What Employers in Maryland Need to Know About the Settlement of Overtime Cases in Federal Court
As Maryland employers have increasingly come to learn, employee claims of unpaid overtime are among the most challenging to resolve. This is true primarily because the federal Fair Labor Standards Act (FLSA) (as well as analogous state wage and hour statutes) are among the most unforgiving, if not the most unforgiving, of all of the employment statutes for employers. What is far less understood by Maryland employers and their business advisors is the process by which wage and hour (i.e., overtime) claims need to be approved in Maryland federal court in order to perfect the parties’ settlement.
Congress enacted the FLSA to protect workers from poor wages and long hours that can result from inequalities in bargaining power between employees and employers. The statute’s provisions are mandatory and generally not subject to modification by contract or settlement, waiver, or bargaining. However, court-approved settlement is an exception to that rule, if the settlement reflects a reasonable compromise of the disputed issues rather than a waiver of claims brought about by the overreaching of an employer.
In reviewing FLSA settlements for approval, federal courts apply the following considerations: (i) whether there are FLSA issues actually in dispute; (ii) the fairness and reasonableness of the settlement in light of the relevant factors; and (iii) the reasonableness of the attorney’s fees if included in the agreement.
When determining whether a bona fide dispute exists with respect to the liability of an employer, courts typically consider the pleadings filed in the case; the recitals in the pleadings filed; and the representations and recitals in the proposed settlement agreement. Disputes can exist for a variety of issues including:
- whether overtime was actually worked;
- whether the defendants knew that overtime was worked;
- whether the additional overtime was reflected on the official time records or worked "off the clock"; and
- whether the employee was paid for any overtime (even if the amount of overtime paid represents a small portion of what the employee believes that he or she is owed).
The Court Approval Process
Once a court has made a threshold determination that a bona fide dispute exists, it then must evaluate the reasonableness and fairness of the settlement based upon the following six factors:
- the extent of discovery that has taken place;
- the stage of the proceedings including the complexity, expense, and likely duration of litigation;
- the absence of fraud or collusion in the settlement;
- the experience of counsel who represents the plaintiff;
- the opinions of counsel; and
- the probability of plaintiff's success on the merits and the amount of the settlement in relation to the potential recovery.
Maryland courts will carefully analyze the inclusion of a general waiver of claims. While some courts have held that an overly broad release provision can render an FLSA settlement agreement unreasonable if the release includes claims that are unrelated to those asserted in the complaint, if the employee is reasonably compensated for the general release executed the settlement can be accepted and a court will not be required to evaluate the reasonableness of the settlement on the non-FLSA claims. A general release is more likely to be approved if the defendant has compensated the plaintiff for non-FLSA claims and for FLSA claims.
Courts will carefully evaluate the attorney’s fees that the parties have agreed to pay to ensure that payment of the attorney's fees does not inappropriately deprive the plaintiff of monies that the court believes are reasonable to be paid in light of all of the circumstances. In this regard, courts expect counsel to submit a statement and supporting documentation verifying the attorney's time spent (and the amount incurred), and an explanation why the agreed upon attorney’s fees are fair and reasonable under the circumstances. In making this decision, Maryland federal courts will apply principles of the traditional “lodestar” method as a guide. This methodology includes determining the “lodestar amount,” which is defined as a reasonable hourly rate multiplied by the hours reasonably expended.
The approval process often entails the issuance of a written opinion by a Maryland federal court. However, at least one of the Maryland federal judges schedules a hearing to pose questions to counsel about the agreement to address relevant issues along the lines outlined above.
Key Takeaways for Maryland Employers
The approval process associated with claims of unpaid overtime, although designed to protect employees not fully paid the overtime and other wages they claim to be owed, has added an unanticipated level of complexity, expense, and uncertainty to perfecting the settlement of these types of cases. Particularly in light of the elaborate and expensive approval process associated with the settlement of overtime claims, employers and their business advisors are well advised to consider the following:
1. Revise job descriptions to make sure that individuals have been properly characterized as employees as opposed to independent contractors.
2. Establish sound handbook policies concerning overtime.
3. Add certifications to timesheets that contain affirmative representations by employees that they accurately and fully reported all of the time they worked and that they understand that no one at the organization is authorized to instruct them to not report all hours worked.
4. Train managers on how to handle requests for overtime and how to monitor overtime work.
5. Make sure that employees are fully compensated when they leave employment.
6. When claims of unpaid overtime are made, amicably explore whether a resolution is possible before a lawsuit is filed.
Marc Engel is an employment attorney and litigator at Lerch, Early & Brewer who advises employers of all types on employment issues, and provides strategies for preventing, defending, and resolving wage and hour claims. For more information on overtime, contact Marc at (301) 657-0184 or firstname.lastname@example.org.