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Indemnities to Employees

Employment Agreements sometimes contain indemnities from the employer for liabilities the employee incurs in the course of performing his or her duties as employee. Such an indemnity can also be implied by law, if the employment agreement does not contain an explicit indemnity. However there are some issues that can effect the enforceability of these.

It is not uncommon for employment agreements and collective employment agreements to contain an express indemnity by an employer in favour of their employee for liabilities incurred by the employee in the course of their employment.

The extent of the employer’s liability to indemnify the employee will then be governed by the express wording of the contractual indemnity and, if the employer is a company, by section 162 of the Companies Act 1993.

Usually such indemnities indemnify the employee against personal liability to a third party arising from the performance of the employee’s duties, provided the employee’s actions were in good faith and did not involve recklessness, wilful neglect or any wilful failure to carry out a lawful instruction from the employer.  However in 2013 in the case of George v Auckland Council [2013] NZEmpC 179 the Employment Court held that the wording of the express indemnity in that case was wide enough to also include all reasonable costs incurred by the employee in an action by the employer against the employee.

Even if an employment agreement does not contain an express indemnity an employer has an implied duty under the common law to indemnify its employees for liabilities that arise during the course of the reasonable performance of their duties.

However this implied duty to indemnify the employee will not apply if:

  1. the employee has not used reasonable skill and care in carrying out their duties and functions or has breached duties owed to the employer.  For example, in the Mana Coach Services Limited v Katz, Ms Katz claimed indemnification of her legal costs incurred in defending a Without Due Care prosecution as a result of an accident which she caused. The Employment Court held that Ms Katz was not entitled to enforce the indemnity from her employer in the collective employment agreement (even though she was discharged without conviction) as the Court found that she had operated a bus carelessly causing damage to a parked car.
  2. the employee has incurred a liability in doing something which it was not his or her duty to do. Such expenses are not then incurred by the employee in the reasonable performance of the employee’s duties.

Note however Section 162 of the Companies Act 1993.  An indemnity by a company registered under the Companies Act 1993 in favour of an employee is void unless the company is expressly authorised by its constitution to indemnify the employee.  If the relevant employer is a company which does not have a constitution, then any purported express indemnity given by the employer to its employees in their employment agreement will be void.  Further, it will not be possible then to imply a common law right of indemnification.

Provided a company is so authorised by its constitution, the company as employer is entitled to indemnify an employee for:

  1. Costs incurred by the employee relating to any act or omission of the employee as an employee in which judgment is given in the employee’s favour, or in which he or she is acquitted, or which is discontinued.
  2. Liability to any person other than the company or a related company, for the employee’s actions or omissions as an employee, and for costs, provided that the relevant liability is not a criminal liability, or liability arising from breach by the employee of any fiduciary duty owed by the employee to the company or a related company, and an express indemnity to an employee from a company as employer cannot go further than this.

These limits on an employee’s right of indemnity from his or her employer therefore need to be remembered where the employer is a company registered under the Companies Act 1993 (and even if there is an express right of indemnity in the employee’s employment agreement).

To sum up, express and implied indemnity terms in employment agreements can shield employees from personal liability to third parties in the course of carrying out their lawful duties.  However these may not be so effective when employees seek recovery from their employer of actual costs and expenses incurred by the employee for incidents arising in the course of their employment, unless as in George v Auckland Council, the express indemnity is wide enough to cover those. Care must be taken to ensure that if there are express indemnity clauses in employment agreements they do not fall foul of s162 of the Companies Act 1993.

 

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.

For further information

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Paul Middlemiss

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