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FLSA settlement agreements cannot be written to impose new terms that the parties have not agreed to

Attorneys fees can be a powerful weapon for workers in FLSA cases.  A recent case in the Second Circuit addressed the parties’ ability to allocate settlement funds as attorney’s fees. The plaintiff was hired by the defendants SD Protection, Inc. and Sandra Dominguez Mercado as a personal chaperone. Fisher v. SD Protection, Inc., et al., No. 18-2504-cv (2nd Cir. Feb. 4, 2020). He was required to supervise student tour groups during late nights and early mornings by enforcing curfews and monitoring noise levels. The plaintiff worked approximately 26 weeks for  the defendants, regularly working over 40 hours per week. The plaintiff was paid $10 an hour, but did not receive any paystubs nor was he paid overtime as required under the Fair Labor Standards Act (“FLSA”) and the New York Labor Law (“NYLL”). As a result, the plaintiff sued the defendants and alleged that he and others similarly situated were entitled to unpaid overtime, liquidated damages, statutory penalties, and attorneys’ fees and costs. 

After several months of discovery, the parties agreed to a settlement, whereby the defendants would pay $25,000 “inclusive of all costs and fees, including but not limited to attorney’s fees,” with $23,000 going to the attorneys, and $2,000 to the plaintiff. The district court approved the total settlement sum of $25,000 but modified it by increasing the amount to be paid to plaintiff and reducing the attorneys’ fees and costs. The district court increased the amount to plaintiff, awarding $15,055 or 60.22% of the settlement amount, and reduced the attorneys’ fees and costs by $9,610 and $3,445, respectively, and allocating those amounts to the plaintiff. Thus, this appeal arose. The plaintiff contended that the district court abused its discretion in modifying the settlement agreement. 

Under the FLSA, the parties must seek district court approval of settlements before any stipulated dismissal is granted. The court has the requirement to make sure the settlement and the request for attorney’s fees and costs are fair for both parties. Calle v. Elite Specialty Coatings Plus, Inc., No. 13‐cv‐6126 (NGG), 2014 WL 6621081, at *2 (E.D.N.Y. Nov. 21, 2014) (“When an FLSA settlement includes an allotment of attorneyʹs fees, the court must also evaluate the reasonableness of the fees.”). 

First, under the FLSA and NYLL, an award of costs includes the reasonable out of pocket expenses. Reichman v. Bonsignore, Brignati & Mazzotta P.C., 818 F.2d 278, 283 (2d Cir. 1987). In order to show that the costs are reasonable, the party must submit adequate documentation showing how much was expended in costs. The Second Circuit first had to determine whether the district court abused its discretion in reducing counsel’s costs to $1,695. The attorney’s stated that the district court committed factual error by failing to properly calculate all costs submitted as evidenced by their accompanying documentation. The Second Circuit agreed. The receipts showed proper costs and expenses of service fees, filing fees, hotels, transportation, working meals, and deposition transcripts, which totaled more than $4,733.60 in costs. Thus, this issue was remanded for the district court to reconsider the appropriate amount of costs.

Second, the Second Circuit considered whether the requested fees of $17,860 was unreasonable and excessive, which was reduced to $8,250, or 33% of the total settlement amount of $25,000. The reduction of $9,610 in attorneys’ fees was thus given to the plaintiff. The Second Circuit said yes, the district court abused its discretion by reducing the amount. The court considered two things: 

  1. First, the district court erred by concluding that the “maximum fee percentage” that counsel can recover in FLSA cases is 33%.  

The Second Circuit said that the FLSA did not support imposing a proportionality limit on reasonable attorneys’ fees. With respect to the statutory text, FLSA provides for a “reasonable attorneyʹs fee to be paid by the defendant.” 29 U.S.C. § 216(b). Nothing in this clause or the surrounding text supports the conclusion that a “reasonable attorney’s fee” must be a “proportional” fee. See, e.g., United Auto. Workers Local 259 Soc. Sec. Depʹt v. Metro Auto Ctr., 501 F.3d 283, 294 (3d Cir. 2007). A proportionality rule would be inconsistent with the remedial goals of the FLSA. “By requiring a percentage cap on attorneys’ fees in FLSA cases, district courts impeded Congress’s goals by discouraging plaintiffs’ attorneys from taking on “run of the mill” FLSA cases where the potential damages are low and the risk of protracted litigation high.” Fisher v. SD Protection, Inc., et al., No. 18-2504-cv (2nd Cir. Feb. 4, 2020). Thus, there is no implicit limit on attorneys’ fees in FLSA cases and district courts should not implement such a limit. Id. 

The Second Circuit went on to say that it doesn’t make sense to limit the award to 33% of the total settlement as these FLSA cases often times involve ordinary, everyday workers who are paid hourly wages, where favorable outcomes result in limited recoveries. Thus, if attorneys in “run of the mill” actions are limited to a proportional fee, no reasonable attorney would take on cases unless the work was essentially pro bono. Thus, without fee-shifting provisions to provide compensation to attorneys, plaintiffs would be left with very little legal recourse. Id. The Second Circuit said that in analogous civil rights legislation, “a fee may not be reduced merely because the fee would be “disproportionate to the financial interest at stake in the litigation.” Kassim, 415 F.3d at 252; accord Dunlap‐McCuller v. Riese Org., 980 F.2d 153, 160 (2d Cir. 1992). The Supreme Court, this court, and the district court have recognized the significance of attorneys’ fees in civil rights cases and have not hesitated to award or approve disproportionate fees to counsel. See, e.g., City of Riverside, 477 U.S. at 564‐67 (upholding award of $245,456.25 in fees, even though plaintiffs recovered only $33,350). Thus, the Second Circuit concluded that the district court erred in imposing a proportionality limit on the attorneys’ fees.

  1. Second, the district court erred by rewriting the parties’ settlement agreement.  

Here, if a district court concludes that a proposed settlement is unreasonable, the court cannot simply rewrite the agreement. It must either reject the agreement or give the parties the opportunity to revise it. The district court can suggest a number for fees and costs, but it does not have the authority to rewrite the agreement with new terms. See Evans v. Jeff D., 475 U.S. 717, 726 (1986) (holding, in Fed. R. Civ. P. 23 context, that “the power to approve or reject a settlement negotiated by the parties before trial does not authorize the court to require the parties to accept a settlement to which they have not agreed”). Courts cannot alter the express terms of the agreement or impose new obligations that are not mandated by the unambiguous terms of the agreement itself. 

As was present here, when courts are presented with settlements pursuant to a stipulated dismissal with prejudice, courts must review the settlement for reasonableness as set forth in Cheeks, 796 F.3d at 199. However, here, the district court treated the issue of fees and costs as if it was being presented with a fee application separately made after a plaintiff has prevailed through litigation or settlement. In those circumstances, district courts have the discretion to set attorneysʹ fees as they reasonably see fit. See, e.g., McDonald ex rel. Prendergast v. Pension Plan of the NYSA‐ILA Pension Tr. Fund, 450 F.3d 91, 96 (2d Cir. 2006) (“A district court may exercise its discretion and use a percentage deduction as a practical means of trimming fat from a fee application”). Thus, the district court erred by evaluating the settlement agreement under the lens of a fee application and then rewriting it. 

This case was remanded back to the district court to evaluate the reasonableness of the attorneys’ fees and costs without using the proportionality limit, as well as reviewing all the tasks the attorneys’ participated in. If the district court determines a reasonable amount that is different from the settlement agreement, it must reject the settlement agreement, and advise the parties what it deems to be reasonable and give them an opportunity to reach a new agreement. 

Just as this plaintiff raised questions regarding his unpaid overtime, if you have questions regarding your unpaid overtime, consider speaking with an attorney today. Josh Borsellino is an experienced FLSA attorney that understands how the rules and regulations work with regards to whether you are entitled to overtime pay. He offers free consultations and can be reached at 817.908.9861.

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