Separating Claim Recovery and Lawsuit Fees: 2nd Circuit Paves Way for Better Negotiations in FLSA Claims

In Fair Labor and Standards Act (FLSA) lawsuits, recovering damages for claims is typically only one part of the discussion when negotiating settlements. Employers engaged in FLSA lawsuits and settlement negotiations with employees and their representative counsel, can quickly become aware that lawsuit costs and plaintiff’s attorney fees are a factor in the overall bargaining process. On February 4, 2020, the Second Circuit, in Fisher v. SD Protection Inc., 2020 WL 550470 (2d Cir. 2020) held that attorneys’ fee awards in FLSA claim settlements are not limited by the principle of “proportionality” in that such fees are not limited or subject to a 1/3 cap based on the amount of the overall settlement.

In the Second Circuit, settlements in FLSA lawsuits were typically subject to strict court scrutiny court review to ensure that the agreed upon terms, including the amount of attorneys’ fees, were fair and reasonable. Thus, many of the district courts within the Second Circuit applied the rule of “proportionality” and refused to approve fee amounts greater than an amount 1/3 of the total settlement.

In Fisher, however, the Second Circuit held that such a rule is at odds with the purpose of the FLSA and has the potential to discourage competent lawyers from taking on cases for low-wage workers due to such limitations on collecting attorneys’ fees. The issue in Fisher arose from a wage dispute brought by an hourly employee, which is a normal cause of action under FLSA lawsuits. The employee sued under the FLSA based on the employer’s alleged failure to pay overtime and provide mandatory accurate wage statements.

The parties reached a settlement before a class was certified, with the total settlement amount at $25,000, including fees and costs. In submitting approval for the settlement from the district court, the parties disclosed that the plaintiff would be paid only $2,000 of that amount, with the remaining $23,000 going to the employee’s attorney. The district court judge disagreed with the terms and reduced the attorneys’ fee to only $8,250, or 1/3 of the total settlement amount as a matter of general policy.

The plaintiff appealed the district judge’s actions to the Second Circuit, and in a detailed decision, the Court reversed and remanded, disapproving of the district court’s requirement of “proportionality” between the amount of the settlement and the size of the fee award. The Second Circuit held that such a rule is not mandated by either the text or the purpose of the FLSA statute. While acknowledging that the proposed split of $23,000 to the plaintiff’s attorney and $2,000 to the plaintiff “understandably gave the district court pause,” the Court rejected an “explicit percentage cap” on fee awards. The Second Circuit justified this decision as in most FLSA wage dispute cases, the plaintiffs are generally hourly workers, and favorable settlement outcomes result in limited recovery. Limiting attorney fees can dissuade competent attorneys from taking on FLSA cases when fee recovery would be proportional to only 1/3 of total recovery. The Second Circuit also criticized the district court judge for rewriting the settlement agreement instead of just simply rejecting the agreement and having the parties revise it. The Second Circuit concluded that in rewriting the agreement, the district court judge exceeded his authority.

The ruling in Fisher is good news for employers in the negotiation process of FLSA lawsuits. In practice it should allow for more free negotiating of settlements, without limitations imposed on fee awards. This ruling will hopefully foster settlements and drive down costs for all parties involved.

VW Contributor: Ryan J. Coufal
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Seventh Circuit Follows Fifth Circuit in Holding FLSA Collective Action Opt-In Notices Should Not be Sent to Employees with Valid Arbitration Agreements

On January 24, 2020 in the case of Bigger v. Facebook, Inc., the Seventh Circuit held that a federal district trial court should not authorize notice of a Fair Labor and Standards Act (FLSA) collective action suit to employees of the defendant company who are ineligible to join the suit because they entered into agreements to resolve disputes exclusively via arbitration. The Seventh Circuit warned that without such limitations, FLSA collective actions run the risk of abuse for being too broad to opt-in and cause unfair harm to employers.

The appellate decision stems from FLSA collective action claims. Typically, early on in these types of litigation cases, plaintiffs will request that courts authorize written notice to potential plaintiffs of the opportunity to join in the collective action suit, in order to certify the collective class. These notices are generally sent to current or previous employees of a defendant employer, allowing them the opportunity to “opt-in” as another plaintiff in the suit.

In Bigger v. Facebook, Inc., a former Client Solutions Manager claimed that Facebook misclassified her as an overtime-exempt employee in violation of the FLSA. Plaintiff Bigger asked the United States District Court for the Northern District of Illinois to conditionally certify a collective action class and to authorize opt-in notice to a national collective of fellow Facebook Client Solutions Managers. In opposition to the request for notice, Facebook argued that most of the employees Bigger proposed to notify had previously entered into arbitration agreements. Facebook asserted these employees should not be classified as potential opt-in plaintiffs due to being limited to resolving disputes with Facebook through arbitration. Thus, Facebook asserted these employees should not receive any notice. The District Court held it was too early to make merits determinations at the conditional certification stage of an FLSA collective action and therefore authorized notice to the entire group plaintiff proposed, regardless of whether they had signed arbitration agreements or not.

Upon appeal, the Seventh Circuit held that the District Court should have allowed Facebook to prove that a large number of its employees had entered into arbitration agreements. The Seventh Circuit noted that the ruling is to protect employers from unfair or “dangerous” harm by stating, “notice giving, in certain circumstances, may become indistinguishable from the solicitation of claims . . . .” The Seventh Circuit thus concluded that district courts must give employers a chance to show that potential notice recipients have valid arbitration agreements.

The Seventh Circuit’s decision in Bigger followed the similar Fifth Circuit ruling last year of In re JPMorgan Chase and Company, 916 F.3d 494 (5th Cir. 2019). The rulings in these cases present a number of considerations for employers. On one hand, these rulings can make it harder for plaintiff’s counsel to use opt-in notices to identify potential plaintiffs for FLSA claims. While on the other hand, employers could run the risk of bearing the cost of arbitration for hundreds of potential FLSA claims upfront if such an issue were to arise, but be limited to arbitration.

VW Contributor: Ryan Coufal
© 2020 Vandenack Weaver LLC
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Observations on LB400

LB400 was introduced in the Nebraska Unicameral, in January of this year to raise the minimum wage of tip earners.  The current minimum wage in Nebraska for tip earners is $2.13 an hour with restaurants ensuring tipped staff obtain at least $9.00 per hour combined standard wage and tips.  The bill was to raise the minimum wage to $4.50 an hour, without indexing the wage to the regular minimum wage.

The bill includes raises the following questions to assure compliance with wage laws:

  1. Are the restaurants actually ensuring that the employees receive the $9.00 an hour combined standard wage plus tips or are they “gaming” the system to ensure more profits for the company?
  2. Can the employees genuinely rely on the tips of the patrons?
  3. Can “standard tips” accurately be reflected in the $9.00 per hour combined minimum standard wage plus tip?

As business owners, employers should consider reviewing current pay policies, including the often-used practice of tip pooling and/or tip splitting, in order to remain in compliance. Another compliance approach to consider would be the modification and reclassification of employees to non-tipped personnel.

 

https://trackbill.com/bill/nebraska-legislative-bill-400-change-the-minimum-wage-for-persons-compensated-by-way-of-gratuities/1636386/

 

The legislation is not finalized so there will be updates on the status of this bill.

Department of Labor Clarifies Stance on Still-Pending Overtime Rule

By James Pieper

In 2016, a dramatic overhaul of the rules for eligibility and payment of overtime under the Fair Labor Standards Act (FLSA) was on the verge of taking effect before being halted by an injunction issued by a federal judge.

With a new administration taking over the Department of Labor, the status of the overtime revisions has been uncertain.  Nor was it known whether the Department would defend its authority to revise the rules in the subject litigation.

In a brief filed on June 30, the Department’s new leadership finally provided some clarity.  The Department defended its legal authority to adopt a new rule (as had been challenged by the plaintiffs), but did not defend the actual changes proposed by the prior administration.

Accordingly, although the rule remains in legal and administrative limbo, it is clear that it will not take effect in the form proposed in 2016.  Should the courts conclude that the Department does have authority to set the earning threshold (under which overtime must be paid to non-exempt employees) by administrative rule, then the new Department leadership will adopt a threshold lower than the amount of $47,476 that was set prior to the injunction.

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Department of Labor Withdraws 2016 Guidance on “Joint Employment”

By James Pieper

On June 7, 2017, new Secretary of Labor Alexander Acosta withdrew guidance provided under the prior administration by the Department of Labor’s Wage and Hour Division that had staked out a broader interpretation of when “joint employment” exists pursuant to the Fair Labor Standards Act (FLSA) and the Migrant and Seasonal Agricultural Worker Protection Act (MSPA).

When two or more employers “jointly” employ an employee, the employee’s hours worked for all of the joint employers during the workweek are aggregated and considered as one employment, including for purposes of calculating whether overtime pay is due. Additionally, when “joint employment” is found to exist, all of the joint employers are jointly and severally liable for compliance with the FLSA and MSPA.

Under a traditional “common law” approach to employment, such “joint employment” would only exist if both employers are able to exercise “control” over the employee’s work.  The 2016 guidance sought to recognize “broader economic realities of the working relationship” and thus “cover some parties who might not qualify as [employees] under a strict application of traditional agency law principles.”

Accordingly, the guidance indicated that a number of scenarios that have not been historically considered “joint employment” – including, particularly, franchisee, staffing-agency and subcontractor relationships – might give rise to “joint employment” under the FLSA and MSPA, thus broadening the potential legal exposure for entities that had in the past not been considered joint employers.  The intent of the Department of Labor to implement such a broader interpretation is now withdrawn.

Although the action reduces some of the potential legal risk, particularly for franchisors and franchisees – who had actively sought the withdrawal of the guidance – the potential for “joint employment” remains a complex area requiring careful attention to potential penalties.

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