Second Circuit Court of Appeals Rules that FLSA Settlements Reached via Rule 68 Offers of Judgment Do Not Require Court Approval

Earlier this month, in Yu v. Hasaki Restaurant Inc., the Second Circuit Court of Appeals ruled that settlements of Fair Labor Standards Act (“FLSA”) lawsuits reached through the “offer of judgment” procedure under Rule 68 of the Federal Rules of Civil Procedure do not require judicial approval.  The court’s decision resolved a significant open question as to whether court approval is required for all FLSA settlements, and paves the way for more efficient and less costly resolution of wage and hour litigation within the Second Circuit, which includes, among other regions, the five boroughs, Westchester, and Long Island.

Under Rule 68 of the Federal Rules of Civil Procedure, a defendant may serve an offer of judgment on the plaintiff which, if accepted, “must” be entered by the clerk of court.  If the plaintiff rejects the offer and elects to proceed with the litigation, but the plaintiff’s ultimate recovery is less favorable than the rejected offer, the plaintiff must pay the costs incurred after the offer was made, which, in this context, includes attorneys’ fees.  Rule 68 thus provides powerful incentives for settlement by requiring plaintiffs and their counsel to evaluate the risks and costs of litigation against the likelihood of success.

In Yu, the plaintiff had worked as a sushi chef at a restaurant owned and operated by the defendant Hasaki.  The plaintiff sued the restaurant and certain individuals, on behalf of himself and all other employees similarly situated, for violation of the overtime provisions of the FLSA and the New York Labor Law.  A few months into the litigation, the restaurant defendant sent the plaintiff, pursuant to Rule 68 of the Federal Rules of Civil Procedure, an offer of judgment for $20,000, plus reasonable attorneys’ fees, costs and expenses.  The plaintiff accepted the offer, and the parties requested that the district court enter judgment accordingly.  The court refused to do so, however, without an explanation from the parties of why the settlement should be approved as fair and reasonable, and ordered the parties to submit their settlement agreement to the court for review.

The district court in Yu believed judicial review and approval of the settlement was required by the 2015 decision of the Second Circuit Court of Appeals in Cheeks v. Freeport Pancake House Inc., 796 F.3d 199 (2d Cir. 2015), despite Rule 68’s mandatory language that the clerk of court “must” enter judgment after acceptance of an offer.  In Cheeks, the Second Circuit held that stipulated dismissals settling FLSA claims with prejudice under Rule 41 of the Federal Rules of Civil Procedure require the approval of the district court (or the Department of Labor).  So-called “Cheeks” review is an often costly and time consuming process in which, after a settlement is reached, the court undertakes a broad “fairness” inquiry of the terms of the settlement.  The court will typically order the parties to file their proposed settlement agreement on the public docket and explain why the settlement is fair.  The court will, generally speaking, scrutinize the monetary terms of the settlement, the amount of fees allocated for payment to plaintiff’s counsel, the breadth of the release provisions, and the restrictions imposed on the plaintiff by any confidentiality and/or non-disparagement provisions in the settlement agreement.

The parties in Yu disagreed with the district court’s conclusion that Cheeks required judicial approval of a settlement reached through a Rule 68 offer of judgment and appealed to the Second Circuit.  On appeal, the Second Circuit agreed with the parties and held that, notwithstanding Cheeks, judicial approval is not required for settlements of FLSA lawsuits achieved under Rule 68.  Accordingly, the appeals court held that once the plaintiff accepted the restaurant’s offer of judgment, the clerk of court should have entered judgment as stipulated by the parties in the accepted offer of judgment.

The decision in Cheeks was intended to protect against certain abuses that can arise in the settlement of wage and hour cases, including the exploitation of unequal bargaining to the detriment of employees.  Cheeks, however, also made it significantly harder to resolve FLSA claims by imposing delays and burdens upon plaintiffs, defendants, and the courts alike.  The decision in Yu marks a potential sea change in FLSA practice in the Second Circuit, as it provides a mechanism for resolution of such lawsuits on terms deemed fair by all parties, and without the expenses and delays associated with the judicial fairness review mandated by Cheeks.