United States District Court, D. Maryland
MEMORANDUM TO COUNSEL
PAUL W. GRIMM, District Judge.
This memorandum is provided to assist counsel in addressing common problems that arise in the settlement of actions brought under the Fair Labor Standards Act ("FLSA"), 29 U.S.C. §§ 201-219.
Congress enacted the FLSA to protect workers from the poor wages and long hours that can result from significant inequalities in bargaining power between employers and employees. To that end, the statute's provisions are mandatory and generally are not subject to bargaining, waiver, or modification by contract or settlement. See Brooklyn Sav. Bank v. O'Neil, 324 U.S. 697, 706 (1945). Court-approved settlement is an exception to that rule, "provided that the settlement reflects a reasonable compromise of disputed issues' rather than a mere waiver of statutory rights brought about by an employer's overreaching.'" Saman v. LBDP, Inc., No. DKC-12-1083, 2013 WL 2949047, at *2 (D. Md. June 13, 2013) (quoting Lynn's Food Stores, Inc. v. United States, 679 F.2d 1350, 1354 (11th Cir. 1982)).
I. Inapplicability of Fed.R.Civ.P. 41(a)(1)(A)
All settlement agreements that resolve claims under the FLSA must receive court approval. Gionfriddo v. Jason Zink, LLC, No. RDB-09-1733, 2012 WL 1077765, at *2 (D. Md. Mar. 29, 2012); Hoffman v. First Student, Inc., No. WDQ-06-1882, 2010 WL 1176641, at *2 (D. Md. Mar. 23, 2010). And, "since Rule 41(a)(1)(A)(ii) makes dismissal under such rule [s]ubject to... any applicable federal statute, ' and since the FLSA requires court approval of such dismissals, the parties may not effectuate such dismissal through use of a stipulation of dismissal." Minsterman v. S.L. Nusbaum Realty Co., No. 10-303, 2011 WL 9687817, at *1 (E.D. Va. Jan. 21, 2011). Some courts have reached the opposite conclusion, see, e.g., Picerni v. Bilingual Seit & Preschool Inc., 925 F.Supp.2d 368 (E.D.N.Y 2013), but the objectives of the FLSA, as announced in O'Neil, cannot be guaranteed through the use of dismissals under Fed.R.Civ.P. 41(a)(1)(A) as a vehicle for avoiding court review and approval of FLSA settlements.
II. Factors Considered in the Approval of FLSA Settlements
In reviewing FLSA settlements for approval, "district courts in this circuit typically employ the considerations set forth by the Eleventh Circuit in Lynn's Food Stores. " Saman, 2013 WL 2949047, at *3 (citing Hoffman v. First Student, Inc., No. WDQ-06-1882, 2010 WL 1176641, at *2 (D. Md. Mar. 23, 2010); Lopez v. NTI, LLC, 748 F.Supp.2d 471, 478 (D. Md. 2010)). The settlement must "reflect a fair and reasonable resolution of a bona fide dispute over FLSA provisions." Id. The Court considers (1) whether there are FLSA issues actually in dispute, (2) the fairness and reasonableness of the settlement in light of the relevant factors from Rule 23, and (3) the reasonableness of the attorneys' fees, if included in the agreement. Id. (citing Lynn's Food Stores, 679 F.2d at 1355; Lomascolo v. Parsons Brinckerhoff, Inc., No. 08-1310, 2009 WL 3094955, at *10 (E.D. Va. Sept. 28, 2009); Lane v. Ko-Me, LLC, No. DKC-10-2261, 2011 WL 3880427, at *2-3 (D. Md. Aug. 31, 2011)).
A. Bona Fide Dispute and Fairness and Reasonableness
In deciding whether a bona fide dispute exists as to a defendant's liability under the FLSA, courts examine the pleadings in the case, along with the representations and recitals in the proposed settlement agreement. See Lomascolo, 2009 WL 3094955, at *16-17. If a bona fide dispute exists, courts evaluate the fairness and reasonableness of the settlement using the following factors:
"(1) the extent of discovery that has taken place; (2) the stage of the proceedings, including the complexity, expense and likely duration of the litigation; (3) the absence of fraud or collusion in the settlement; (4) the experience of counsel who have represented the plaintiffs; (5) the opinions of  counsel...; and (6) the probability of plaintiffs' success on the merits and the amount of the settlement in relation to the potential recovery."
Saman, 2013 WL 2949047, at *3 (quoting Lomascolo, 2009 WL 3094955, at *10).
B. Attorneys' Fees
Under 29 U.S.C. § 216(b), "the wronged employee should receive his full wages plus the [liquidated damages] penalty without incurring any expense for legal fees or costs.'" Silva v. Miller, 307 F.App'x 349, 351 (11th Cir. 2009) (quoting Maddrix v. Dize, 153 F.2d 274, 275-76 (4th Cir. 1946) (emphasis added)). Thus, although contingent-fee arrangements are allowed, and sometimes even preferred, in many common-fund cases, see, e.g., Goldenberg v. Marriott PLP Corp., 33 F.Supp.2d 434, 437 (D. Md. 1998) (citing authority from multiple circuits), a district court may abuse its discretion by approving, without an independent evaluation for reasonableness, an FLSA settlement that includes a contingent fee, Lyle v. Food Lion, Inc., 954 F.2d 984, 988 (4th Cir. 1992) (concluding that "it was an abuse of discretion for the district court... to forgo the lodestar approach and to calculate reasonable attorney's fees by adopting instead the attorney's customary contingent-fee arrangement"); Llora v. H. K. Research Corp., No. 96-1552, 1997 WL 693062, at *1 (4th Cir. Oct. 29, 1997) (concluding that "it was an abuse of discretion for the district court to award attorney's fees that equaled one-third of the judgment award without adequately explaining its reasoning for failing to use the lodestar amount"). This is because "permitting contractual waiver of... the right to minimum wage, overtime compensation, liquidated damages, and attorney's fees-would nullify the purposes of the [FLSA]." Walthour v. Chipio Windshield Repair, LLC, 944 F.Supp.2d 1267, 1272 (N.D.Ga. 2013), aff'd, 745 F.3d 1326 (11th Cir. 2014), cert. denied, 134 S.Ct. 2886 (U.S. 2014).
Consequently, allowing a contingent fee that distributes a percentage of the damages award to the attorney, effectively allowing the employee to waive both the statutorily-mandated attorneys' fees and the portion of her wages and liquidated damages allocated to attorneys' fees, would be an impermissible infringement on the statutory award to the employee. See Walthour, 944 F.Supp.2d at 1272; see also O'Neil, 324 U.S. at 706 & n.16. Nonetheless, an attorneys' fee award negotiated pursuant to a contingent-fee arrangement can be approved if the court finds (1) that the fees were negotiated separately from the damages, so that they do not infringe on the employee's statutory award, and (2) that they are reasonable under the lodestar approach. See Silva, 307 F.App'x at 351 ("FLSA requires judicial review of the reasonableness of counsel's legal fees to assure both that counsel is compensated adequately and that no conflict of interest taints the amount the wronged employee recovers under a settlement agreement."); Lyle, 954 F.2d 984, 988 (4th Cir. 1992); Llora, 1997 WL 693062, ...