The Fourth Circuit Court of Appeals (which includes North Carolina and South Carolina) is among the minority of federal appellate circuits that restricts the ability of employers and employees to release claims for unpaid overtime and minimum wages under the Fair Labor Standards Act. The court relies on an old Department of Labor regulation stating that such claims may only be released under court or DOL supervision. Most federal courts outside the Fourth Circuit have applied this rule only to prospective wage violations, and not to general releases of claims for possible past violations.

This interpretation has made it very difficult to settle unpaid federal wage claims in the Fourth Circuit. If the parties seek DOL administration of the settlement, the employer subjects itself to a DOL wage investigation that could go well beyond the scope of the payment issues currently in question. If the parties file a lawsuit for the sole purpose of obtaining approval of the settlement, this step entails substantial cost and possible public disclosure of the settlement terms. Neither alternative would apply to a general release filed in conjunction with a reduction in force or other situation where there is no current wage payment controversy.

To make matters worse for employers, on February 12, District Judge Cogburn of the U.S. District Court for the Western District Court of North Carolina issued an order denying a motion for summary judgment filed by an employer with respect to unpaid wage claims under the North Carolina Wage and Hour Act. In Rehberg v. Flowers Baking Co. of Jamestown, LLC., the plaintiffs filed a collective action lawsuit alleging that they were misclassified as independent contractors, and therefore were owed unpaid wages under the FLSA and the North Carolina state wage statute.

The defendant had settled with a number of the workers, and had obtained releases of legal claims. The company moved for summary judgment on the North Carolina state wage claims with respect to class members who had signed such releases. The plaintiffs opposed the motion, claiming that North Carolina, like the FLSA, prohibits release of state wage claims.

Judge Cogburn noted that this issue has never been litigated in North Carolina. He concluded that the North Carolina Wage and Hour Act parallels the FLSA and should be interpreted in the same manner. In addition, he noted a provision of the state law providing that partial payment of unpaid wages to an employee does not extinguish a claim for the remainder of the amount. Although not directly stated in the order, presumably parties could settle claims with court or NCDOL supervision.

If this decision becomes the general standard in North Carolina, it will create major problems for employers and employees who wish to privately settle unpaid wage claims. Judge Cogburn’s order calls into immediate question the validity of any such releases, meaning that an employee can sign the agreement, consider the payment as only partial consideration for an unpaid wage claim, and sue for the remainder. Employers faced with this reality will hesitate before agreeing to compromise unpaid wage claims.

Unlike the FLSA, North Carolina wage and hour claims deal with things like failure to pay promised wages and vacation pay, breach of compensation terms of employment agreements, interpretation of bonus and commission policies and the like. The Fourth Circuit or North Carolina state courts could reach a different decision than the federal district court, or the North Carolina General Assembly could amend the state act to specifically allow private settlements. Absent such action, the validity and enforceability of such private settlements remains highly questionable.