When Is A Settlement Of A Wage And Hour Claim Not A Settlement?

by Ruth Horvatich

(402) 341-3070

Okay – your employee threatens a lawsuit based on your alleged failure to pay all the overtime he or she claims they are entitled to. You just want to get rid of the claim. The employee accepts your “low ball” offer to settle and signs a release. You are home free, right? Maybe not! The general assumption is that when an employee signs a release and waiver of all claims, that puts an end to the dispute. Under wage and hour law, that is not necessarily so, as a recent court decision illustrates.

In Abrego v. Yu Lin, an employee filed a claim for unpaid overtime against his employer. In a demand letter sent by his attorney, the employee stated that the total damages due would be in the amount of more than $217,000. When his employer did not respond, a lawsuit was filed on his behalf. The day after the lawsuit was filed, the employee signed an agreement settling his claim for $6,000. The agreement contained a provision releasing all disputes between the employee and his employer. The agreement was made without the knowledge and assistance of the employee’s attorney.

The employer subsequently filed a motion to dismiss the lawsuit, claiming that all disputes had been resolved by the settlement agreement. In rejecting that motion, the court stated that the wage and hour laws require that employees be compensated at the minimum wage for all hours worked and at time and a half for all hours worked over 40 and that an employee can’t just waive their statutory rights to such payment. It noted that for a settlement to stand, there had to be a bona fide dispute over the hours worked or the employee’s entitlement to be paid for such hours and the terms of the settlement had to be fair and reasonable. The court concluded that there was no evidence of an actual dispute between the parties about the number of hours worked by Mr. Abrego and refused to recognize the settlement.

The lesson of the Abrego v. Yu Lin decision is clear: Under federal wage and hour law, in order to establish a bona fide settlement of a disputed wage and hour claim, there must be a real dispute about the hours worked. If there is no dispute, the employee must be paid all the hours they claimed they worked, and not just a fraction. Additionally, if there is a bona fide dispute as to the hours and amounts due, the settlement amount must still bear a reasonable relationship to the disputed claim. The absence of those two factors, any settlement agreement entered into by an employee may not be worth the paper it is written on.

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