Your employee violates a clear and established company policy which results in a lawsuit against the company. The employee is named in the lawsuit as well. Does the company have the obligation to pay for the employees defense despite the employee's clear negligence?
The answer is YES.
California law requires that employers indemnify their employees for lawsuits brought against the employee for acts committed in the course and scope of the employee's employment.
This obligation is found in California Labor Code section 2082 which states:
"An employer shall indemnify his or her employee 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, even though unlawful, unless the employee, at the time of obeying the directions, believed them to be unlawful."
Cal. Labor Code § 2802(a).
The California Supreme Court has explained that this is a serious obligation based on the public policy of the State of California.
"California has a strong public policy that favors the indemnification (and defense) of employees by their employers for claims and liabilities resulting from the employees’ acts within the course and scope of their employment. Labor Code section 2802 codifies this policy and gives an employee a right to indemnification from his or her employer. (See Grissom v. Vons Companies, Inc. (1991) 1 Cal.App.4th 52, 59-60 [1 Cal. Rptr. 2d 808] [the purpose of Lab. Code, § 2802 is “to protect employees from suffering expenses in direct consequence of doing their jobs”]; Janken v. GM Hughes Electronics (1996) 46 Cal.App.4th 55, 74, fn. 24 [53 Cal. Rptr. 2d 741] [Lab. Code, § 2802 “shows a legislative intent that duty-related losses ultimately fall on the business enterprise, not on the individual employee”].)
Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 952 (2008).
Although Labor Code section only refers an employer's "indemnity" obligation, by using the words "and defense," the Edwards court made clear that the employer's obligation includes an obligation to both defend and indemnify the employee. Obviously, an employees right to only indemnity would be of little comfort if the employee was required to pay for the expensive cost of defending the lawsuit his or her self.
This is further confirmed by the fact that Labor Code section 2082(c) which provides that the employee may recover attorneys fees and costs if the employee is required to bring suit to enforce his or her rights.
The California Legislature gave employees the further protection of making this a non-waivable obligation. Labor Code section 2804 states:
"Any contract or agreement, express or implied, made by any employee to waive the benefits of this article or any part thereof, is null and void, and this article shall not deprive any employee or his personal representative of any right or remedy to which he is entitled under the laws of this State."
Cal. Labor Code § 2804.
Further, not only are any such agreements illegal, an employer's attempt to coerce an employee into signing such an agreement may give right to the independent tort of intentional interference with prospective economic advantage. In Edwards v. Arthur Anderson, 44 Cal. 4th 937 (2008), the California Supreme Court explained.
Labor Code section 2804 voids any agreement to waive the protections of Labor Code section 2802 as against public policy. . . . Courts have interpreted Labor Code section 2804 to apply to Labor Code section 2802, making allcontracts that waive an employee's right to indemnification null and void. . . . Thus, indemnity rights are nonwaivable, and any contract that does purport to waive an employee's indemnity right would be contrary to the law and therefore unlawful to that extent.
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Edwards asserts that the TONC's language releasing "any and all" claims encompassed his statutorily nonwaivable right to indemnification under Labor Code section 2802, thus amounting to an independent wrongful act that would support his intentional interference with prospective economic advantage claim. The Court of Appeal agreed . . . .
Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937, 952-53 (2008).
The one and only exception to his rule is if the employee was engaging in unlawful conduct and knew that his or her conduct was unlawful at the time. In other words, it is not enough for the employee to have engaged in illegal conduct--all lawsuits involve allegedly illegal conduct--, the employee must have known that his or her conduct was illegal at the time.
Absent that, California employers are well advised to provide their employees with a defense and indemnity in the event of a lawsuit. The obligation is a serious one and violation of it could create additional liability for the employer.