When an employer signs a general release of claims with a former employee, it expects that the agreement and the consideration provided will prevent future legal claims. However, certain actions, such as Workers’ Compensation claims cannot be released in a private agreement between the employer and employee. To many an employer’s surprise, the list of these unwaivable claims includes overtime and minimum wage actions under the federal Fair Labor Standards Act.

According to an old Department of Labor rule, FLSA claims may only be waived in a settlement agreement that is made under court or DOL supervision. This means that in order for the employer to resolve such claims, the plaintiff must have filed suit or initiated an administrative investigation of the employer’s pay practices. The Fourth Circuit and other appellate circuits have upheld the validity of this regulation.

The Fifth Circuit stood as an exception to this position, interpreting the DOL rule to apply only to attempts by employers to prospectively release FLSA claims. However, last week the Fifth Circuit, in Bodle v. TXL Mortg. Corp., restricted its prior position on release of FLSA claims. In this case, the plaintiffs had settled a non-compete dispute with the employer and had signed general releases of claims. They then filed a subsequent claim for overtime payment. The defendant sought to dismiss the claim based on the prior release.

The Fifth Circuit rejected this position, stating that private releases of FLSA claims only work when the underlying dispute that leads to the release involves unpaid overtime or minimum wages. General releases obtained in unrelated matters or releases signed in the absence of any known dispute between the employer and employee will not act to prevent later FLSA claims.

Given these legal realities, how should employers protect themselves from FLSA claims? The release can contain acknowledgements by the employee that he or she was correctly paid for all time worked. This could create a factual inconsistency if the employee later claims unpaid wages. If the employer is aware of an actual FLSA issue, it could seek court or DOL approval of any settlement. Companies generally avoid DOL involvement because the agency could expand the scope of the investigation, or could reject the settlement proposal. In some situations, employers can file declaratory actions in court with the purpose of seeking quick approval of a settlement agreement.

However in most circumstances, employers should understand that their use of general releases in conjunction with a reduction in force or as a condition of severance payments, will not prevent later claims for unpaid wages.