Question: What is a Qualified Settlement Fund?

QSF in overtime lawsuits

Answer: Qualified Settlement Funds are often used is collective action or class action overtime lawsuits under the Fair Labor Standards Act (FLSA) or state wage and hour laws.  The Qualified Settlement Fund (“QSF”) is an account that is recognized by the IRS to hold and distribute settlement proceeds.

The IRS Code § 468B-l(c) outlines the requirements for a QSF:

1.        It is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;

2.        It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability — (i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq. ; or (ii) Arising out of a tort, breach of contract, or violation of law; or (iii) Designated by the IRS Commissioner in a revenue ruling or revenue procedure; and

3.        The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).

In class action overtime lawsuits, it is not unusual for the parties to set up a QSF as a common fund with its own tax identification number.  Employers that have been sued in overtime lawsuits benefit from the use of a QSF because it provides the companies a tax deduction in the current calendar year in which the settlement funds are deposited and tax reporting are made for the fund.  Over the past several years, a number of oil and gas companies in Texas have faced lawsuits for failing to pay their workers overtime pay. Dozens of lawsuits have been filed on behalf of oil and gas workers who say they’re not getting paid properly.  Due to the economic crisis that has adversely affected oil and gas companies there have been more oil and gas companies and oil field service companies that have filed bankruptcy in recent years.  At the same time more overtime lawsuits have been filed against oil field service companies, oil and gas companies in the Southern and Western district of Texas. As a result of the two trends, the use of QSF in overtime settlements potentially isolates assets in the settlement fund from the threat of bankruptcy. Oil field workers and employers that are involved in overtime lawsuits should consider setting up a QSF as soon as they receive preliminary court approval of their settlement agreement. For defendants in overtime lawsuits that is close to insolvency,  the QSF permits them to limit their legal cost and exposure so that their lenders and share holders can plot a way through the financial crisis.

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