Do Individual FLSA Settlements Really Require Judicial Approval?

The U.S. District Court for the District of Utah has issued a decision challenging the common understanding that settlement of a minimum wage or overtime claim under the Fair Labor Standards Act (FLSA) always requires approval from the Department of Labor (DOL) or a court. On September 17, 2021, in Saari v. Subzero Engineering, case no. 2:20-cv-00849, Magistrate Judge Cecilia M. Romero held that approval of individual FLSA settlements does not require DOL or judicial approval except in “exceptional circumstances.” See Doc. 37, 2021 WL 4245300.[1]

The determinative facts of Saari are simple. In conjunction with Mr. Saari’s resignation in 2020, he signed a settlement agreement containing a release and a representation that “all wages and compensation” had been paid to him and that no additional “payments or benefits” were owed. Id. at *1. In exchange for entering this settlement agreement, Mr. Saari received $5,027.59, which appears to have satisfied his demand for reimbursement of certain business expenses.

A few months later, Mr. Saari filed a lawsuit alleging that the employer had failed to pay him and four other co-plaintiff overtime wages, in violation of the FLSA. Notably, the case was not brought as a collective action. The employer sought summary judgment as to Mr. Saari, based on the general release in his settlement agreement. Mr. Saari argued that the general release did not bar his overtime claim because “he did not negotiate overtime wages as part of the Agreement” and because judicial approval is required for FLSA settlements.

The Court began by applying the 10th Circuit’s general test (not specific to the FLSA) for whether a release is binding:

(1) the clarity and specificity of the release language; (2) [his] education and business experience; (3) the amount of time [he] had for deliberation about the release before signing it; (4) whether [he] knew or should have known [his] rights upon execution of the release; (5) whether [he] was encouraged to seek, or in fact received benefit of counsel; (6) whether there was an opportunity for negotiation of the terms of the Agreement; and (7) whether the consideration given in exchange for the waiver and accepted by [him] exceeds the benefits to which [he] was already entitled by contract or law.

Id. at *2 (emphasis in original), quoting VanLandingham v. Grand Junction Regional Airport Authority, 603 F. App’x 657, 660 (10th Cir. 2015). The Court found the release enforceable under this test, noting that the language in the general release was clear, Mr. Saari was advised in the agreement of his right to seek counsel, he was given 21 days to review the agreement before signing, and the agreement contained representations that all wages had been paid.

The Court then turned to the question of whether judicial approval is required before a settlement with an employee can effectively release FLSA claims. As a starting point, the Court noted that neither the text of the FLSA nor precedent from the Supreme Court or the 10th Circuit requires judicial approval of individual FLSA settlements. While this statement is true, it is arguably oversimplified, as the Supreme Court has long held that “to allow waiver of statutory [minimum and overtime] wages by agreement would nullify the purposes of the [FLSA].” Brooklyn Sav. Bank v. O’Neil, 324 U.S. 697, 707 (1945). In 1949, the FLSA was amended to authorize the Department of Labor to supervise wage claim settlements but remained silent as to judicial approval of settlements. See 29 U.S.C. 216(c).

Nonetheless, federal courts have exercised authority in approving both collective actions and individual settlements under the FLSA. Judge Romero’s opinion in Saari cites numerous examples of the District of Utah exercising approval authority over FLSA collective actions. Id. at *3, citing Campbell v. C.R. England, Inc., No. 2:13-cv-00262, 2015 WL 5773709, at *2 (D. Utah. Sept. 30, 2015); Cazeau v. TPUSA, Inc., 2:18-cv-00321-RJS-CMR, 2021 WL 1688540 (D. Utah. Apr. 29, 2021); Brueningsen v. Resort Express Inc., 2:12-cv-843-DN, 2016 WL 10537003 (D. Utah May 23, 2016).

Judge Romero’s opinion cites one example of the District of Utah exercising approval authority over an individual FLSA action. Id., citing Keel v. O’Reilly Auto Enterprises, LLC, 2:17-cv-667, 2018 WL 10509413 (D. Utah May 31, 2018). In Keel, Judge Parrish stated that “the court has a duty to ensure that FLSA wage-payment settlements represent a ‘fair and reasonable resolution of a bona fide dispute.’” Keel, 2018 WL 10509413, at *2, citing Lynn’s Food Stores, Inc. v. United States, 679 F.2d 1350, 1355 (11th Cir. 1982). Judge Romero departed from Judge Parrish’s analysis in Keel, reasoning as follows:

Since [Keel was decided in 2018], circuit courts and district courts in the Tenth Circuit have split “on the issue of whether private settlements of bona fide disputes between employers and employees are valid under the FLSA without court or Department of Labor (DOL) approval,” and the majority of district courts “have held that such approval is not necessary.” Id. at *1–3 (emphasis added) (citing Lawson v. Procare CRS, Inc., No. 18-cv-00248-TCK-JFJ, 2019 WL 112781 (N.D. Okla. Jan. 4, 2019) (collecting cases); Acevedo v. Sw. Airlines Co., No. 1:16-cv-00024-MV-LF, 2019 WL 6712298, at *7 (D.N.M. Dec. 10, 2019) (same)). Moreover, this court has expressly rejected initiating a civil action for the sole purpose of requesting court approval of a private, out-of-court settlement of an individual’s FLSA claims like the Agreement at issue here. See Chappell v. Copper View Animal Hospital, No. 1:17-mc-52, 2017 WL 5172392, at *1 (D. Utah May 26, 2017) (noting that the parties failed to provide authority that “confers jurisdiction over a stipulation to approve a private, out-of-court FLSA settlement without the parties first commencing a traditional civil action”).

Judge Romero thus rejected the view that judicial approval is required of all individual FLSA claims, adopting instead an approach from the District of New Mexico and the District of Colorado, which requires judicial approval only in “‘exceptional circumstances,’” such as where there is “‘evidence of malfeasance or overreaching [by the employer] in obtaining a settlement agreement.’” Saari, at *4, quoting Hawthorn v. Fiesta Flooring, LLC, No. 1:19-cv-00019 WJ/SCY, 2020 WL 3085921, at *1 (D.N.M. June 10, 2020). This approach appears to be driven by the fact that judicial approval of every employee release is simply not feasible for the parties or the courts.

The requirement for judicial approval in “exceptional circumstances” still gives a nod to the Supreme Court’s long-standing policy concern that Congress’s purpose behind the minimum wage and overtime requirements could be thwarted by overreaching employers taking advantage of desperate or ill-informed employees.

Assuming that the “exceptional circumstances” endorsed in Saari continues to be followed in Utah and the 10th Circuit, the practical effect will be to reverse the sequence of the Court’s approval role. The issue of whether the settlement was made pursuant to a bona fide dispute will come before a court only if an employee later files a file wage claim, not at the time a settlement is inked. Employers and their counsel will need to ensure that settlements are entered pursuant to a bona fide dispute and that their actions in negotiating settlements cannot be reasonably characterized as “malfeasance” or “overreaching.” Employees will have the burden to show “exceptional circumstances” before proceeding with the merits of their wage claims.

In this way, the “exceptional circumstances” approach adopted by Judge Romero attempts to strike a balance in which the courts will exercise enough oversight to prevent employers from doing an end-run around the FLSA while also enabling employers acting in good faith to have some assurance that settlement agreements will be effective in the absence of express judicial approval.

Going forward, employee settlement agreements should be drafted with these considerations in mind. For example, agreements should include enough context regarding the events leading up to a settlement to demonstrate that the parties’ dispute was bona fide. Agreements should also include a forfeiture clause, stating that if the employee successfully invalidates the release, the consideration must be returned.

[1] Pursuant to 28 U.S.C. § 636(c) and Fed. R. Civ. P. 73, all parties in the case consented to Magistrate Romero conducting all proceedings, including entry of final judgment.