Businesses seeking protection from wage and hour violations face a legal minefield as courts increasingly reject indemnification agreements under the Fair Labor Standards Act.
At a Glance
- Courts are divided on enforcing contractual indemnification for FLSA violations, creating uncertainty for employers
- Multiple federal circuits have rejected statutory indemnification rights between co-employers in wage and hour cases
- Some courts refuse to enforce indemnification agreements on public policy grounds, claiming they undermine FLSA’s purpose
- Businesses must conduct thorough wage and hour audits and consider jurisdiction when creating protective agreements
The Indemnification Dilemma for American Businesses
American employers face substantial risks under federal and state wage and hour laws. These include potential liability for unknown claims, liquidated damages, and the possibility of class or collective action suits that can multiply damages exponentially. Many businesses have turned to contractual indemnification agreements as a standard risk management strategy, particularly when working with staffing agencies, contractors, or other business partners who may share employer responsibilities.
However, this common business practice has hit a significant roadblock. Multiple courts have refused to enforce such agreements in Fair Labor Standards Act cases, citing public policy concerns that these arrangements might undermine worker protections. This judicial resistance creates a troubling predicament for companies trying to operate responsibly while protecting themselves from potentially devastating legal claims.
Federal Courts Reject Statutory Indemnification
The legal foundation for this problem stems from significant appellate court decisions. The Second Circuit established a precedent in Herman v. RSR Sec. Servs. Ltd., decisively rejecting the concept of statutory indemnification rights among co-employers under the FLSA. This ruling effectively closed one avenue of protection for businesses sharing employment responsibilities.
The Ninth Circuit reached a similar conclusion, emphasizing that remedies such as indemnification or contribution should be developed by Congress, not created by judicial interpretation. This reinforced the view that courts should not invent remedies not explicitly provided in the statute. These decisions set the stage for lower courts to expand this reasoning to contractual agreements as well.
The Contractual Enforcement Divide
The real challenge for businesses arises from how district courts have extended these rulings to private contractual agreements. Some courts have taken the position that allowing indemnification agreements would create an end-run around the FLSA’s purpose of protecting workers. These courts reason that if employers could simply pass their liability to another entity, it would reduce their incentive to ensure compliance with wage and hour laws.
Other courts have taken a different approach, enforcing indemnification agreements between sophisticated business entities. These courts reason that private contracts between businesses shouldn’t be voided on public policy grounds when both parties understood the risks involved. This judicial split leaves businesses in a precarious position, unable to predict whether their risk management strategies will hold up if challenged.
Practical Steps for Risk Management
Despite this legal uncertainty, businesses aren’t without options. The most effective protection comes from preventing violations in the first place. Companies should identify potential sources of liability through comprehensive wage and hour audits. These reviews can uncover misclassification issues, improper pay practices, or off-the-clock work that might trigger FLSA claims.
When drafting indemnification provisions, businesses must carefully consider the judicial landscape in their potential litigation venues. A provision that might be enforceable in one jurisdiction could be worthless in another. Legal counsel should draft agreements with an awareness of the most current case law in relevant jurisdictions, being particularly attentive to how courts have ruled on similar provisions.
Although regulatory uncertainty persists, these preventative measures can help responsible businesses navigate the complex requirements of wage and hour compliance while maintaining appropriate risk management strategies. Until Congress or the Supreme Court provides clearer guidance, companies must remain vigilant and adaptable to protect their interests.
