New York Federal Court Holds that Pre-Litigation FLSA Settlements Do Not Require Approval by the Court or DOL

In Gaughan v. Rubenstein, 2017 U.S. Dist. LEXIS 107042 (S.D.N.Y. July 11, 2017), the Southern District of New York held that a pre-litigation settlement agreement releasing an employer “from any and all claims and rights of any nature whatsoever” is fully enforceable even without being approved by a court or the Department of Labor (“DOL”).

By way of background, Plaintiff worked as a paralegal for Defendant (an attorney) at the rate of $17.50 per hour, with overtime at $26.50 per hour. After Defendant terminated Plaintiff’s employment, Plaintiff retained another attorney who sent a demand letter to Defendant demanding ¬unpaid minimum wage, overtime, and liquidated damages under the FLSA. The parties engaged in “several months of negotiation” and ultimately agreed to settle Plaintiff’s FLSA claims through a private settlement. 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 ….” After executing the settlement agreement and receiving the settlement funds, Plaintiff nonetheless filed a lawsuit under the FLSA, which Defendant moved to dismiss due to the settlement and release.

The Second Circuit Court of Appeals has never ruled on whether pre-litigation settlements can be enforceable without DOL or court approval. In 2015, in Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2nd Cir. 2015), the Second Circuit held that where the plaintiff had already filed a lawsuit under the FLSA, she could not privately agree to release her FLSA claims and stipulate to their dismissal with prejudice under Federal Rules of Civil Procedure 41(a)(1)(A)(ii). The Second Circuit found that under Rule 41(a)(1)(A)(ii), stipulated dismissals settling FLSA claims with prejudice “require approval of the district court or the DOL to take effect.”

Thus, going back to Gaughan, “[t]he viability of [Plaintiff]’s claims against [Defendant] turns on whether the Agreement between [Plaintiff] and [Defendant] precludes these claims. Relying on the Second Circuit’s decision in Cheeks, [Plaintiff] contends that FLSA claims resolved by a pre-litigation, out-of-court settlement agreement cannot bind the parties involved unless either the Department of Labor (“DOL”) or a court had approved the agreement’s terms. [Plaintiff] therefore argues that, because the Agreement was never approved by the DOL or by a district court, she is not bound by its terms. [Defendant] counters that Cheeks does not apply to the Agreement, because it was entered into before any litigation commenced and thus fall outside of the purview of Federal Rule of Civil Procedure 41, which is the subject of the Cheeks decision.”

The Southern District of New York dismissed Plaintiff’s FLSA claims, finding that Cheeks applies “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.” In other words, Rule 41 applies only to settlements reached while a case is pending, not when an FLSA claim is settled before any legal action was initiated.

“The Court therefore upholds as consistent with the FLSA [Plaintiff]’s pre-litigation settlement agreement with [Defendant].” To hold otherwise “would effectively require that any parties, even ably counseled plaintiffs, wishing to settle an FLSA dispute out-of-court without bringing suit, obtain judicial or agency approval for their settlement. The Court is unaware of no charter for imposing such a requirement.”

If you believe that your employer is violating the FLSA by denying you minimum wage and/or overtime compensation, it is important to speak with a New York City employment attorney to properly assess and determine all of your legal rights.