A question that has bedeviled ­employers for decades: Can employers obtain a release of claims under the Fair Labor Standards Act (FLSA) in the absence of U.S. Department of Labor (DOL) or court approval? A recent decision in the U.S. District Court for the Southern District of New York, Gaughan v. Rubenstein, adds more fuel to the fire, ­dismissing a plaintiff's FLSA claims against Lee Rubenstein and holding that the ­plaintiff's “pre-litigation settlement agreement” released her FLSA claims, even without the imprimatur of the DOL or a court.

How the Courts Previously Have Ruled

Until recently, wage-and-hour practitioners generally have looked to the U.S. Court of Appeals for the Eleventh Circuit's 1982 decision in Lynn's Foods Stores v. United States as the governing standard. In Lynn's Foods, the Eleventh Circuit held that there were only two ways an employee could release a private FLSA claim, a payment supervised by the DOL or “a stipulated judgment entered by a court which has ­determined that a settlement proposed by an employer and employees, in a suit brought by employees under the FLSA, is a fair and reasonable resolution of a bona fide dispute over FLSA provisions.” In reaching its ­conclusion, the Eleventh Circuit relied upon several Supreme Court decisions analyzing the inability of employees to contract away their rights to minimum wage and overtime under the FLSA and relying upon the “great inequalities in bargaining power between employers and employees.”

Enter the Fifth Circuit's 2012 decision in Martin v. Spring Break '83 Productions, which took a less categorical approach. In Martin, the plaintiffs filed a grievance with their union contending that they were not paid wages for work performed. After ­investigating the grievance, the union and defendant entered into a settlement agreement “pertaining to the disputed hours allegedly worked” by the plaintiffs. Before the settlement agreement was signed by union representatives, plaintiffs brought suit under the FLSA. Rejecting the ­argument that the release was invalid “because ­individuals may not privately settle FLSA claims,” the Fifth Circuit held that the payment offered to and accepted by the plaintiffs under the settlement ­agreement was “an enforceable resolution of those FLSA claims predicated on a bona fide dispute about time worked and not as a ­compromise of guaranteed FLSA substantive rights themselves.”

The Second Circuit entered this fray in 2015 in the Cheeks v. Freeport Pancake House case, narrowly holding that where the plaintiff had already filed a lawsuit under the FLSA, she could not privately agree to release her FLSA claims and ­stipulate to their dismissal with prejudice under Rule 41(a)(1)(A)(ii) of the Federal Rules of Civil Procedure. Citing to the “unique ­policy considerations underlying the FLSA,” which the Second Circuit reasoned was “distinct from all other employment statutes,” it found the FLSA to be an exception to Rule 41(a)(1)(A)(ii)'s “general rule that ­parties may stipulate to the dismissal of an action without the involvement of the court.”