Wage and hour lawsuits (e.g., those involving an employee’s claim that he or she was deprived of overtime pay) under the Fair Labor Standards Act (“FLSA”) pose unique challenges for employers. This is due in part to the fact that the FLSA entitles a prevailing plaintiff to the payment of his or her attorneys’ fees by the employer and, in some cases, an award of double damages.

Additionally, unlike most other types of labor and employment cases, actions involving the FLSA cannot be settled without the approval of a court or the supervision of the U.S. Department of Labor. In deciding whether to approve such a settlement, courts consider whether the terms of the parties’ agreement are the product of a “reasonable compromise” rather than “overreaching” by the employer.

One component of the “reasonable compromise” analysis has historically been whether the plaintiff’s attorneys’ fees were proportional to the amount of plaintiff’s recovery. Federal courts in the Second Circuit (including those in New York) usually capped the amount of plaintiff’s attorneys’ fees at one-third of plaintiff’s recovery. The practical effect of this was that, if plaintiff’s attorney spent significant time to recover a relatively small amount of damages, the amount of fees recoverable by plaintiff’s counsel would not fairly compensate the attorney for the work performed. This deterred plaintiffs’ attorneys from taking smaller cases, and left employers with less incentive to settle early.

On February 4, 2020, the U.S. Court of Appeals for the Second Circuit overruled the so-called “proportionality rule”. In Fisher v. SD Protection, Inc., ___ F.3d ___ (2d Cir. 2020), the District Court rejected a FLSA settlement which provided that the plaintiff was to receive $2,000 and his counsel was to receive $23,000. The District Court effectively rewrote the settlement so that plaintiff would receive $15,000 and his attorneys would receive the balance.

The Second Circuit reversed, finding that the proportionality rule impeded the FLSA’s purpose of “ensur[ing] a fair day’s pay for a fair day’s work”, and had to be eliminated in order to “encourage members of the bar to provide legal services to those whose wage claims might otherwise be too small to justify the retention of able, legal counsel.”

The Second Circuit also held that District Courts are not at liberty to rewrite parties’ settlement agreements. If the Court finds the terms of a settlement unreasonable, it must reject the agreement and send it back to the parties for renegotiation or with a direction to proceed with the litigation. The Court may, however, make suggestions about what it would consider a reasonable amount of attorneys’ fees for plaintiff’s counsel.

The Second Circuit’s determination in Fisher fortifies the protections available to employees under the FLSA. However, employers must take heed of this increased exposure to liability, and consider whether an early settlement (at a stage when plaintiff’s attorneys have not spent significant time on the matter) would be more advantageous in the long-run as a matter of dollars and cents.