On December 6, 2019, the Second Circuit Court of Appeals held that judicial approval is not required for offers of judgment to settle Fair Labor and Standards Act (“FLSA”) claims made pursuant to Federal Rule of Civil Procedure 68(a). This development may provide employers with a valuable strategic tool for use in FLSA cases, as least in the Second Circuit, allowing the parties to include terms in offers of judgment that the courts might disallow were court approval required.

Generally speaking, Rule 68 offers of judgment are a pre-trial mechanism whereby defendants can cap their litigation costs by shifting to the plaintiff all costs incurred after a pre-trial offer is made (including attorney’s fees) if that offer is rejected and the court subsequently renders a judgment that is less favorable to the plaintiff than the rejected offer.  If accepted, a Rule 68 offer of judgment does not provide the court with an opportunity to hold a hearing or otherwise consider the fairness of the offer; rather, the rule states that the clerk of the court must enter a judgment.

In Yu v. Hasaki Restaurant, Inc., Yu, a sushi chef employed by Hasaki Restaurant, Inc. (“Hasaki”), filed a complaint against the restaurant and its owners alleging violations of the overtime provisions of the FLSA and New York Labor Law.  In response, Hasaki mailed Yu a Rule 68 offer of judgment for $20,000 plus reasonable attorneys’ fees, costs, and expenses through the date of the offer.  Yu accepted and notified the court of same.

Based on the Second Circuit’s decision in Cheeks v. Freeport Pancake House, Inc., which held that stipulated dismissals settling FLSA claims with prejudice pursuant to FRCP 41(a)(1)(A)(ii) require approval of either the district court or the DOL to take effect, the trial court ordered the parties to submit briefs on the issue as to why the settlement should be approved as fair and reasonable or, alternatively, why judicial approval was not required.  The parties argued that judicial approval of Rule 68(a) offers of judgment for FLSA claims is not required, notwithstanding Cheeks.  At approximately the same time, the Secretary of Labor filed an amicus brief in a separate, unrelated case arguing that judicial approval in fact is required in this exact scenario.

Notwithstanding Rule 68’s clear language directing the clerk to enter judgment for the plaintiff (without any court discretion or oversight), the trial court t held that judicial approval of the parties’ FLSA settlement was required, relying on the existence of certain exceptions to Rule 68(a)’s mandatory terms (none of which explicitly includes offers of judgment implicating the FLSA) and the Second Circuit’s reasoning in Cheeks.  Recognizing a division on this question among the lower courts, however, the trial court certified its order for interlocutory appeal.

Upon carefully examining the statutory text of Rule 68(a) and the FLSA, the Second Circuit agreed with the parties that Rule 68(a)’s language regarding entry of judgment is mandatory regardless of the absence of any judicial approval or oversight.  It further held that even if exceptions to Rule 68(a)’s mandatory terms exist, there was no clear congressional intent to exempt the FLSA from the operation of Rule 68(a) and no Supreme Court precedent requiring judicial approval of stipulated settlements of FLSA claims.

With Yu, the Second Circuit cleared an often significant obstacle to the resolution process of FLSA settlements.  Parties in that Circuit can now avoid the time and expense that would be incurred by presenting the settlement to the court for review and a fairness hearing and will have freedom to include terms, such as non-disclosure and non-disparagement provisions, that are often disallowed in FLSA settlements submitted to court for fairness and approval.  It is important to note, however, that Rule 68 judgments must be filed publicly on the court’s docket, reflecting that the plaintiff is a prevailing party.