Under Department of Labor rules, most waivers or releases of claims cannot affect employee rights to overtime or minimum wage payments under the Fair Labor Standards Act. These rules sometimes result in situations where an employee receives a severance package, yet later sues for unpaid wages. A new case from the Fifth Circuit Court of Appeals addresses whether employers are entitled to a set-off against overtime claims based upon such severance payments.

In Martin v. Pepsiamericas, Inc., a Pepsi manager signed a release of claims and received a large severance package upon her departure from employment. She later sued, claiming that she was not paid overtime during several years of her employment. Pepsi moved to dismiss the claim, noting that the severance paid exceeded the maximum amount of unpaid overtime claimed. Pepsi asserted that it is entitled to offset such severance against the overtime claim unless the offset results in payment of a subminimum wage.

The Fifth Circuit disagreed, reversing a grant of summary judgment for Pepsi. In its decision, the court noted a line of decisions that reject employer attempts to assert counterclaims against employees in federal court FLSA actions. In general, employers are required to separately bring such actions outside of the FLSA lawsuit. The Fifth Circuit likened the set-off claim here to a counterclaim. Unless the employer demonstrates that the set-off amount claimed was a true pre-payment of wages to the employee, it is not entitled to claim an offset against unpaid overtime claims.

In this case, the severance amount paid was not a wage pre-payment, but served as consideration for the release of claims provided by the employee. As such, Pepsi was not entitled to an offset. Employers that pay severance packages to employees in return for a release of claims should be aware that such release has a very limited application to any later FLSA claim.