Broad Generic Release In Prior State Court Settlement Did Not Bar Subsequent FLSA Claims: Fifth Circuit | Practical Law

Broad Generic Release In Prior State Court Settlement Did Not Bar Subsequent FLSA Claims: Fifth Circuit | Practical Law

In Bodle v. TXL Mortgage Corporation, the US Court of Appeals for the Fifth Circuit held that two employees' overtime claims under the Fair Labor Standards Act (FLSA) were not barred by their release in a private settlement of a prior state court action that did not involve a bona fide dispute under the FLSA or any claim for unpaid wages. While the court asserted that private settlements reached over a bona fide dispute regarding the FLSA and unpaid overtime are sufficient to bar a subsequent FLSA suit, the parties in this case had not addressed the FLSA or unpaid overtime in their settlement of the state action involving the employees' non-compete restrictions.

Broad Generic Release In Prior State Court Settlement Did Not Bar Subsequent FLSA Claims: Fifth Circuit

by Practical Law Labor & Employment
Published on 05 Jun 2015 • USA (National/Federal)
In Bodle v. TXL Mortgage Corporation, the US Court of Appeals for the Fifth Circuit held that two employees' overtime claims under the Fair Labor Standards Act (FLSA) were not barred by their release in a private settlement of a prior state court action that did not involve a bona fide dispute under the FLSA or any claim for unpaid wages. While the court asserted that private settlements reached over a bona fide dispute regarding the FLSA and unpaid overtime are sufficient to bar a subsequent FLSA suit, the parties in this case had not addressed the FLSA or unpaid overtime in their settlement of the state action involving the employees' non-compete restrictions.
On June 1, 2015, in Bodle v. TXL Mortgage Corporation, the US Court of Appeals for the Fifth Circuit held that two employees' FLSA unpaid overtime claims were not barred by their release in a private settlement of a prior state court action that did not involve a bona fide dispute under the FLSA or any claim for unpaid wages. While the court asserted that private settlements reached over a bona fide dispute regarding the FLSA and unpaid overtime are sufficient to bar a subsequent FLSA suit, the parties in this case had not addressed the FLSA or unpaid overtime in their settlement of the state action involving the employees' non-compete restrictions. As a result, the employees had not bargained away their overtime claims. (No. 14-20224, (5th Cir. June 1, 2015).)

Background

In 2012, about a year after Ambre Bodle and Leslie Meech resigned their employment with TXL Mortgage Corporation (TXL) to work for a competing company, TXL sued the former employees in state court for violating their non-compete restrictions. Several months later, the employees and TXL settled the state court action by entering into a settlement agreement that contained a broad, generic release of TXL. At the same time the settlement was reached, the employees sued TXL in federal court for failing to pay them for overtime as required under the FLSA. The district court granted summary judgment to TXL, finding that the release executed by the employees to settle the state court action waived their FLSA claims because at the time the settlement was made, the plaintiffs were aware of their claims for unpaid overtime. The employees appealed to the Fifth Circuit.

Outcome

The Fifth Circuit held that the employees' FLSA claims were not barred by the release settling the prior state court action because:
  • In contrast with the settlement in Martin v. Spring Break '83 Productions, LLC, 688 F.3d 247 (5th Cir. 2012), where the parties specifically disputed the number of overtime hours worked, here:
    • the state court case did not involve unpaid overtime or any FLSA claim; and
    • the settlement discussions did not address overtime or the FLSA.
  • Absent specific negotiations about overtime, the plaintiffs would not be guaranteed to receive unpaid overtime allegedly due to them.
The Fifth Circuit reversed the district court's grant of summary judgment to TXL and remanded.
The Fifth Circuit noted that:
  • The district court relied heavily on the Fifth Circuit's decision in Martin, which enforced a private settlement of FLSA claims because the settlement:
    • represented a compromise over FLSA claims; and
    • resolved a bona fide dispute over hours worked where it was not possible to validate the number of hours the employees had worked.
  • A district court decision relied on by the 5th Circuit in Martin enforced a release that resulted directly from an employee's complaint that:
    • he had not been paid overtime; and
    • expressly stated that the payment received from the employer was full settlement for overtime pay.
    (Martinez v. Bohls Bearing Equipment Co., 361 F. Supp. 2d 608 (W.D. Tex. 2005).)
  • The settlement between the parties in this case:
    • involved a state court action centered around the employees' non-compete agreement; and
    • included discussions about unpaid commissions and salary but not unpaid overtime.
Separately, the Fifth Circuit disposed of TXL's argument that plaintiffs' FLSA claims were barred by res judicata. The court noted that res judicata did not apply because of the different subject matter in the two lawsuits (the state court action involved the plaintiffs' alleged violation of their non-compete agreements while the current FLSA case involved unpaid overtime).

Practical Implications

This decision suggests to employers that broad or general releases may not be sufficient to dispose of potential FLSA claims. To secure a valid and enforceable release of FLSA claims, even when the underlying dispute with former employees does not directly address overtime or the FLSA, employers should draft a release that:
  • Specifically references the employee's waiver of claims under the FLSA for unpaid overtime and wages.
  • Expressly acknowledges that the employee has been paid all wages, compensation, overtime and any other compensation due under the FLSA.
  • Requires that the employee will not take part in any FLSA class or collective action seeking unpaid overtime or wages.