Attorney Fee Disputes Between Employers and Employees Clarified

Winter 2011Newsletters California Update

A California Court of Appeal recently determined that Labor Code section 2802 does not require an employer to reimburse an employee for attorney’s fees incurred in the employee’s successful defense of the employer’s action against that employee. In the case, an employer filed a lawsuit against a former employee for breach of contract, conversion, negligence and several other causes of action. After the former employee successfully defended the action, he sought to recover his attorney’s fees from his former employer under California Labor Code section 2802 because he alleged that the fees incurred in defending himself were an expense that arose out of his employment with his former employer. Under Section 2802, employers must “indemnify” their employees for “all necessary expenditures or losses incurred by employees in direct consequence of the discharge of their duties.” The appellate court denied the request for fees. The court questioned whether the legal fees incurred by the former employee were “in direct consequence” of his employment, and explained that the word “indemnify” in this context is usually understood as an obligation to pay for expenses incurred in a lawsuit by a third party, not expenses incurred in a “first party” dispute between an employer and an employee. Further, the court indicated that the broader intent of the law does not support extending the reach of section 2802 to an employer’s claims against its employees.

While employers in California have a range of indemnification obligations to their current and former employees, this case clarifies that employers do not need to reimburse employees for legal fees or costs expended in defense of claims made against them by their employers.

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