What You Need To Know About Indemnification Clauses

Indemnification Clauses in an Employment Agreement

An indemnification clause, or indemnification provision, prevents the indemnified party from incurring harm as a result of legal liability. The indemnification provision is legally enforceable when one party agrees to indemnify the other party. 

Key points

  • An indemnification clause in an employment agreement aims to protect the employer, employee, both, or all parties specified in the contract.
  • Seek legal advice if you are unsure whether to include or how to draft an indemnification clause or agreement.
  • An Indemnification Agreement is primarily used in high risk activities which require the client or party engaging in the activity to assume liability for any expenses, damages, or liabilities which may arise.
  • Australian common law can imply indemnity into employee agreements so an express indemnity clause in an employment agreement is not always required.

What does an indemnification clause mean?

In an employment agreement, an indemnification clause acts as a contractual transfer of risk from employee to employer, as well as from employer to employee in the case of mutual indemnification clauses. Indemnity clauses can take a variety of forms, however, an indemnity clause most often aims to prevent or compensate the employer or employee for loss which may occur as a result of being held legally liable for an event which occurs to a third party. Third party indemnity clauses come into operation where a third party is affected by the indemnified party and instead of the indemnified party being held legally liable, legal liability is transferred to the party contractually obligated by the indemnity clause to cover any expenses and hold responsibility for any damage caused.

Different types of indemnification clauses

It is important to note that indemnification clauses can include either one, or multiple of the indemnity clause types listed below.

  • Indemnity clauses which protect against third party liabilities or claims: Party A provides indemnity to Party B to protect against liabilities or expenses arising from Party C.
  • Indemnity clauses which protect against financial loss: Party A provides indemnity to Party B if Party C does not honour their financial obligation to Party B. 
  • Indemnity clauses where all parties indemnify each other (mutual indemnification): This occurs where each party in the contract indemnifies the other parties in their contract for losses or liabilities which occur as a result of the indemnifier breaching the contract.
  • Indemnity clauses which protect Party B from Party B: In these indemnification clauses Party A indemnifies Party B against losses Party B incurs most often as a result of Party B’s own negligence.
  • Indemnity clauses which protect the indemnifier from Party B’s actions or omissions: These types of indemnity clauses indemnify Party B against all liabilities and losses incurred except for liabilities and losses which arise from Party B’s own acts or omissions.
  • Other forms of indemnity clauses: Indemnification clauses don’t always fit in the categories specified in this list and can be written to reflect the specific requirements of the contract and parties involved. If you are unsure what type of indemnity clause to include in your contract which will best suit your needs we recommend seeking legal advice.

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What’s in it for the employer?

Indemnification clauses are especially important for building trust and respect with employees and increasing the reliability of employees and senior management staff by providing protection against liabilities and related costs. Indemnification clauses give the employer the ability to provide cap limits on expenses and costs arising from liability incurred by employees. Employers who are looking to hire executive level staff, directors, and other high level staff can also increase their chance of attracting highly sought after individuals to their business due to the added protection provided to employees during the course of their duties.

Employers and businesses who provide indemnification in high risk/high reward roles, are far more likely to receive quality applicants. Providing employees in high risk/ high reward employment with indemnification enables employees to go about their work much more efficiently and effectively and is highly likely to increase the productivity of staff.

Depending on how indemnification clauses are drafted, including an indemnification provision in an employment agreement can also protect the employer from being held liable or having to pay for costs which are a direct result of an employee’s own actions or negligence. Indemnification clauses can also be drafted to protect the employer from specific events depending on the contract. Indemnification clauses which indemnify the employer from events which occur as a direct result of the employee, or events which are specified in the contract, also help to build good faith between the employer and the employee by holding both the employer and the employee accountable to the expectations laid out in the indemnity provision. 

What is Mutual Indemnification in Employment Contracts?

Mutual indemnification in an employment agreement occurs when all parties specified in the indemnity provision indemnify each other for losses or liabilities which occur as a result of the indemnifier breaching the contract. For example, if an employer breaches the contract they are now liable to pay the employee (indemnified party) for any expenses incurred or liabilities received as a result of the breach in contract. Likewise, if an employee in a mutual indemnification clause breaches or breaks the terms of the contract they are then held liable per the indemnity provision and must pay or take responsibility for any expenses incurred or liabilities received by the indemnified party (employer).

Does Mutual Indemnification make employment contracts safer?

While mutual indemnification can assist in setting guidelines and expectations and enforcing responsibility, whether mutual indemnification clauses are safer than other forms of indemnity clauses, an indemnification agreement, or not having an indemnity clause at all is generally dependent on the specified contract. For example, while including a mutual indemnification clause in an employment agreement can assist in protecting the employer from being held liable by gross negligence or liabilities arising as a result of an omission or action by the employee, including mutual indemnity in a high risk/high return employment contract or contract for a high level executive may decrease the trust a potential employee has in your company if they do not feel protected from liabilities or expenses arising as a result of the employers actions or omissions. If you are unsure how to draft your indemnity clause, or if you are unsure if an indemnity clause is suitable for your contract we highly recommend seeking legal advice to further understand your obligations to employees and your employees obligations to you. All in all, whether mutual indemnification makes employment contracts safer or not is unclear and highly dependent on the specific circumstances of the employment agreement.

Do employers have to indemnify employees?

While employers in Australia do not have to include an indemnification clause in their employment agreements, businesses in Australia are still liable for employees for circumstances listed in Australia’s common law regardless of the presence of indemnification clauses. For indemnifiable situations which arise under common law, employers are required to indemnify their employees. It is important to remember that indemnity under common law is provided to any party in an employment relationship with the business or company engaging them. Contractors are one example of an alternative relationship where indemnity under certain circumstances is still present and required to be provided by the business. Providing employees with an indemnity agreement or including an indemnity clause in their contract can assist your company to better prevent legal action arising from indemnification claims by ensuring that both the business and the employees have some understanding of what constitutes a breach of the agreement or specified indemnities provided. 

If you are unsure whether someone is in an employment relationship with you or your business, you can reach out to the team at Business Kitz for a free 30 minute consultation or give us a call on 1300 988 954

What does it mean to indemnify your employer?

When your employer is indemnified this means that the employee in the employment relationship will take liability for the specified event/s in the indemnity clause or agreement onto themselves which result as a consequence of their own actions or omissions, or result as a consequence as the employer breaching the contract. It is important to remember that even if an indemnity clause in an employment agreement only references the employer as indemnified, the employer is still required by common law to indemnify employees regardless of whether the employees indemnification is specified in the employment agreement. In mutual indemnification, indemnifying your employer protects the employer against liabilities, expenses, or legal action which may arise as a result of the employee breaking or breaching the contract terms and likewise the employee is indemnified by the employer. Generally, employment agreements which include an indemnity clause indemnify the employee or utilise mutual indemnification to protect both the employer and the employee from taking on the others liabilities and expenses as per the specified events in the contract or employment agreement.

Should I have an Indemnification Agreement instead of an Indemnity clause?

Most businesses do not need an indemnification agreement and some can even operate smoothly without an indemnification clause due to the presence of indemnity in the common law, however, high risk businesses, for example, can benefit from an Indemnification agreement due to the presence of a greater number of risks and therefore a greater number of indemnifiable circumstances. Unlike an indemnity clause in an employment agreement an indemnity agreement is separate to the employment contract and is often provided primarily to help protect the business or company by removing or minimising their liability for damages, expenses, or losses which may arise in certain circumstances. 

For example, a hair salon can benefit from providing clients with an indemnity agreement to hold their business and employees harmless from liabilities, damages, or expenses which may arise from their services. For hair salons or other beauty services utilising an indemnification agreement can assist in preventing claims being made by clients as a result of accidents or arising while employees carry out the regular duties of their job. Providing clients with an indemnity form ensures the clients themselves are held responsible for any accidents or issues which occur during the course of the service and are issues or accidents which are generally expected or affiliated with the industry or service. High risk activities such as sky diving or deep sea diving are also recommended to employ indemnity agreements in their daily operations due to the high risk nature of the activities.

Drafting Indemnities

It is very important when drafting indemnity clauses to consider whether you have the authority to draft the indemnity agreement or clause as some indemnities may be in conflict with the common law or general employment standards. If you or your business is drafting an indemnity clause or agreement we recommend calling the Fair Work Commission to ensure that the indemnity clause is consistent with Fair Work legislation. For further certainty on the quality of your indemnity agreement or clause we recommend seeking legal advice to ensure the indemnity provision is legal and drafted in a way which is most appropriate for you or your business to correctly indemnify the people involved in the contract. 

For more information on indemnity clauses and agreements or any related questions please feel free to contact our team by giving us a call on 1300 988 954 or booking a free consultation with us online. 

Do I need an indemnity clause in my employment agreement?

If you are unsure whether you need an indemnification clause in your contract, It is generally best to include this in your agreement. You can read more about indemnification clauses here. If you are still in need of assistance we recommend booking a free 30 minute consultation with the Business Kitz team, alternatively, If you are seeking legal advice we recommend contacting our sister law firm Legal Kitz. If you are unsure whether you require Legal Advice feel free to book a free consultation with the Business Kitz team or give us a call on 1300 954 988.

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