Does Dees v. Hydradry Leave Employers High and Dry in FLSA Settlements? (Part I)
In Dees v. Hydradry, Case No. 8:09-cv-1405-T-23TBM (M.D. Fla., April 19, 2010), U.S. District Judge Steven Merryday issued a 29 page opinion that addresses the key issues pertaining to the settlement of FLSA cases in the Eleventh Circuit. The opinion is remarkable not only for its length and scholarly tone, but because, if followed by other district courts, it could make settlement of FLSA cases much more difficult in the Eleventh Circuit.
In this first of two posts, I summarize the Dees decision. In the second post, I will offer some thoughts on the impact Dees may have in FLSA cases in the Eleventh Circuit, and identify some questions that Dees leaves unanswered.
(Unwanted) Judicial Scrutiny
Judge Merryday issued his Dees decision four months after the parties filed a one paragraph Joint Stipulation of Dismissal with Prejudice. The parties represented in their stipulation that
The Defendant has agreed to pay Plaintiff for all overtime owed in full, without compromise. ($550 in Actual Damages, $550 in Liquidated Damages). Defendant agreed to separately pay Plaintiff attorney's fees and costs of $2,900 ($1,900 in attorney's fees; $1,000 in costs). As such, no judicial scrutiny is needed. See Mackenzie v. Kindred Hosps. East, LLC, 276 F.Supp 2d. 1211, 1217 (MD.Fla. 2003).”
But judicial scrutiny is exactly what the parties got. Judge Merryday begins his opinion by noting that although the FLSA prohibits agreements that curtail an employee’s FLSA rights, the FLSA is silent as to whether an employee can compromise a claim for unpaid wages. Reviewing the Supreme Court’s decisions in Brooklyn Savings Bank v. O'Neil, 324 U.S. 697 (1945) and D.A. Schulte v. Gangi, 328 U.S. 108, 114 (1946), Judge Merryday concludes that these decisions, “[a]lthough prohibiting purely private compromise …. leave unanswered whether an employee may compromise a claim with supervision by the district court.”
That question was answered by the Eleventh Circuit in Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982). As noted by Judge Merryday:
The Eleventh Circuit held that the FLSA permits an employee only two avenues for compromising an FLSA claim. First, an employee may accept a compromise supervised by the Department of Labor. By accepting the compromise, the employee waives the right to sue for the unpaid wages. Second, if an employee sues for back wages under the FLSA, the parties may present a proposed compromise to the district court, which “may enter a stipulated judgment after scrutinizing the settlement for fairness…. [A]n employee may compromise a claim if the district court determines that the compromise “is a fair and reasonable resolution of a bona fide dispute over FLSA provisions.”
Judge Merryday endorses the reasoning of Lynn’s Food Stores by opining that “leaving an FLSA settlement to wholly private resolution conduces inevitably to mischief”:
An employer who pays less than the minimum wage or who pays no overtime has no incremental incentive to comply voluntarily with the FLSA, if, after an employee complains, the employer privately compromises the claim for a discount -- an amount less than the full amount owed under the FLSA (plus, with savvy negotiation, a confidentiality agreement to preclude the spread to other employees of information about the FLSA). If approval is required, the discount might become unavailable and the undiscounted principal owed the employee might increase (for example, as a result of liquidated damages or a more refined damage computation), both of which unhappy prospects conduce to voluntary compliance by the employer. The Eleventh Circuit in Lynn's Food and perforce this district court proceed on the logical and salutary premise that the FLSA, a statute famously designed to preempt in certain particulars the possibility of private agreement, remains immune to the unsupervised intrusion of a private agreement.
Absent DOL or court approval, Judge Merryday notes, the release of a compromised FLSA claim remains unenforceable. The employer remains liable for the unpaid wages, and the employee may sue to recover any wages (or liquidated damages) compromised by the parties’ private agreement.
What does a Compromise Mean?
What does it mean to say an FLSA claim has been compromised? In Mackenzie, 276 F.Supp 2d. at 1211, the employer made an offer of judgment for full relief. After determining that a collective action was inappropriate, the magistrate judge determined that the offer fully compensated the plaintiff on his FLSA claim, and therefore recommended entry of judgment in favor of the employee for the amount of the employer's offer of judgment.
Judge Merryday was the district judge in Mackenzie, and he adopted the magistrate’s recommendation. But in Dees he notes that if the parties' agreement includes any additional term – “such as the forbearance of a valuable right of the employee, including perhaps one of the employee's FLSA rights, or the exchange of another valuable consideration of any kind” – the claim has been compromised and MacKenzie is inapplicable:
To the extent that the employee receives a full wage but relinquishes something else of value, the agreement (even if exhibited to the court as a stipulation for “full compensation” or an offer of judgment) involves a “compromise,” and Lynn's Food requires judicial approval of the compromise.
Scrutinizing a Settlement for Fairness
Judge Merryday then analyzes how a court should scrutinize a settlement for fairness. First, “the court should consider whether the compromise is fair and reasonable to the employee (factors ‘internal’ to the compromise).” Next, “the court should inquire whether the compromise otherwise impermissibly frustrates implementation of the FLSA (factors ‘external’ to the compromise).” Only if both factors are met should the court approve the settlement.
With respect to “internal” factors, Judge Merryday focuses on four issues. First, the district court must examine the nature of the dispute, and determine whether the employer is “extract[ing] a disproportionate discount on FLSA wages in exchange for an attenuated defense to payment.”
Second, the court must ensure that the parties’ settlement agreement does not contain a confidentiality provision because, according to Judge Merryday, such provisions frustrate the purposes of the FLSA, by: (1) empowering an employer to retaliate against an employee for exercising FLSA rights; (2) effecting a judicial confiscation of the employee's right to be free from retaliation for asserting FLSA rights; and, (3) transferring to the wronged employee a duty to pay his fellow employees for the FLSA wages unlawfully withheld by the employer.
Third, the court must ensure that the employee is not waiving FLSA rights prospectively. For example, the employee may not stipulate that he is an exempt employee.
Fourth, the court must “review . . . the reasonableness of counsel's legal fees to assure both that counsel is compensated adequately and that no conflict of interest taints the amount the wronged employee recovers under a settlement agreement.” Judge Merryday quotes with approval Judge Presnell’s opinion in Bonetti v. Embarq Management Co., __ F. Supp. 2d __, 2009 WL 2371407 (M.D. Fla. Aug. 4, 2009):
[T]he best way to insure that no conflict has tainted the settlement is for the parties to reach agreement as to the plaintiff's recovery before the fees of the plaintiff's counsel are considered. If these matters are addressed independently and seriatim, there is no reason to assume that the lawyer's fee has influenced the reasonableness of the plaintiff's settlement.
In sum, if the parties submit a proposed FLSA settlement that (1) constitutes a compromise of the plaintiff's claims; (2) makes full and adequate disclosure of the terms of settlement, including the factors and reasons considered in reaching same and justifying the compromise of the plaintiff's claims; and (3) represents that the plaintiff's attorneys' fee was agreed upon separately and without regard to the amount paid to the plaintiff, then, unless the settlement does not appear reasonable on its face or there is reason to believe that the plaintiff's recovery was adversely affected by the amount of fees paid to his attorney, the Court will approve the settlement without separately considering the reasonableness of the fee to be paid to plaintiff's counsel. However, if the parties can only agree as to the amount to be paid to the plaintiff, the Court will continue the practice of determining a reasonable fee using the lodestar approach.
With respect to external factors, Judge Merryday lists several factors that may militate in favor of rejecting a proposed compromise, including:
[T]he presence of other employees situated similarly to the claimant, a likelihood that the claimant's circumstance will recur, a history of FLSA non-compliance by the same employer or others in the same industry or geographic region, or the requirement for a mature record and a pointed determination of the governing factual or legal issue to further the development of the law either in general or in an industry or in a workplace.
Filing Under Seal, In Camera Inspections, and Fairness Hearings
Judge Merryday then addresses the practices of filing settlements under seal, or having the court review them in camera, or having fairness hearings that do not include the admission of the agreement into the record. Judge Merryday concludes that all these practices are inimical to the public’s right of access to a judicial proceeding, and also “thwart[] Congress's intent both to advance employees' awareness of their FLSA rights and to ensure pervasive implementation of the FLSA in the workplace.” Thus, concludes Judge Merryday, “the parties must file the settlement agreement in the public docket.”
Rejection of Stipulation of Dismissal
Turning finally to the stipulation of dismissal filed by the parties in Dees, Judge Merryday rejects the stipulation and orders the parties to request approval of their settlement by : (1) filing their settlement; (2) describing "the bona fide dispute or disputes resolved by the compromise and confirm[ing] that the filed agreement includes every term and condition of the parties' resolution (in other words, confirm the absence of any ‘side deal’)”; and (3) demonstrating the reasonableness of the proposed attorney's fee using the lodestar approach, or representing that the parties agreed to the plaintiff's attorney's fee separately and without regard to the amount paid to settle the plaintiff's FLSA claim.
