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January 22, 2020

Second Circuit Ruling Puts Potential Arrow in Employers' Quiver When Facing Collective Action FLSA Claims

In collective actions involving wage claims under the Fair Labor Standards Act (FLSA), each individual plaintiff’s claim can often be relatively small. However, as litigation becomes more protracted, the plaintiff’s attorneys’ fees can accrue quickly and become a significant––and sometimes even overriding––part of any judgment, as the FLSA contains a fee-shifting provision that allows a “prevailing” plaintiff to recover their fees from the defendant employer.

Offers of judgment under Rule 68 of the Federal Rules of Civil Procedure have long been useful tools for establishing early, cost-effective resolutions of FLSA actions with modest unpaid wage claims. Now, without having to be concerned with the burdens, expenses, and delays associated with a judicial fairness review, Rule 68 offers can become even more efficient vehicles for Second Circuit employers to resolve FLSA claims before potential attorneys’ fees awards become the primary impediment to resolving the parties’ disputes.

On December 6, 2019, in Yu v. Hasaki Restaurant, Inc., a divided Second Circuit Court of Appeals panel held that judicial approval is not required when the resolution of FLSA claims occurs through Rule 68 offers of judgment.

Under Rule 68, a defendant may serve a plaintiff an offer of judgment that, if accepted in writing within 14 days, “must” be entered on the court’s docket by the court clerk. If the plaintiff rejects the offer and the case proceeds to verdict, the plaintiff must pay the defendant’s post-offer costs (which, in FLSA cases, includes attorneys’ fees) when the plaintiff’s ultimate recovery is less favorable than the rejected offer. As the Supreme Court has recognized, “The Rule prompts both parties to a suit to evaluate the risks and costs of litigation and to balance them against the likelihood of success upon trial on the merits” (Marek v. Chesney, 473 U.S. 1, 5 [1985]).

In Hasaki Restaurant, the plaintiff sushi chef filed a putative collective action in the US District Court of the Southern District of New York, alleging violations of the FLSA’s overtime provisions. Three months after the complaint was filed, the defendant restaurant served the plaintiff with a Rule 68 offer of judgment, which the plaintiff accepted within 14 days. The plaintiff then filed a letter with the district court, notifying it that he accepted the offer.

Before the court clerk entered judgment on the docket, the district court judge, sua sponte, ordered the parties to submit their resolution for his approval and to explain why it was fair and reasonable. The parties contended they did not need judicial approval of a resolution of the plaintiff’s FLSA claims achieved through the Rule 68 process. Citing Cheeks v. Freeport Pancake House Inc., 796 F.3d 199 (2d Cir. 2015), the district court ruled judicial approval of the parties’ settlement was required, notwithstanding the fact that it was reached pursuant to Rule 68.

Relying on what it viewed to be the unambiguous language of both Rule 68 and the FLSA, the Second Circuit agreed with the parties, and held that acceptance of a Rule 68 offer of judgment that disposes of a disputed and litigated FLSA claim does not need to be reviewed by a district court or the US Department of Labor (USDOL) before the court clerk can enter the judgment. In reaching this conclusion, the Second Circuit noted that “Rule 68(a)’s command that the clerk must enter the judgment is mandatory and absolute.” The court also observed the text of the FLSA does not require offers of judgment to have judicial approval before FLSA actions can be dismissed. It also commented that “Rule 68(a) avoids any secret settlement problems because offers of judgment are publicly filed on the court’s docket.” For these reasons, the Second Circuit distinguished the case from Cheeks, which held that stipulated dismissals settling FLSA claims with prejudice pursuant to Rule 41(a)(1)(A)(ii) require approval of either the district court or the USDOL to take effect.

If you have any questions regarding the content of this legal alert, please contact Brian Culnan, partner, at bculnan@barclaydamon.com or another member of the firm’s Labor & Employment Practice Area.

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