The complex web of federal and state wage and hour laws create potentially devastating risk of exposure for employers.
Years of possible liability for yet unknown claims, liquidated damages, shifting attorneys’ fees, not to mention the risk of class or collective suit, can quickly transform seemingly minor and technical irregularities into expensive complications. And for companies that partner with other entities to meet their staffing needs, resolving this risk of liability is a critical piece of their business operations.
Quite often, the quick solution for this concern is through a traditional business arrangement: contractual indemnification. Shifting risk of loss via contract is fairly standard, especially as courts generally enforce the unambiguous terms of the parties’ agreement. Yet employers should take note of a concerning trend among courts across the country, which have in some cases refused to enforce indemnification agreements in Fair Labor Standards Act (“FLSA”) matters on public policy grounds.
How Did We Get Here?
Courts ordinarily steer clear of interrupting the unambiguous contractual agreements of sophisticated business entities, so what is motivating this judicial scrutiny of indemnification clauses in FLSA matters? Much can be traced back to the Second Circuit’s decision in Herman v. RSR Sec. Servs. Ltd., which rejected an interpretation of the FLSA that would have provided a statutory right to indemnification or contribution among co-employers.[1]
In Herman, a putative co-employer who had been found liable for back wages following a bench trial sought to shift those losses to his co-defendants, whom he claimed were the plaintiff’s actual employer. In reviewing this claim, the Second Circuit looked to the text of the FLSA, its overarching intent, its remedial mechanisms, and the law’s statutory history. None counseled in favor of creating a new statutory obligation among co-employers. The law was silent as to any right to contribution or indemnification, employers were clearly not the class for whose benefit the FLSA was enacted, and no evidence in the legislative history of the statute favored the judicial creation of this new statutory right. Accordingly, the Second Circuit unequivocally held that “there is no right to contribution or indemnification for employers held liable under the FLSA.” Id. at 144.
More than 20-years after Herman, the Ninth Circuit reached the same conclusion.[2] In rejecting yet another attempt to develop a statutory reading of the FLSA that would have permitted a claim for contribution or indemnification, the Ninth Circuit highlighted how “Congress, not the courts” held responsibility for developing this type of remedy. Following this “cautious” approach toward statutory interpretation, the Ninth Circuit similarly “decline[d] to find an implied cause of action for contribution or indemnification under the FLSA.” Id. at 1105.
How Does this Impact Contractual Obligations?
Although the Second and Ninth Circuit limited their holdings to statutory claims to indemnification under the FLSA—and notwithstanding the judicial “cautio[n]” recognized in their analysis—district courts across the country have not been so restrained. Only two years after Herman, district courts in New York began expanding the rejection of a statutory right to contribution under the FLSA to also negate contractual indemnification agreements. In Gustafson v. Bell Atl. Corp., the defendants sought to enforce an indemnification clause that would have required a putative co-employer to pay for any losses incurred as a result of their violations of the FLSA.[3] The defendants in this matter emphasized that their claim was “purely one for damages for breach of contract by a third party,” and thereby did not fall within the gambit of Herman. The Court disagreed.
Irrespective of the contractual basis for indemnification, the Court held that “defendants’ attempt to recover damages from [the co-employer] for overtime violations is an attempt to receive indemnification for FLSA liability.” Id. (emphasis added). Whether the putative co-employer was responsible for the alleged overtime violation was of no consequence. In the Court’s view: “[a]llowing indemnification in cases such as this would permit employers to contract away their obligations under the FLSA, a result that flouts the purpose of the statute.” Id. Accordingly, the indemnification clause was held unenforceable for purposes of any FLSA-related damages.
Are Courts Uniform In this Approach?
Unsurprisingly, courts across the country are divided on this issue. Some have adopted the public policy arguments noted above, holding that contractual indemnification of FLSA damages would give employers little reason to comply with the statute and run contrary to the FLSA’s statutory purpose.[4] Others have rejected this premise, and distinguished indemnification claims taken against employees (which are prohibited on public policy grounds) from contractual agreements involving sophisticated business entities that should be enforced.[5] Still others have permitted contractual indemnification claims without even opining on this brewing public policy dispute; in these cases, the parties’ unambiguous contractual intent is sufficient to enforce their agreement.[6]
As one court succinctly stated: “[f]or each FLSA case that permits contractual indemnity claims, however, there is a case that prohibits the same.”[7]
How Should Employers Address This Uncertainty?
The lack of any uniformity in this regard, and the policy-based rationale for negating these provisions, presents a difficult problem for employers: an inability to easily allocate risk and develop protection from exposure.
But companies can still take affirmative steps to address this concern. First and foremost, companies must identify potential sources of liability, both internally and through their arrangements with business partners. Indemnification agreements may not provide sufficient protection against FLSA claims, and identification of any vulnerabilities can help dictate how best to allocate appropriate business costs. Next, a comprehensive wage and hour audit of these internal and external pay practices can help quantify risk and potential loss. This will help business leaders maintain compliance with federal and state wage and hour laws, explore remediation opportunities to resolve problems prospectively, and dictate how to structure relationships with business partners in order to reduce the risk of joint liability. Finally, companies and their counsel should carefully consider the forum of any brewing FLSA dispute, in order to gauge the likelihood of success on any indemnification claim.
Judicial uncertainty notwithstanding, these steps can help business leaders identify and quantify risk while also achieving the primary goal of any indemnification clause: safeguarding the company against potential loss.
ENDNOTES
[1] 172 F.3d 132 (2d Cir. 1999).
[2] Scalia v. Employer Solutions Staffing Grp, LLC, 951 F.3d 1097 (9th Cir. 2020).
[3] Gustafson v. Bell Atl. Corp., 171 F. Supp. 2d 311 (S.D.N.Y. 2001).
[4] Goodman v. Port Auth. of N.Y. & N.J., 850 F. Supp. 2d 363 (S.D.N.Y. 2012); Scalia v. MICA Contracting, LLC, 2019 WL 6711616, at *4 (S.D. Ohio Dec. 10, 2019), report and recommendation adopted, 2020 WL 635908 (S.D. Ohio Feb. 11, 2020).
[5] Varnell, Struck & Assocs., Inc. v. Lowe’s Cos., 2008 WL 1820830, at *10-11 (W.D.N.C. Apr. 21, 2008); Plummer v. Rockwater Energy Sols. Inc., 2019 WL 13063612, at *4 (S.D. Tex. July 2, 2019) (“The court finds that no controlling authority bars Rockwater’s claims for contractual indemnity and contribution under the FLSA.”).
[6] Bogosian v. All Am. Concessions, 2011 WL 4460362, at *4 (E.D.N.Y. Sept. 26, 2011).
[7] Robertson v. REP Processing, LLC, 2020 WL 5735081, at *5 (D. Colo. Sept. 24, 2020).
