Can a general release in a settlement waive an employee’s FLSA overtime claims?

Everybody agrees that an employee-employer settlement is supposed to close things out. The language is carefully crafted to include whatever complaints were made or not, and the goal is to end it once and for all.

Some issues, though, can’t be waived away so easily.

For example, parties can’t waive overtime rights under the Fair Labor Standards Act (FLSA) in a private agreement. The court or Department of Labor has to sign off on such a release. In Nasrallah v. Lakefront Lines, a federal court in Ohio allowed an overtime claim to proceed even though the plaintiff already signed a release in a discrimination settlement.

Tamara Nasrallah reached a $40,000 settlement on her discrimination claim against her employer Lakefront Lines. The settlement included a general release that included a release of all claims whether known or unknown, including attorneys’ fees and costs. It specifically referenced claims under the FLSA and Ohio wage and hour laws. So on paper, the release appeared airtight. Any employer in this position would assume that claims about overtime were gone for good.

The settlement also included separate provisions stating that Nasrallah waived any claims for further compensation. She also acknowledged that she had been properly paid for all the hours that she had worked and any wages she was entitled to. She also agreed that she wasn’t entitled to any payments outside of the agreement.

So how could she turn around and sue for overtime?

In an under-oath declaration, she stated that she understood that her overtime rights couldn’t be settled without approval of either the Department of Labor or a court. Further, her statements that she had been paid what she was owed only covered non-overtime rights, like contract or discriminatory pay claims. In other words, in her mind, any private settlement of overtime rights was a nullity, so statements acknowledging that she had been paid all she was owed for such things couldn’t affect her rights to overtime pay.

The court agreed with her.

Lakefront had argued that if the underlying dispute didn’t involve a FLSA claim, a private settlement prevented a later FLSA lawsuit. The court, though, said case law was to the contrary. In the FLSA context, Congress was concerned about the unequal bargaining power between employers and employees. According to the most liberal reading of the rule, an employee and employer could reach a private FLSA settlement only if they were trying to resolve a bona fide dispute over the number of hours worked and/or wages due. Here, the prior dispute wasn’t FLSA based. Further, there was no evidence that overtime was discussed in the settlement negotiations. Finally, there had been no factual development of hours worked or the amount due for overtime. In essence, her generic acknowledgement that she had been paid what she was owed wasn’t sufficient where overtime hadn’t been part of the discussion.

What should employers do about this?

If there is a lawsuit pending, the answer is clear: get the court to approve the FLSA components of a settlement. This is an easy solution, because a court’s sign-off is exactly the kind of approval that the rule mandates. Therefore, the release of overtime claims should stick.

If there is no lawsuit, such as in situations involving severance packages or pre-suit discussions, then things get a lot trickier. In those cases, there’s no court to bless an agreement, so employers are left trying to decide among imperfect options.

I’d advise against trying to enlist the Department of Labor to supervise any settlement. The reason is that a wage-hour audit may lead to an OSHA visit and then an ERISA audit. If you invite the Department of Labor to supervise a settlement, you’re just setting yourself up for deeper scrutiny.

Likewise, filing a lawsuit just so that a court can approve a settlement and release is overkill almost every time, but it is still the safest play under a literal reading of the law.

A better middle path is to negotiate potential claims of unpaid wages - and the release of those claims - with the employee’s attorney and document the negotiation. Doing so will help you defend against any later FLSA claim. Why is this important? Because the documentation of the bargaining over overtime sets up a factual dispute over pay that was compromised. A general release may not be sufficient, as Lakefront learned the hard way. Without that documentation, the finality you bargained for may be illusory.