Labor & Employment Law

Important Development in Class Action Law: Indemnification Agreement Upheld

By Mark Tabakman

A case has recently issued that provides instructive guidance for employers who may want to insulate themselves from potential liability in a class action lawsuit.  A federal judge has ruled that an entity, a sub-contractor that provided janitorial personnel and crews to Target Corp. was contractually obliged to indemnify Target in a Fair Labor Standards Act lawsuit where the janitorial employees sued Target and the contractor for unpaid overtime compensation.  The case is entitled Itzep et al. v. Target Corp. et. al and was filed in the Western District of Texas..

Significantly, the defendants did not contest the fact that the workers did in fact work more than forty hours, but were not properly paid overtime.  The dispute was really about which defendant would have to pay the damages.  The subcontractor, Jim's Maintenance, contended that the indemnification provision was facially illegal as it was void under the public policy of the State of Minnesota (the state that the parties agreed contractually controlled the claim).

The federal judge rejected that contention.  The judge agreed that the public policy of Minnesota was not offended by this contract, which was between two commercial entities.  It was a business transaction.  The judge also held, however, that Target was precluded from seeking indemnification for defense costs, as it did not tender the defense to the subcontractor as required by the contract, but the court held that the company could seek indemnification for its other expenses.

The bottom line was that the subcontractor was obliged to pay its employees, not Target.  When it did not pay, the workers sued both entities and won the judgment, but then target could, on the 'back end' go after the subcontractor as it was and remained that entity's legal obligation to pay the workers. That is unless the entities were found to be joint employers (which they were not).  This scenario posed an entirely different set of perils for an employer who subcontracts out certain work (most commonly cleaning and janitorial) but whose supervisors may exercise nominal or putative authority over the subcontractor's employees when they work at the customer, i.e. Target.

The lesson for employers engaged in such subcontracts is to apportion the liability for unpaid wages, overtime and discrimination and other claims to the subcontractor for its employees.  This can be done via provisions in the contract that spell out the obligations of each party and what will happen, i.e. indemnification, if a particular party does not live up to those obligations.
 

Full post as published by Wage & Hour - Development & Highlights on June 11, 2010 (boomark / email).