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Spring 2009

Employer Indemnification Obligation Expanding In California

by Jonathan A. Massimino, Associate


One aspect of the employment relationship is the general principle that the employer is obligated to indemnify the employee, as its agent, for costs the employee incurs in carrying out his or her employment duties.  Certain jurisdictions, such as California, codify this responsibility, reflecting the strong public policy favoring employee indemnification.  Specifically, Section 2802 of the California Labor Code compels employers to indemnify employees for all “necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, or of his or her obedience to the directions of the employer.” Recent cases in California have broadly interpreted this duty on the part of employers, which has lead to increasing indemnity obligations for employers.  Examples of this enlarged responsibility include mandatory reimbursement for legal fees incurred by employees resulting from actions taken in the scope of their employment, travel expenses, and tools used in the course of employment.  The method of employee reimbursement has also recently come under scrutiny, and the California Supreme Court has recently issued an opinion clarifying the matter.  As with most employment-related violations in California, the potential penalties for failure to comply with employee indemnification obligations are potentially crippling for employers.  As such, it is critical for contractors with California operations to be mindful of their indemnity obligations, and the manner in which their obligations must be fulfilled; as increasingly harsh economic realities are forcing former employees to claim all monies possible from their former employers.

As noted above, the employer owes a wide range of indemnification obligations under Labor Code Section 2802.  A primary example is defense costs incurred by an employee, including any settlement or judgment, resulting from an action brought against the employee for his or her actions within the course and scope of employment.  In this case, Section 2802 compels the employer to pick up the tab, including any costs the employee incurs in enforcing the employer’s indemnity obligation.  The rationale behind this role may extend to criminal actions brought against the employer as well.  In fact, the employer’s indemnification duty is so broad that it requires indemnification of the employee regardless of the merits of the claim, or whether the employee is ultimately found innocent.  As a result of the relatively low showing required to trigger the employer’s indemnification responsibilities, employees are increasingly looking to their employer’s deep pockets in the event they deem that their costs have not been fully compensated.

In order to prevail on a Section 2802 claim, an employee need only show that he or she made expenditures or incurred losses in direct consequence of the discharge of his or her duties, or at the direction of the employer, and that the losses and/or expenditures were necessary.  Even where an act violates the employer’s direct orders or policies to the contrary, including personal acts necessary for the comfort, health, and convenience of the employee, the action may still fall within the employee’s scope of employment and trigger the employer’s indemnification duty.  It is worth noting, however, that behavior resulting in sexual harassment claims generally falls outside the scope of employment, and the employer has no duty to indemnify the employee unless the claim is ultimately shown to be unfounded.  As the broad requirements make clear, the public policy behind the statutory indemnification duty is strong, as exemplified by the fact that California law voids any agreement purporting to limit and/or waive employee rights under Section 2802.
 
While the focus of Section 2802 is on indemnification of the employee, the more practical, everyday effect of the statute is to compel employers to reimburse employees for the more direct costs incurred while acting for the employer.  The most commonly reimbursed expense is travel costs, including mileage reimbursement.  Other examples include tools supplied by the employee, uniforms, cell phone costs, equipment, such as computers, and even liability insurance premiums when required by the employer.  Home office costs are also reimbursable, and may even include the value of the space set aside by the employee to work from home.  The extent of the indemnification obligation is seemingly limited only by the imagination of the employee.

California employers must also be careful in calculating the costs to be reimbursed to employees.  In the recent California Supreme Court case of Gattuso v. Harte-Hanks Shoppers, Inc., the employer reimbursed traveling salespeople for expenses incurred in using their personal vehicles by paying an increased base salary and an enhanced commission rate.  The plaintiff employees argued that this method of compensation failed to satisfy the employer’s duty to indemnify and reimburse them for their business expenses.  Specifically, the employees argued that the employer’s compensation method failed to fully correlate to the employees’ expenses, and thus the employer did not fulfill its reimbursement requirement pursuant to Section 2802.  The court, however, noted that while reimbursement to employees for their actual expenses was the most accurate method, doing so was impractical with regard to employees’ use of their personal vehicles.  Accordingly, the court held that a standard mileage rate is an acceptable method by which employers can reimburse employees for the use of their personal vehicles, and that the employee and employer can negotiate this rate, but to the extent that an employee can show that the mileage rate is less than his or her actual expenses, the employer may be liable for the difference.

In the same opinion, the court also held that the enhanced rate of compensation used by the employer was acceptable, so long as the employees were fully reimbursed for their costs and the employer was able to fully identify which portions of the enhanced compensation were intended as expense reimbursement.  This holding calls into question the practice of pre-set expense accounts.  To the extent that an employee can show expenses in excess of the set amount, the employer may be obligated to further reimburse the employee.  While the employer’s method of reimbursement was upheld in the Gattuso matter, the case serves as a cautionary tale to employers who intend to get creative in their reimbursement methods.  A straight mileage rate, and actual reimbursement for other costs, is still the preferred and advised method.  The construction industry is especially susceptible to potential employee reimbursement claims.  Personnel constantly travel from job site to job site, raising an interesting question of when and how they must be reimbursed for their related travel costs.  In California, employees should be reimbursed for all travel, with the exception of their commute to and from home.  Travel from one project to another, however, should be reimbursed by employers, as should cell phone costs related to work.  More complicated issues arise when employee negligence leads to property damage at a project or a third-party lawsuit naming the employee individually as a party.  The duty to indemnity is still present, causing an even more painful headache for the employer.  Employers are cautioned to tailor job duties for each position, so as to limit the argument that an offending employee was acting within his or her scope of employment.  In the event that an employer needs to provide a defense for a malfeasant employee, it is advisable to do so quickly, so that costs can be controlled and the legal strategy of the individual can be coordinated with that of the employer.


The information or opinion provided in this article is the author's own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.
 
Watt, Tieder, Hoffar & Fitzgerald is one of the largest construction law firms in the world, with a practice that encompasses all aspects of construction contracting, claims and disputes resolution, and transactional legal services. WTHF principally represents large general contractors, design firms, and sureties throughout the country and internationally.