Can a company settle an overtime claim with its employee without litigation?

Conventional wisdom says no, but recent legal decisions suggest that it may be possible if the settlement is in good faith.  (These decisions have analyzed the terms of the Fair Labor Standards Act (FLSA or Act) that prevent an employee from waiving rights under the Act.)  Traditionally, courts have held that, even if employer and employee want to settle an overtime claim for an agreed amount, the parties must still obtain approval of the settlement from a court or the U.S. Department of Labor (DOL).  Otherwise, the settlement might be unenforceable, and the employee could still sue asking for additional payment, liquidated damages, and attorneys’ fees.

The FLSA prohibits employers from forcing new employees to waive their FLSA rights in a private contract as a condition of their employment.  Courts have read the provisions more broadly as barring settlements in which employees waive claims for prior unpaid wages or overtime in exchange for payment without court or DOL approval.  The logic is that such oversight is needed to ensure the fairness of the transaction.

This has created a practical problem for employers that discover that an employee was not properly paid minimum wages or overtime.  To address a wage and hour problem, the parties must elevate the issue to a public filing of some type.  For example, in the U.S. District Court located in Alexandria, Virginia, judges routinely require that any FLSA settlement be filed as part of the public record (and not as a private matter “under seal”).  Thus, by trying to resolve an FLSA claim with an employee, an employer might unwittingly notify other employees of the issue and the payment being made to their colleague.  This, in turn, might cause other employees to file suit.

Several recent court decisions, however, have noted that neither the FLSA itself nor its regulations bar employers and employees from privately settling past wage or overtime claims for full value. The courts rendering these decisions have reasoned that, as long as there is a genuine dispute over the amount of minimum wages or overtime due and the parties reach a good faith resolution, the private settlement agreements are just as enforceable as those reached with court or DOL approval.

Even some courts that disagree and require court or DOL approval of FLSA settlements have ruled that a private settlement that pays full wages and overtime for hours worked may render moot a later FLSA lawsuit.

Employers that find themselves in the unenviable position of trying to fix past mistakes concerning minimum wages or overtime should consult with skilled counsel to discuss the best option for fully and finally resolving the situation.