Employers often consider asserting counterclaims against employees who file lawsuits against them.  Most lawyers representing employers counsel against filing counterclaims except in exceptional cases (e.g., an employee’s theft of trade secrets or breach of a covenant not to compete). However, where an employer pays an employee valuable severance benefits in return for a release or a covenant not to sue, the employer may consider avenues to recoup the benefits paid to a former employee who breaches that agreement and sues the employer.  A recent opinion from the Fifth Circuit explains an employer should not generally seek a set-off against damages in a claim seeking unpaid wages or overtime under the Fair Labor Standards Act (FLSA) in the FLSA action. 

In Martin v. Pepsi, Martin was an hourly route settlement clerk for Pepsi for approximately five years. During this time she was paid overtime for the hours she worked in excess of forty hours per week. She was promoted to route settlement supervisor and her manner of compensation was changed to a weekly salary. When Martin was laid off she was provided with nearly $23,000 in severance payments in return for a complete release of claims and a promise not to file any lawsuits or other claims against Pepsi arising from her employment or termination of employment.  After pocketing the severance money, Martin sued Pepsi for unpaid overtime under the FLSA and asserted state law claims for fraudulent misrepresentation and punitive damages under state law. Pepsi moved to dismiss Martin’s claims arguing that the trial court lacked jurisdiction. The crux of the argument was that because Pepsi was entitled to an off set for the severance payments made to Martin due to her broken promise not to sue Pepsi and the amount of the set-off exceeded the unpaid overtime and liquidated damages Martin could recover, there was no controversy for the court to decide. The trial court agreed and dismissed Martin’s case. 


In reversing the trial court’s dismissal, the Fifth Circuit held that counterclaims seeking damages or set offs against recovery in FLSA cases are not permitted unless the money being set-off can be considered wages that the employer pre-paid to the plaintiff-employee. In Martin, the money that was sought to be set-off against the FLSA overtime was the severance benefits paid in return for a release of claims.


Martin does not appear to foreclose an employer’s ability to maintain a state court lawsuit for breach of contract arising from an employee’s breach of a contract not to sue in return for severance payments. For example, the employer might sue for recession to have the plaintiff return any severance benefits paid to him or for the attorney’s fees and costs incurred in defending a lawsuit the plaintiff promised he would not file. What is clear is that a counterclaim in the FLSA suit or an affirmative defense seeking a set off against FLSA damages is not the proper way to seek a return of the severance benefits paid to a plaintiff who promised not to sue the employer.