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The Right to Indemnity in Employment Contracts

A recent decision out of BC creates an opportunity to review the law of “indemnity” in employment law. Indemnity is a legal word meaning, in essence, to reimburse the Party A for damages they are ordered to pay someone due to the wrongful act of Party B.  For example, if an employee causes damage to a third party, and the employer is ordered to pay the third party money to compensate (since the employer is vicariously liable for the actions of the employee), an indemnity clause in a contract could require the employee to reimburse the employer.

Gichuru v. Smith

The B.C. case was called Gichuru v. Smith, and the facts and argument are unusual.  In B.C., articling students sign a standard articles contract with the principal lawyer who will supervise them.  The articles contract includes the following ‘indemnity’ clause:

3. The principal and the articled student agree to indemnify each other for any damage, injury or loss which one of them may suffer through the other’s breach of this agreement.

The articling student was terminated for alleged cause, and sued the employer (lawyer who was his supervisor) for wrongful dismissal.  The employer claimed that the indemnity clause in the contract shielded him from a lawsuit by the employee.  The Court said that is not what an indemnity clause does, and summarized the law of indemnity in employment contracts.

Indemnity cases usually involve an employee who commits a legal wrong that causes damage to a third party. The third party sues the employee and the employer, and the employer is ordered to pay damages to the third party.  Then the employer sues the employee seeking to be ‘indemnified’.

The Gichuru decision involved a very different situation.  There, the employer attempted to use the indemnity clause as a shield against any lawsuit filed by the employee alleging wrongdoing by the employer, such as wrongful dismissal. The Court ruled that an indemnity clause in an employment contract does not prohibit an employee from suing for breach of the contract term requiring notice of termination.  That’s because the party that is at fault cannot use an indemnity clause to shield them from damages that flow from their wrongful act.  Therefore, Gichuru was entitled to continue his lawsuit against the employer.

Review of Law on Indemnity in Employment Case

The law of indemnity in employment situations is interesting because it is guided by policy concerns.  In essence, the courts have said that employees generally should not be ordered to indemnify employers because employees lack the financial means and also the bargaining power to negotiate compensation that would account for the increased risk that would come from a requirement to indemnity the employer.  In a case called Douglas v. Kinger, the Ontario Court of Appeal explained that last point as follows:

Moreover, there is a power imbalance inherent in most employment relationships.  An employee is usually not in a position to bargain at the outset of the employment relationship regarding the terms of his or her potential liability for an act of negligence.  In contrast, an employer concerned about employee negligence is in a position to dictate terms of employment and can contract for the employee’s liability.

The Supreme Court reviewed these policy concerns  in London Drugs v. Kuehne & Nagel (SCC).  These cases take a different route than the (in)famous British House of Lords decision in Lister v. Romford Ice & Storage [1957], which ruled that employees should always be held liable to the employer for damage they cause.

So, to summarize, usually an employee will not be required to indemnify an employer for damage they cause in the course of their employment, unless the damage was a result of ‘gross negligence’ or deliberate actions intended to do damage.  That is a general rule, and there are some exceptions, such as when the employee is highly skilled and highly paid.  In that case, the policy concerns expressed above (lack of bargaining power and resources) do not weigh against imposing a duty to indemnify the employer.

Questions for Discussion

1.   Do you think that employers should be held responsible for damage caused by their employees?

2.   Should employees be required to reimburse their employers when their conduct leads the employer to incur damages?

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One Response to The Right to Indemnity in Employment Contracts

  1. Sean Bawden Reply

    January 8, 2017 at 1:56 pm

    Prof. Doorey:

    As always an interesting post and introduction to a provocative issue. For my summary of the state of the law in Ontario, have a look at http://bit.ly/2irdoew.

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