (4th Cir. 2011), the Fourth Circuit reversed a lower court's dismissal of another FLSA claim. The Simmons case was an FLSA collective action. The plaintiffs claimed they were misclassified as exempt employees and denied overtime. In order to resolve the claims in an efficient manner, the employer offered to provide all of the relief that the FLSA would give to the opt-in plaintiffs. It then moved to dismiss the collective action and opposed class certification and court-facilitated notice to potential members. The employer argued its offer mooted the case because there was no active case or controversy; its offer would provide full relief. The lower court agreed, but the Fourth Circuit reversed.

According to the Fourth Circuit, the employer's offer had several conditions that prevented it from providing full relief. The court determined the offer did not render the lawsuit moot because there was no offer to allow entry of judgment: “From the view of the plaintiffs' perspective, a judgment entered in their favor is far preferable to a contractual promise by the Defendants in a settlement agreement to pay the same amount.”

In addition, in order to receive payment, the employer required an affidavit from each individual describing the dates of overtime work, total hours or back pay claimed, and an explanation of the calculation of back pay. According to the court, the conditional nature of the offer rendered the amount of the offer vague and ambiguous.

A final provision in the offer, which precluded the employer from successfully arguing that the case was moot, was that the offer required confidentiality. According to the court, the requirement of confidentiality prevented the determination of mootness because the plaintiffs could proceed with the litigation and recover the same amounts without being bound by confidentiality. In other words, there was still something to gain from litigation.

How Can an Employer Resolve FLSA Claims?

Obviously, the best action an employer can take to avoid costly FLSA claims is to make sure its employment practices comply with the FLSA. Periodic audits of the exempt status of employees, to make sure both job duties and the law have not changed, and audits of the time-reporting processes and procedures, can save significant litigation costs later. The age-old “ounce of prevention” adage is particularly applicable to wage and hour issues. Once an employee leaves employment, it may be too late to “fix” any FLSA issues.

However, even after employment ends, there are actions an employer can take to reduce its risk of liability, including offering severance agreements. Although severance payments, even with full releases, do not preclude an employee from filing an FLSA claim, they sometimes have a deterrent effect. Employees may believe they have resolved all claims or may be satisfied with the result and therefore, never raise an FLSA claim. If there is an explicit concern about an FLSA claim, employers may want to specifically address this. It may be possible to gather information through exit interviews or even affidavits. Early fact investigations, before a plaintiff's attorney gets involved and dollar signs encourage the employee to embellish, may limit the basis for a subsequent claim. Payments may then be characterized expressly as payment for any unpaid wages or overtime instead of severance. In Martin, the employer did not receive the benefit of its severance payment because the agreement stated it was for a full release of claims; it was not specifically designated as payment for unpaid wages or overtime. If the employee receives full compensation specifically for an FLSA claim, he may effectively release the claim without court or DOL approval (because there has been no compromise that requires judicial approval).

Even if litigation has already been filed, an employer has options to attempt to limit its exposure, or at least limit the plaintiff's attorney from using the litigation to obtain excessive fees. An employer may consider making a specific offer of judgment under Federal Rule of Civil Procedure 68. In Simmons, the employer did not make an effective offer of judgment because it did not follow the Rule 68 requirements. Although an offer of judgment does not necessarily moot the case, it places pressure on the plaintiff's attorney to consider a reasonable settlement. If the plaintiff refuses an offer of judgment and then receives less through litigation than the amount offered, the plaintiff's recovery of attorney fees may be limited.

Keep in mind that any resolution during litigation may become public record. Therefore, any FLSA litigation, even if only for a single plaintiff, should spark an employer to review its procedures for similar employees. There may be other employees who could raise similar claims. In addition to resolving the litigation, the employer may need to resolve similar issues for similarly situated employees or take corrective action to limit future exposure.

Patricia Anderson Pryor, a member of this newsletter's Board of Editors, is a Partner in the Cincinnati office of Jackson Lewis. Ms. Pryor is a frequent speaker at legal seminars and to employers and professional groups, and has been featured on the radio broadcast, Employment Straight Talk.

Litigation is expensive. It is not unusual for a case to cost an employer $200,000 just in fees and expenses to go to trial. That does not account for any damages or costs that the employer may have to pay if it loses. It is, therefore, not surprising that employers attempt to resolve even the least meritorious of issues with employees through severance agreements and settlements to avoid these expenses.

Nowhere is this more true than with claims alleging violations of the Fair Labor Standards Act (FLSA). In recent years, claims for unpaid overtime, work off the clock or misclassification of employees have become popular among plaintiff's attorneys.

FLSA Claims

Unlike employment discrimination claims, where back pay and front pay may continue to accrue and compensatory and punitive damages may know no bounds, FLSA claims often have a more defined and limited maximum recovery. The potential liability is often far less than expected litigation fees. For example, two hours of missed overtime each week for two years may only amount to $1,248 for an employee making $8.00 an hour. Even with liquidated damages, this only amounts to $2,496.

Pure FLSA claims quickly become about the recovery of attorneys' fees for the plaintiff's attorney, as these fees often surpass the underlying liability. If the plaintiff succeeds on liability, her attorney fees may be recoverable regardless of how little the plaintiff recovers. Despite the limited nature of liability, the amount of potential recovery increases substantially (in the form of attorney fees) as litigation continues. An hour of unpaid overtime could result in a $12 payment to the employee and a $100,000 payment to the attorney ' an absurd result, and another factor encouraging early resolution.

However, unlike other statutes, the FLSA makes it extremely difficult for employers to resolve these claims early. The FLSA has long been interpreted as prohibiting employees from waiving their rights under the Act. As a result, general or so-called “full” releases of claims often have very little effect on an employee's claims for unpaid overtime or other FLSA violations. In Lynn's Food Stores, Inc. v. United States , 679 F.2d 1350 (11th Cir. 1982), the Eleventh Circuit stated that claims for lost wages under the FLSA may only be settled or compromised when the Department of Labor (DOL) supervises the payment or when the district court reviews and approves a settlement in a private action for back wages under 29 U.S.C. ' 216(b). This prohibition on private settlement in the absence of full payment or relief makes it very difficult to effectively resolve these matters before incurring litigation-type fees.

Confidentiality of FLSA Settlements May Be
Difficult

An additional wrinkle in resolving FLSA matters is the difficulty that employers may have in requiring that the resolution be confidential. An important aspect of most settlements is confidentiality to avoid “me too” claims from other employees who think they can obtain the same settlement. Because FLSA settlements require DOL or court approval, they often become public record. This creates an additional hurdle to settlement.

Before a district court approves a settlement, it is required to scrutinize the settlement to determine whether it is a fair and reasonable resolution of a bona fide dispute. As a result, the agreement is generally filed with the court, which makes it publicly available. Although a court may allow a confidentiality provision in the agreement, its effectiveness is greatly reduced because of the public nature of court records. Courts are generally hesitant to seal publicly filed documents.

Two Recent Decisions

Confidentiality is not the only hurdle employees face when attempting to resolve FLSA claims. Two recent decisions emphasize other difficulties employers face when trying to settle FLSA claims.

In Martin v. Pepsi Americas Inc. , 628 F.3d 738 (5th Cir. 2010), the employer attempted to set off a severance payment made for a release of claims against any liability for FLSA violations.

The employer paid the employee various severance benefits in exchange for which it received a release of all claims. After signing the release and collecting the severance, the employee claimed that she was misclassified as exempt and denied overtime. She claimed that she was owed more than $19,000 in back pay and liquidated damages under the FLSA. The employer argued that the claim should be dismissed because it had more than paid this amount as part of the severance payment. The lower court agreed and dismissed Martin's claim because the maximum recovery was less than the amount Pepsi Americas had paid her. But the Fifth Circuit reversed. The circuit court refused to allow set-offs against FLSA claims. According to the court, only if the money to be set off could be considered wages that the employer prepaid to the employee, would the court allow a set-off.

In Simmons v. United Mortgage & Loan Investment, 2011 WL 184356 (4th Cir. 2011), the Fourth Circuit reversed a lower court's dismissal of another FLSA claim. The Simmons case was an FLSA collective action. The plaintiffs claimed they were misclassified as exempt employees and denied overtime. In order to resolve the claims in an efficient manner, the employer offered to provide all of the relief that the FLSA would give to the opt-in plaintiffs. It then moved to dismiss the collective action and opposed class certification and court-facilitated notice to potential members. The employer argued its offer mooted the case because there was no active case or controversy; its offer would provide full relief. The lower court agreed, but the Fourth Circuit reversed.

According to the Fourth Circuit, the employer's offer had several conditions that prevented it from providing full relief. The court determined the offer did not render the lawsuit moot because there was no offer to allow entry of judgment: “From the view of the plaintiffs' perspective, a judgment entered in their favor is far preferable to a contractual promise by the Defendants in a settlement agreement to pay the same amount.”

In addition, in order to receive payment, the employer required an affidavit from each individual describing the dates of overtime work, total hours or back pay claimed, and an explanation of the calculation of back pay. According to the court, the conditional nature of the offer rendered the amount of the offer vague and ambiguous.

A final provision in the offer, which precluded the employer from successfully arguing that the case was moot, was that the offer required confidentiality. According to the court, the requirement of confidentiality prevented the determination of mootness because the plaintiffs could proceed with the litigation and recover the same amounts without being bound by confidentiality. In other words, there was still something to gain from litigation.

How Can an Employer Resolve FLSA Claims?

Obviously, the best action an employer can take to avoid costly FLSA claims is to make sure its employment practices comply with the FLSA. Periodic audits of the exempt status of employees, to make sure both job duties and the law have not changed, and audits of the time-reporting processes and procedures, can save significant litigation costs later. The age-old “ounce of prevention” adage is particularly applicable to wage and hour issues. Once an employee leaves employment, it may be too late to “fix” any FLSA issues.

However, even after employment ends, there are actions an employer can take to reduce its risk of liability, including offering severance agreements. Although severance payments, even with full releases, do not preclude an employee from filing an FLSA claim, they sometimes have a deterrent effect. Employees may believe they have resolved all claims or may be satisfied with the result and therefore, never raise an FLSA claim. If there is an explicit concern about an FLSA claim, employers may want to specifically address this. It may be possible to gather information through exit interviews or even affidavits. Early fact investigations, before a plaintiff's attorney gets involved and dollar signs encourage the employee to embellish, may limit the basis for a subsequent claim. Payments may then be characterized expressly as payment for any unpaid wages or overtime instead of severance. In Martin, the employer did not receive the benefit of its severance payment because the agreement stated it was for a full release of claims; it was not specifically designated as payment for unpaid wages or overtime. If the employee receives full compensation specifically for an FLSA claim, he may effectively release the claim without court or DOL approval (because there has been no compromise that requires judicial approval).

Even if litigation has already been filed, an employer has options to attempt to limit its exposure, or at least limit the plaintiff's attorney from using the litigation to obtain excessive fees. An employer may consider making a specific offer of judgment under Federal Rule of Civil Procedure 68. In Simmons, the employer did not make an effective offer of judgment because it did not follow the Rule 68 requirements. Although an offer of judgment does not necessarily moot the case, it places pressure on the plaintiff's attorney to consider a reasonable settlement. If the plaintiff refuses an offer of judgment and then receives less through litigation than the amount offered, the plaintiff's recovery of attorney fees may be limited.

Keep in mind that any resolution during litigation may become public record. Therefore, any FLSA litigation, even if only for a single plaintiff, should spark an employer to review its procedures for similar employees. There may be other employees who could raise similar claims. In addition to resolving the litigation, the employer may need to resolve similar issues for similarly situated employees or take corrective action to limit future exposure.

Patricia Anderson Pryor, a member of this newsletter's Board of Editors, is a Partner in the Cincinnati office of Jackson Lewis. Ms. Pryor is a frequent speaker at legal seminars and to employers and professional groups, and has been featured on the radio broadcast, Employment Straight Talk.