Indemnification clauses are being used increasingly as a way to mitigate risk in contingent workforce programs. They come from attorneys and risk managers who try to shift the financial risk away from their companies. But they can create a false sense of risk management in one’s program.
For starters, the financial shift created by the clause may not accurately reflect actual accountability for the risks being covered. As a result, the party that is responsible for a loss may not be required to pay for it; in some cases, the entire clause may be deemed invalid if drafted improperly.
What is indemnification?
Indemnification occurs when one party assumes liability for a situation (regardless of whose responsibility it is) and relieves the other parties of the financial consequences and responsibility for the situation. Indemnification does not relieve a company of legal risk; it is only meant to make a company whole in the event of a covered (indemnified) loss.
While they are often considered such, indemnification clauses are not insurance; further, insurance policies often do not cover risk transfers. Indemnification clauses, also known as hold harmless clauses, are often demanded by customers as part of their standard agreements with staffing providers. But frequently, neither party really understands the clauses’ implications.
In general, indemnity provisions must satisfy four requirements to be considered enforceable by the courts:
1. They must be conspicuous. Some state courts have required they be in bold or capitalized language that is clearly set apart from other parts of a contract.
2. The parties must agree to them. Some state courts require that the person signing the agreement has actual authority to bind the company assuming the liability.
3. They must survive strict construction. This applies when the indemnitee seeks to be indemnified even from its own negligence. In such a case, any indemnity provision between the parties will be strictly construed to determine enforceability. That is, in cases where the supplying company is arguably free from negligence, the obligation to indemnify an engaging company for its own negligence must be “clearly and unequivocally” expressed in the agreement.
4. They must evidence a “clear intent of the parties.” Not even a strict construction of the indemnification agreement can be used to defeat the clear intent of the parties. The indemnitee may recover under the contract, if it is clear that the purpose and unmistakable intent of the parties in entering into the contract was for no other reason than to cover losses occasioned by the indemnitee’s own negligence.
Staffing Industry Push-back
Claims against companies come in two forms: civil lawsuits or administrative (e.g., Equal Employment Opportunity Commission complaints). The most common stemming from contingent worker assignments are:
1. Complaints brought by a contingent worker against the client and/or staffing firm; for example: racial, gender or disability discrimination; harassment; violation of a civil right such as “privacy”; bodily injury caused by an unsafe condition; or “personal injury” such as defamation.
2. Claims by a third party against the client and staffing firm alleging some improper conduct by the contingent worker.
Staffing firms are at a disadvantage in these situations, though, because they generally do not supervise the assigned contingent worker directly and do not have any control over their contingent worker’s work environment, which includes the facilities, equipment and co-workers. Despite this, because they are the contingent worker’s employer of record, they generally would at least be jointly liable for misconduct by the client.
As such, some staffing firms have been pushing back against indemnification clauses that hold them financially responsible for that which they have no control over. The key here is making sure the risks indemnified in a contract are applied to the responsible party.
For example, if a contingent worker is hurt in an industrial accident due to a machine failure or some other condition under the control of the client company, in most circumstances the provider should not be expected to indemnify that loss.
If the loss is in some way due to bad acts or a failure to act on the part of the staffing provider, however, such as failure to provide adequate training or candidate vetting, those types of losses should be addressed under an indemnity clause.
In short, indemnification responsibility should lie with the entity with which the business risk is associated. Obviously every situation is different, and your company policy may be to pursue total indemnification whenever possible.
The enforceability of indemnification agreements is affected by state law, so you need to be certain that your attorney is familiar with those clauses in your customer contracts. Because possible exposure is extremely significant, it may be worth the expense to have your attorney review those clauses.
Obviously a source of much conflict between buyers and suppliers is what the purpose of the indemnity provision is. What one company requires to be included in such a clause may not be required by another. One supplier may be willing to accept a certain level of risk but another may choose to walk away from a contract entirely. Be mindful of the limits of indemnity. An overly broad indemnity clause may give companies the impression they are covered, when in fact they are not protected.
A number of key contractual best practices are incorporated in Staffing Industry Analysts’ CCWP Certification Program. More information about CCWP can be found here.
NOTE: This article does not constitute legal advice. It is recommended that you consult your internal company counsel prior to entering into any agreement.
