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Paul Zimmerman

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Dmytro Zinkevych ©

When the Exception Swallows the Rule

When I was in law school, one of my professors used a metaphor to make a point. In law, there are rules and exceptions to those rules, and sometimes the exceptions become so large that they “swallow” the rule. Instead of referring to it this way, however, my professor would call this situation “The Tomato That Ate Cleveland,” referencing a 1950s sci-fi movie.

This metaphor came to mind recently as I was catching up on the status of Fair Labor Standards Act (“FLSA”) cases in New York. The FLSA requires payment of a minimum wage to “non-exempt” workers, as well as overtime at a rate of 1½ the regular rate of pay for all hours worked in excess of 40 hours in one week.

In recent years, FLSA litigation has skyrocketed, flooding court dockets throughout the country. While most FLSA cases settle, the settlement amounts are usually very high. These cases can be brought initially on behalf of an entire group or class of employees without their consent, which dramatically raises the stakes for the employer.

Individual cases can also be very costly for employers, and this may become even more true as a result of a recent decision from the federal court of appeals in New York. In general, a settlement represents a compromise of claims, each side assessing:

  • The risk of having a jury decide the case;
  • The probability of success; and
  • The fact that taking a case through the entire litigation process will generally take many years and cost a lot of money to defend or prosecute.

As a result, the plaintiff usually takes less than claimed, while the employer will pay more than the claim may be worth.

Cheeks v. Pancake House

The tide may be turning in favor of plaintiffs, though, due to the decision in Cheeks v. Pancake House in July 2015. In Cheeks, the court ruled that it is mandatory to get court approval of any FLSA settlement, to make sure the settlement is “fair and reasonable.” Courts will examine a variety of factors to determine whether the settlement is “fair and reasonable,” including a computation of the underpaid wages and the method used to calculate the ultimate settlement payment. (Cheeks v. Freeport Pancake House, Inc., 796 F.3d 199 (2d Cir. 2015).

The impact of Cheeks was brought home when reading about a recent FLSA settlement involving Cantor Fitzgerald. An IT employee had brought a claim for unpaid overtime, which he calculated to be about $100,000. Cantor tried to settle with the employee for $50,000 prior to the suit, but the employee refused. Ultimately, Cantor settled the suit for $140,000—$100,000 for the employee and an extra $40,000 for his lawyer.

Without the rule in Cheeks, it is unlikely that this case would have settled so high. The employer may have even settled for the $50,000 originally offered, plus an extra $15,000 or so for the attorney. The fact that Cheeks requires court approval seems to have pushed this settlement to about double of what it might have otherwise been.

The Lesson Learned

Regardless of how large or small, all employers should audit the exempt/non-exempt status of their employees on a regular basis. Failure to do so means that even just one unfortunate misclassification could cost hundreds of thousands of dollars.  

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.