Labor & Employment Law Daily Enforcing proportionality standard in evaluating fees in FLSA settlement, and rewriting agreement, was error
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Thursday, February 6, 2020

Enforcing proportionality standard in evaluating fees in FLSA settlement, and rewriting agreement, was error

By Tulay Turan, J.D.

The Second Circuit found the district court erred in rewriting the settlement agreement and in evaluating the fees portion of the agreement as a separate fee application.

In an FLSA overtime case, a federal district court abused its discretion in rewriting a settlement agreement by modifying the allotment of $25,000 in settlement funds between a professional chaperone and his attorney, the Second Circuit ruled. The lower court also erred in concluding the “maximum fee percentage” his attorney could retain in an FLSA suit is generally limited to 33 percent of the total settlement amount. Accordingly, the court vacated the district court’s order and remanded for further proceedings (Fisher v. SD Protection Inc., February 4, 2019, Chin, D.).

No overtime compensation. In 2015, SD Protection hired the chaperone to work in hotel hallways to supervise student tour groups during late nights and early mornings, enforcing curfews and monitoring noise levels. In his 26 weeks of employment, he regularly worked 49 hours per week and was paid $10 an hour on a weekly basis. SD Protection did not furnish any paystubs to him and he was not compensated for any overtime as required by the FLSA and the New York Labor Law. The employer also failed to provide proper wage notices or wage statements as required by NYLL.

In March 2017, the chaperone sued SD and an individual defendant for violations of the FLSA and NYLL, alleging that he and others similarly situated were entitled to unpaid overtime, statutory penalties, liquidated damages, and attorneys’ fees and costs. The chaperone never filed a motion for class or collective certification, however. After months of discovery, in October 2017, the parties participated in a settlement conference and agreed to a settlement in principle. The district court ordered the parties to submit a final, executed settlement agreement and a Cheeks fairness submission.

In January 2018, the chaperone’s attorneys submitted a letter discussing the factors enumerated in Wolinsky v Scholastic, Inc, and the executed settlement agreement as well as certain documentation of the attorneys’ time records and expenses. The agreement required SD to pay $25,000 with the attorneys receiving $23,000 for fees and costs and the chaperone receiving the remaining $2,000.

Settlement approved, but modified. In July 2018, the district court issued an order approving the total settlement of $25,000 but modified it by increasing the amount allocated to the chaperone from $2,000 to $15,055, or 60.22 percent of the settlement amount. The court found he was entitled to $585 in unpaid overtime compensation, $585 in liquidated damages, $5,000 for wage notice violations and $5,000 for wage statement violations under the NYLL, for a total of $11,170. The court also allocated $3,885 to the chaperone based on its reduction in requested attorneys’ costs. The court awarded $1,695 in costs instead of the requested costs of $5,140 for filing, service and court reporting fees, and travel expenses. Although the chaperone’s maximum possible recovery was apparently $11,170, the court stated it would allocate the cost differential to him, inadvertently calculating it as $3,885 rather than $3,445. In addition, the court found the proposed attorneys fees of $17,860 was “unreasonable and excessive” and reduced the fees to $8,250, equivalent to 33 percent of the total settlement. This appeal followed.

Reduction in costs. First, the court found the district court committed an abuse of discretion in reducing the attorneys costs from $5,140 to $1,695. The district court committed a factual error by failing to properly calculate the costs as documented in the accompanying receipts and invoices. The Second Circuit found the submitted receipts added up to $4,733.60. Thus, it remanded for the district court to reconsider the amount of costs.

Proportionality limit on fees. Next, the court found the district court erred as a matter of law in concluding the “maximum fee percentage” that counsel may be awarded in an FLSA suit is generally limited to 33 percent of the total settlement amount. The district court reduced the fees to $8,250 based, in part, on the perceived disproportionality of the fee to the chaperone’s recovery, using proportionality as an outcome-determinative factor in evaluating the reasonableness. “Neither the text nor the purpose of the FLSA, however, supports imposing a proportionality limit on recoverable attorneys’ fees,” the Second Circuit wrote. It also stated a proportionality rule would be inconsistent with the remedial goals of the FLSA.

By implementing a percentage cap on attorneys’ fees in FLSA actions, district courts impede “Congress’ 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.” In some cases, the proportion of fees may be relevant in considering the reasonableness of an award, but there is no explicit limit on attorneys’ fees in FLSA actions, and district courts should not implement such a limit. Even if helpful, the percentage of attorneys’ fees cannot be the determinative factor in evaluating the reasonableness of the award. Thus, the court concluded the district court erred in imposing a proportionality limit on the recoverable attorneys fees.

Rewritten settlement agreement. Finally, the court found the district court abused its discretion in rewriting the parties’ settlement agreement. “If a district court concludes, pursuant to Cheeks, that a proposed settlement is unreasonable in whole or in part, the court cannot simply rewrite the agreement—it must reject the agreement or give the parties an opportunity to revise it,” the court wrote.

Here, the 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 attorneys’ fees. But where the issue of fees and costs is presented in the context of a complete settlement agreement that includes an agreement with respect to fees and costs, the inquiry is different as the settlement is submitted for approval, not adjustment or revision. As such, the district court erred by evaluating the settlement agreement under the lens of a fee application and then proceeding to rewrite the agreement.

Accordingly, the court vacated the district court’s order and remanded for further proceedings, specifically instructing the court to evaluate the reasonableness of the requested attorneys’ fees and costs without using proportionality as an outcome-determinative factor.

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