Bifurcated Settlement Structures: An Unsettling Loophole for New York Employers
Posted on Nov 6, 2019Four years ago, the Second Circuit held that parties cannot settle Fair Labor Standards Act (“FLSA”) claims through a private stipulated dismissal with prejudice pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(ii).[1] Under Cheeks, FLSA settlement agreements must be approved by either a court or the Department of Labor (“DOL”).[2] In deciding Cheeks, the Second Circuit was concerned with the “disparate bargaining power between employers and employees,”[3] and wanted to ensure that individual plaintiffs would not be pressured into unfair settlement agreements.[4]
Interestingly, Cheeks does not fully explain what constitutes an unfair FLSA settlement agreement. However, the district courts have generally agreed that such agreements cannot contain: confidentiality provisions,[5] terms that allocate more than one-third of the total settlement amount for attorney’s fees,[6] asymmetric general releases,[7] or non-disparagement clauses that lack a carve-out for truthful statements made about the litigation experience.[8] Understandably, employers have looked for ways to settle FLSA claims without having to adhere to these limitations. In New York, bifurcated settlement structures present one such method.
How Bifurcated Settlement Structures WorkLike many federal regulations, the FLSA is meant to “establish a national floor” for standards across the country, specifically for wage protections.[9] New York has enacted additional wage protections that go beyond the FLSA’s minimum requirements within the New York Labor Law (“NYLL”).[10] Therefore, when an employer violates the minimum standards of the FLSA, they are also violating the additional standards of the NYLL. Consequently, FLSA and NYLL claims are commonly brought together in federal courts in New York.
However, Cheeks only applies to FLSA claims. In other words, private agreements that settle NYLL claims are currently enforceable without governmental review. As a result, many lawyers have proposed bifurcated settlement structures, under which the parties settle FLSA claims in an agreement that they submit to the court, and settle NYLL claims in a separate, private agreement.[11] This settlement structure was allowed in Abrar v. 7-Eleven, Inc.[12] and Yunda v. SAFI-G, Inc.[13] However, the Yunda court explicitly recognized the underlying purpose of such a structure.[14]
The Problem with Bifurcated Settlement StructuresThe threat posed by these settlement structures was perfectly articulated by Magistrate Judge Levy:
[A]bsent an opportunity to review the NYLL settlement agreement in this case, the court has no way of knowing whether or not this is a true dismissal without prejudice. Similarly, unless the court can review this agreement, it cannot determine whether the agreement contains other conditions relating to or otherwise affecting the FLSA claims that would be impermissible if executed in an FLSA settlement agreement.[15]
Although the Gallardo court ultimately required that the non-FLSA settlement agreement be submitted for review, it suggested that this ruling was only appropriate because there was a stipulated dismissal of the FLSA claim, rather than a separate and fully-detailed FLSA settlement agreement. However, whenever there exists a private non-FLSA settlement agreement in this context, there is a risk that the parties are using it as a means to hide terms that impermissibly affect the employee’s FLSA claims.
ConclusionTo close the bifurcated settlement loophole entirely, the Second Circuit should revisit its ruling in Cheeks and expand it to require the review of all agreements settling any claims that were brought along with an FLSA claim. Additionally, the Second Circuit should instruct district courts to approve non-FLSA settlement agreements as long as they do not contain terms that unfairly affect FLSA claims. This instruction would ensure that the proposed expansion only effectuates what was already intended by Cheeks. To enact this change, the Second Circuit would simply have to hear one of the many new cases in which a bifurcated settlement structure has been proposed, and could use the rationale articulated in Gallardo.
Some may argue that this issue is best left to either Congress or the New York legislature. However, the Second Circuit has already assumed an active role in interpreting the FLSA,[16] and has characterized it as being a “uniquely protective statute.”[17] Therefore, if the Second Circuit agrees that this proposed change is necessary to enforce the purpose of the FLSA, then it could reasonably conclude that this objective supersedes any state sovereignty concerns.
Although bifurcated settlement structures are not the only way to avoid Cheeks,[18] many courts have begun to reject alternative methods. For example, a growing number of judges have prevented lawyers from successfully using Rule 68 Offers of Judgment to evade Cheeks review.[19] Therefore, the solution proposed here squarely aligns with this recent trend of courts closing loopholes that, if left unchecked, would undermine Cheeks and the FLSA.
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[1] Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199, 206 (2d Cir. 2015).
[2] Id.
[3] Id. at 207 (2d Cir. 2015) (referencing Brooklyn Sav. Bank, 324 U.S. at 706–07 (1945)).
[4] Id. at 205–07.
[5] Souza v. 65 St. Marks Bistro, No. 15-CV-327 (JLC), 2015 WL 7271747, at 4* (S.D.N.Y. Nov. 6, 2015).
[6] Bukhari v. Senior, No. 16CIV9249PAEBCM, 2018 WL 559153, at *1 (S.D.N.Y. Jan. 23, 2018).
[7] Lopez v. Poko-St. Ann L.P., 176 F. Supp. 3d 340, 346 (S.D.N.Y. 2016).
[8] Snead v. Interim HealthCare of Rochester, Inc., 286 F. Supp. 3d 546, 553 (W.D.N.Y. 2018).
[9] Pacific Merchant Shipping Ass’n v. Aubry, 918 F.2d 1409, 1425 (9th Cir. 1990).
[10] N.Y. Labor Law §§ 190–99-a, 650–65 (Consol. 2019).
[11] Christopher Theodorou, A Facial Reconstruction of Settlements: Analyzing the Cheeks Decision on FLSA Settlements, 35 Hofstra Lab. & Emp. L.J. 209, 216 (2017) (explaining what bifurcated settlement structures are); A. Jonathan Trafimow & Julia Gavrilov, ‘Cheeks’: Restricting Private Settlements Under Fair Labor Standards Acts, N.Y.L.J. (Online), (Dec. 7, 2016) (citing instances where parties successfully used bifurcated settlement structures), https://www.law.com/newyorklawjournal/almID/1202774041536/cheeks-restricting-private-settlements-under-fair-labor-standards-act/.
[12] Abrar v. 7-Eleven, Inc., No. 14CV6315ADSAKT, 2016 WL 1465360 at *1 (E.D.N.Y. Apr. 14, 2016).
[13] Yunda v. SAFI-G, Inc., No. 15 CIV. 8861 (HBP), 2017 WL 1608898, at *2 (S.D.N.Y. Apr. 28, 2017).
[14] Id. (“Clearly, the purpose of such a structure is to avoid some of the limitations that Cheeks and its progeny have imposed on settlements of FLSA claims. The NYLL settlement agreement contains several provisions that would be impermissible in an FLSA settlement. Recognizing that issue, the parties have instead included these provisions in their NYLL settlement agreement to immunize them from judicial review. I conclude that such a bifurcated settlement agreement is permissible”).
[15] Gallardo v. PS Chicken, Inc., 285 F. Supp. 3d 549, 553 (E.D.N.Y. 2018).
[16] See Cheeks, 796 F.3d at 201–07. Despite acknowledging that “the FLSA is silent as to Rule 41” and that neither the Supreme Court nor the Advisory Committee’s offer any direct support, the Second Circuit nevertheless concluded that the FLSA was an “applicable federal statute” under Rule 41. The Second Circuit reached this conclusion primarily by appealing to “the unique policy considerations underlying the FLSA” and by characterizing the FLSA as a “uniquely protective statute” designed to “prevent abuses by unscrupulous employers, and remedy the disparate bargaining power between employers and employees.”
[17] Id. at 207.
[18] Glenn S. Grindlinger & Alexander W. Leonard, 'Cheeks v. Freeport Pancake House': A Full Stack of Approval Decisions 18 Months In; Outside Counsel, N.Y.L.J. (Online), (Mar. 22, 2017) (explaining several of the ways that litigants have avoided Cheeks altogether), https://www.law.com/newyorklawjournal/almID/1202781869499/cheeks-v-freeport-pancake-house-a-full-stack-of-approval-decisions-18-months-in/.
[19] Mei Xing Yu v. Hasaki Rest., Inc., 319 F.R.D. 111, 116–17 (S.D.N.Y. 2017) (holding that parties cannot evade Cheeks’ requirement of judicial or DOL review by way of Rule 68); Lopez v. Overtime 1st Ave. Corp., 252 F. Supp. 3d 268, 272–73 (S.D.N.Y. 2017) (requiring that the parties submit the Rule 68 Offer to the court for a fairness review).