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Use caution when asking employees to waive rights

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Albert F. Sebok Albert F. Sebok
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Albert F. Sebok is a member of the Jackson Kelly PLLC Industrial, Environmental and Complex Litigation Practice Group. He represents and consults with employers on labor and employment matters.

In recent months, four Circuit Courts of Appeals have issued decisions considering whether differing statutory rights could be waived under the Fair Labor Standards Act, or FLSA. Overall, the message from these decisions is that employees' rights remain difficult to waive or alter outside of a pre-dispute agreement to arbitrate claims. 

One reason for such pronounced focus on the FLSA in this area arises from the fact that the U.S. Supreme Court issued a series of decisions in the 1940's which significantly limited the ability of employees to waive FLSA rights. In those cases, the Court was particularly concerned with employers gaining unfair competitive advantages in the marketplace by coercing their employees to waive their rights to minimum wage and overtime protections. 

The Supreme Court has never applied these broad holdings in the FLSA context to the relatively more recent anti-discrimination statutes enacted by Congress. To the contrary, the Supreme Court has found that plaintiffs can waive procedural rights under these federal statutes such as the right to a judicial forum. While federal appeals courts have generally applied this type of waiver of rights to FLSA claims in the arbitration context, as demonstrated by the two recent Second Circuit decisions, federal courts outside the arbitration context, as noted by the recent decisions of the Sixth and Eleventh Circuit, have generally adhered to the reasoning of the 1940's Supreme Court decisions in limiting the FLSA rights that can be waived by employees.

In the first case, July 29, the Eleventh Circuit Court of Appeals held that a former employee can waive claims under the FLSA only if the settlement is conducted under the supervision of the Secretary of Labor or if a court enters a stipulated judgment on the FLSA claim after scrutinizing the fairness of the settlement. (See Nall v. Mal-Motels, Inc., 723 F.3d 1304 [11th Cir. July 29, 2013]). 

In reaching this ruling, the Eleventh Circuit recognized that it was extending the holding of its seminal decision in this area, (Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350 [11th Cir. 1982]), which applied this limitation only to suits by current employees. In its opinion, the Court cited liberally to the 1940's Supreme Court holding that employees could not waive their right to recover liquidated damages for past violations of the FLSA when there was no genuine dispute about liability. 

Specifically, in Nall, the district court enforced a settlement which had been negotiated by the individual defendant, who was acting without an attorney, and the plaintiff, without the participation of plaintiff's counsel. Interestingly, at the meeting in which the settlement occurred, the individual defendant requested that plaintiff bring her counsel but she did not. Plaintiff's counsel later opposed a motion to enforce the settlement agreement. The Eleventh Circuit reversed the trial court's decision to enforce, finding that the settlement could not be entered as a stipulated judgment because plaintiff's counsel had asked the court to reject the settlement that was reached without his knowledge or participation. The Eleventh Circuit noted that it was not deciding whether the same result would apply if plaintiff's counsel had participated in the settlement and then later objected to it. 

While the Fifth Circuit Court of Appeals recently upheld a private settlement of FLSA claims by a union on behalf of its members without court approval because there was a bona fide dispute about potential liability (Martin v. Spring Break '83 Productions LLC, 688 F.3d 247 [5th Cir. 2012]), several lower federal courts have followed the Eleventh Circuit's holdings, concluding that settlements for less than full unpaid wages and liquidated damages always require court approval if the Secretary of Labor does not supervise the settlement. Therefore, the most prudent approach is to seek court approval of any FLSA settlement, even when there is a bona fide dispute concerning liability. 

Second, on Aug. 6, the Sixth Circuit Court of Appeals held that the FLSA's two-year statute of limitations for non-willful violations (three years for willful violations) could not be shortened in an employment agreement. (See Boaz v. FedEx Customer Information Services, Inc., 2013 WL 3985015 [6th Cir. Aug. 6, 2013]). 

Some federal courts, finding that statutes of limitation are merely procedural rights, have held that they can be shortened in an employment agreement. One of the early federal appeals courts that supported the premise that statutes of limitation could be abbreviated was the Sixth Circuit Court of Appeals. In Thurman v. DaimlerChrysler, Inc., 397 F.3d 352 (6th Cir. 2004), the Court affirmed the dismissal of two statutory claims under 42 U.S.C. § 1981 and a state anti-discrimination statute and a common law claim because the complaint was filed after the expiration of the six-month statute of limitations period agreed to by the employee in an employment application. 

In Boaz, as part of her application process, the plaintiff signed a 15 paragraph employment contract that contained an agreement to assert legal claims within six months of the date of the alleged wrongful act. The district court granted summary judgment on the FLSA and Equal Pay Act claims, finding the claims time-barred under the six-month limitations period contained in the employment agreement. On appeal, the Sixth Circuit reversed, holding that employees could not waive either procedural or substantive rights under the FLSA based on the United States Supreme Court decisions from the 1940's. 

The Boaz Court distinguished Title VII claims noting that its procedural rights could be waived and that refusing to hire a person from a protected class did not give an employer the same type of competitive advantage which would accrue if the employer failed to pay minimum wages. 

In distinguishing its earlier holding that employees could waive the right to a judicial forum for FLSA claims, the Sixth Circuit noted that the alternative arbitral forum must allow for the "effective vindication" of the statutory claim and that the six-month limitations did not allow for such effective vindication. Finally, the Court applied the same rationale to claims under the EPA because Congress enacted the EPA as an amendment to the FLSA and because the failure to pay women a lawful wage would give an employer the same unfair competitive advantage that the Court was concerned about eradicating in the 1940's decisions. 

Finally, also in August, the Second Circuit Court of Appeals issued two separate decisions holding that class-action waiver provisions in arbitration agreements were enforceable against FLSA claims even if the employee could show that the waiver removed the plaintiff's financial incentive to pursue the claim. (See Sutherland v. Ernst & Young LLP, 2013 WL 4033844 [2d. Cir. Aug. 9, 2013] and Rainere v. Citigroup Inc., 2013 WL 4046278 [2d. Cir. Aug 12, 2013]). 

In Sutherland, the district court refused to compel arbitration and stay the federal court action finding the arbitration agreement was unenforceable because the employee would incur prohibitive costs if compelled to arbitrate under the class-action waiver provision and, therefore, would not be able to effectively vindicate her rights under FLSA. On appeal, the Second Circuit reversed based on the recent U.S. Supreme Court decision in American Express Co. v. Italian Colors Restaurant, 133 S.Ct. 2304 (2013). The Court noted that the American Express decision rejected the argument that a class action waiver could be invalidated based on the argument that it would not be economical to pursue the rights solely on an individual claim basis. Thus, the Second Circuit found nothing in the text of the FLSA that would preclude the waiver of collective action claims, a procedural mechanism instead of a substantive right. The Second Circuit did not reference the 1940's Supreme Court decisions. Similarly, agreeing with the Eighth Circuit Court of Appeals, the Second Circuit likewise refused to follow the holding of the National Labor Relations Board's recent decision, In re D.R. Horton Inc., 357 NLRB No. 184 (Jan. 3, 2012), which found that a class-action waiver violates the National Labor Relations Act. 

The two Second Circuit decisions clearly follow the burgeoning United States Supreme Court precedent recognizing arbitration's favored status under federal law, particularly in light of the recent on-point Supreme Court decision. The one area where some federal district courts have continued to recognize a distinction between FLSA claims and other statutory claims in the arbitration arena is in the area of settlement. When compelling arbitration of FLSA claims and staying the underlying action, these federal courts have recognized that any settlement of FLSA claims reached in arbitration will only be binding if the parties return to the court for judicial approval of the settlement.