Businesses Should Update Indemnity Agreements to Protect Against Contractor Lawsuits

In the past decade, many businesses have significantly improved compliance under the Fair Labor Standards Act (“FLSA”) and other employment laws when it comes to their own employees. At the same time, many workers who provide skilled services to those businesses now do so as independent contractors, often based on service agreements between businesses and vendors who employ those workers (or who retain the workers as independent contractors themselves). Unfortunately, many of those agreements contain indemnity provisions that lack language adequately protecting the businesses.

In fact, here is a recent trend (especially with potentially expensive wage-and-hour disputes) where a worker will sue alleging independent contractor misclassification. And these workers sue not only the entity that employed them but also the business that had a services agreement with the workers’ employer. Without strong indemnity language in the services agreement, a business can have a hard time making sure the vendor takes responsibility for the legal compliance of its compensation decisions. By the same token, without clear indemnity language, it is difficult for vendors to know their indemnity obligations.

Below are suggestions for improving indemnity agreements, both to better protect against expenses arising from claims asserted by vendors’ employees and to ensure that vendors clearly understand what they are agreeing to in such agreements.

  • Include express, conspicuous language mentioning the business’s own negligence. If a business is going to have a vendor indemnify the business for the business’s own negligent acts, many courts require the indemnity agreement to contain express, conspicuous language stating this. The rationale is that a vendor should not be liable for another entity’s actions unless it has knowingly and voluntarily agreed to that obligation. (For example, Texas has an Anti-Indemnity Act that requires such language be express and conspicuous.) In contrast, if a vendor does not want to indemnify such acts, it should be sure that the indemnity agreement fails to contain such a provision.
  • Include express, conspicuous language mentioning actions by the business with other states of mind. Even when an indemnity agreement expressly and conspicuously binds a vendor to indemnify a business for the business’s negligent acts, the agreement will not necessarily extend indemnity to the business’s acts with other states of mind (like recklessness, intent, willfulness, etc.). As a result, a worker can sue the business, with the vendor able to argue that since the underlying suit requires a state of mind higher than negligence (such as a willful FLSA violation, or intentional discrimination under Title VII), the indemnity agreement is silent when it comes to that dispute. Although some courts have suggested that public policy prevents a business from obtaining indemnity for its own acts beyond negligent ones, this is an unsettled area of the law. And without express, conspicuous language in the agreement, there is no way for a business to even argue this point. You can’t ask a court to enforce language that isn’t there (even if the answer ends up being no).
  • Include express, conspicuous language referring to joint and several liability. Many courts consider tort claims (including claims under statutes like the FLSA) to create joint and several liability. This complicates indemnity agreements: If an agreement fails to expressly state that the vendor is indemnifying the business for harms where the business is alleged to be jointly and severally liable, the vendor can claim that all the business is entitled to is contribution (a payment covering the vendor’s share of fault), not indemnity. Businesses can prevent this by including language expressly stating that their vendors will indemnify the business regardless of whether they are alleged (or found) to be jointly and severally liable.
  • Refer to all statutes for which you want indemnity. When drafting an indemnity agreement, ask yourself: How would you draft a release-of-claims agreement if one of the vendor’s employees sued you? This is another reason to seek litigation counsel when drafting indemnity agreements, especially litigation counsel experienced in resolving employment disputes. For example, USERRA, the law protecting veterans and service members, requires that any agreement releasing claims under USERRA specifically mention USERRA. An indemnity agreement that fails to mention USERRA or other statutes that can result in significant judgments like the FLSA or Title VII is risking an argument that indemnity fails to reach those claims.
  • Refer to the classes of harms for which you want indemnity. Although listing specific, high-risk statutes is important, it’s also important not to limit the indemnity obligation by leaving out the classes of harms for which you want indemnity. So it is important to say, in addition to listing specific high-risk statutes, that the vendor will indemnify the business for all alleged violation of employment laws and regulations, “whether federal, state, local, or other.” There needs to be a balance between specificity (because saying “all federal, state, or local laws” without any detail may be subject to a challenge based on lack of notice) and generality (you would not want to limit yourself only to “personal injuries” or “environmental claims” or “tax, insurance, or agency actions”). This dovetails with the last guideline.
  • Refrain from using language limiting indemnity to small classes of claims. While you should include language that is specific enough to cover the potentially expensive types of claims (personal injury, FLSA, environmental, etc.), it is important not to state these specifics in limiting language. So you can mention specific types of claims and statutes, but it doesn’t hurt to also explain that the indemnity covers all types of employment, environmental, torts, contract, regulatory, etc. claims under federal, state, local, or other law. Language like “etc.” or “and any similar claims” can make the difference, because it helps combat the argument that the indemnity agreement limited indemnity to a small set of claims. This is not a guarantee that indemnity will reach all claims, but without that language it is easy for a vendor to argue that the agreement failed to specify that those claims are covered.

The Bottom Line for Employers

Drafting indemnity agreements should be done by looking for the worst-case scenarios, which usually means a large, expensive lawsuit. Litigation counsel can help businesses draft indemnity agreements to make sure that they cover exactly what the parties intend to be indemnified. While the advice above is directed at the most expansive reach of indemnity, the parties may want to apportion the risk differently, and the language of the agreement is critical. Of course, each indemnity agreement is different, and since state law governs indemnity, enforceability depends on which state’s laws apply and what those specific laws say. If you have questions about indemnity, you should seek legal counsel (including litigation counsel) familiar with both indemnity issues generally and the specific state laws that may apply to your agreement.