FLSA settlements cannot assume the lawyer gets only 33 percent of the amount

If you handle wage and hour case under the Fair Labor Standards Act, your life changed in August 2017, when the Second Circuit ruled that private parties cannot settle these cases without court approval. The court reached that decision in Cheeks v. Pancake House, 796 F.3d 199 (2d Cir. 2017), which exempted the FLSA from the general principle that parties in civil rights and other cases can settle on their own without court intervention. The idea is that Congress wanted workers to recover their full entitlement to lost wages for overtime and minimum wages. Cheeks is a relatively new case, so the courts are still working through the details. This case is the most significant post-Cheeks case thus far.

The case is Fisher v. SD Protection Inc., issued on February 4. The parties settled this case in the amount of $25,000, agreeing that $23,000 of that amount would go to plaintiff's lawyer, and plaintiff would get the rest. To the uninitiated, this may seem unfair to plaintiff, as the lawyer gets most of the money. But many FLSA cases do not involve large damages, and the lawyer may spent much time in preserving the plaintiff's rights anyway. Attorneys' fees case law recognizes that the legal fees may sometimes exceed the value of the case. In this action, the lawyers actually expended more than $50,000 on the case.

Under the Cheeks review, the district court approved the $25,000 amount, but it rewrote the agreement to give the plaintiff approximately $15,000, or about 60 percent of the agreement. The lawyers got only $8,250 in fees, or 33 percent of the total amount. The court also awarded plaintiff's counsel about $1,700 in costs. The issue on appeal is whether the district court was allowed to do this under Cheeks. He was not. The Court of Appeals rules that the district court abused its discretion.

The Court of Appeals says that when the trial disapproves of the FLSA settlement, it cannot rewrite it; it must instead either reject the agreement or allow the parties to revise it. We have two major holdings.

First, the district court cannot presume that the proper attorneys' fees allocation from a FLSA settlement is 33 percent. Sure, that's usually the going rate for settlements, and district courts have modified FLSA settlements under Cheeks to reflect that percentage, determining that the one-third amount is proportional to the overall settlement. But attorneys' fees decisions in other contexts, including Title VII cases, hold that attorneys' fees cannot be reduced to ensure proportionality with the overall value of the case, and the FLSA does not specifically require proportionality in awarding fees. And, the Court finds, proportionality would not make sense in FLSA cases because these cases are often not worth a lot of money, and it may take time-consuming lawyering to ensure the plaintiffs get proper relief. This is especially true where FLSA plaintiffs do not earn much money to start with.

The district court also abused its discretion in rewriting the settlement agreement. There is no case law on this issue under the FLSA, but cases in other contexts hold that trial courts cannot rewrite settlement agreements that they deem unfair or unjust. That principle now applies in wage and hour cases. While trial courts may adjust the attorneys' fees entitlement when a prevailing party moves for fees in civil rights cases, this is not that scenario, as this FLSA settlement was agreed to by the parties and presented to the district court for its approval.

The case returns to the district court to again review the FLSA settlement, noting that plaintiff's maximum recovery in this case would have been around $11,000. The appellate court also notes that plaintiff's lawyer conducted much work on this case; that would also bear upon the fairness of the settlement. The trial court may advise the parties what it would deem a fair settlement, but it cannot rewrite the agreement.