Executive Summary: On December 6, 2019, a sharply divided panel of the Second Circuit (covering New York, Connecticut, and Vermont) ruled that judicial approval of Fair Labor Standard Act (FLSA) settlements resolved under Federal Rule of Civil Procedure 68’s offer of judgment mechanism is not required. In the Second Circuit, FLSA settlements typically require judicial approval for fairness under a 2015 Second Circuit decision called Cheeks v. Freeport Pancake House. However, the Second Circuit held that where FLSA plaintiffs resolve their disputes with employers by accepting an offer of judgment, judicial approval, in that narrow instance, is not required under Cheeks.
The Second Circuit’s Ruling: Yu v. Hasaki Restaurant, Inc., et al. (2d Cir. 2019), involved a putative collective action brought under the FLSA for unpaid overtime. Shortly after filing suit, defendant Hasaki Restaurant offered the named plaintiff $20,000 plus reasonable attorneys’ fees as an offer of judgment to settle under Rule 68(a). Plaintiff accepted the offer, and the parties filed the offer and notice of acceptance with the district court.
Before the Clerk of the Court could enter judgment, however, the district court sua sponte ordered the parties to submit the settlement for a fairness review and judicial approval under Cheeks. The district court explained that it believed Cheeks required it to scrutinize the parties’ settlement to ensure it was fair and reasonable. Both parties disputed the district court’s authority to do so. They filed an interlocutory appeal with the Second Circuit. Because neither litigant agreed with the district court’s order, the Second Circuit appointed Public Citizen as amicus curiae to defend the district court’s ruling.
The Second Circuit reversed the district court, finding that judicial approval was not mandatory for FLSA settlements reached under Rule 68(a). The court began with the text of Rule 68(a). The court held that on its face, the rule “command[s] that the clerk must enter judgment” and is both “mandatory and absolute.” The court assumed, for the sake of argument, that in certain situations, Rule 68 offers of judgment are susceptible to judicial review. So, the question boiled down to “whether FLSA claims fall within the narrow class of claims that cannot be settled under Rule 68 without approval by the court (or the DOL).” The court answered that question, “no,” holding that approval is not required.
First, contrary to the district court’s reasoning, the Supreme Court has never explicitly prohibited settling FLSA claims through stipulated judgments. Nor has any circuit court held that FLSA claims cannot be settled under Rule 68(a) without judicial approval. Public Citizen argued that Supreme Court precedent “laid the foundation” to hold that Rule 68(a) offers of judgment must be approved by a judge before the clerk may enter judgment. But the Second Circuit was not prepared to “make that interpretive leap” absent any indication so requiring from Congress or the Supreme Court.
Second, the court rejected Public Citizen’s argument that extrinsic sources and the overall body of law on the FLSA requires judicial approval of Rule 68(a) settlements. The court found, again, that Rule 68(a) was an unambiguous, mandatory command, and found “no indication by Congress or the Supreme Court that the FLSA requires judicial approval of stipulated judgments concerning FLSA claims in the context of ongoing litigation . . . .” The text of the statute is clear and unambiguous, and where Congress could have provided for such judicial review, but did not, the court was not willing to find that Congress “hide[s] elephants in mouseholes.”
Third, Public Citizen contended that Cheeks compelled judicial review of FLSA settlements for fairness. While the court acknowledged the similarities between the two cases, it declined to extend Cheek’s holding to Rule 68(a) offers of judgment. Cheeks was distinguishable because it addressed whether parties could enter a “stipulated dismissal of FLSA claims with prejudice, without the involvement of the district court or DOL, that may be enforceable,” pursuant to Rule 41(a)(1)(A)(ii)’s allowance for a stipulation of dismissal with prejudice subject to any applicable “federal statute.” All the court did in Cheeks was hold that the FLSA was an “applicable” federal statute without interpreting the FLSA itself. The Cheeks court did not, among other things, address other avenues for dismissal such as Rule 68(a) offers of judgment. The court found it dispositive that while Rule 41(a) contained a delineated exception for “federal statutes” which provide for judicial review, by contrast, Rule 68(a) does not contain such an exception, and its command is inexorable.
Finally, Public Citizen argued that the FLSA’s “unique features and policies” and the Act’s “remedial and humanitarian goals” warranted judicial review of Rule 68(a) settlements. The court disagreed for several reasons. First, the court rejected “[a]ppeals to broad remedial goals and congressional purpose” when the text of the statute is unambiguously clear. Second, the court noted the recent Supreme Court observation that the argument that “the FLSA pursues its remedial purpose at all costs is “flawed.” Third, the fact that a Rule 68(a) stipulated judgment must be entered does not mean it cannot later be challenged under the common law of contract or Rule 60(b) for fraud, misrepresentation, misconduct, or “any other reason that justifies relief.” The court did not see its role as “weighing these policy considerations and determining which policy to prioritize when the statute is unambiguous.” That is for Congress to decide.
Employers’ Bottom Line: Settling wage and hour cases just became a bit easier in the Second Circuit. Employers facing FLSA claims should weigh the costs and benefits of pursuing early settlement rather than engaging in costly litigation, where warranted, given that the Second Circuit just eliminated a judicial obstacle to settlement of FLSA claims. Given judicial imprimatur is not required for Rule 68(a) settlements, parties to a litigation can be a little more creative in facilitating settlements and avoiding protracted proceedings.
If you have any questions regarding this Alert or other labor or employment related issues, please contact the author, Jeff Shooman, jshooman@fordharrison.com, counsel in our Berkeley Heights and New York offices. Of course, you may also contact the FordHarrison attorney with whom you usually work.