Tuesday, October 18, 2011

Did You Ever Want To Sue Your Employee Or Ex-Employee?

That is exactly what Nicholas Labs did.  It sued its former employee, Christopher Chen, for competing with the company when he was in the company's employ.  The company concluded that Mr. Chen diverted business opportunities away from Nicholas Labs to his own business. 

As any good employee would, he cross-complained against Nicholas Labs, contending that under Labor Code section 2802 he was entitled to indemnity for defending himself against the lawsuit.  In other words, he wanted Nicholas Labs to pay the legal fees and other expenses he incurred defending himself against the claims by Nicholas Labs. 

Eventually, Nicholas Labs dismissed its complaint against Mr. Chen.  The court does not explain why; however, I suspect the company realized that either its claim was poor or that it wouldn't get any money out of him anyway.  Nevertheless, Mr. Chen's cross-complaint for indemnity went forward. 

Section 2802 of the Labor Code requires an employer to indemnify its employee for "all necessary expenditures or losses incurred by the employee in the direct consequence of the discharge of his or her duties."  The court concluded that the term "indemnify" refers to situations where a third-party sues the employee, and not to situations where the employer sues the employee. 

In the end, good news for employers.  Employees cannot ask you to pay for the legal fees they incur defending lawsuits prosecuted by the employer.  But employers should still exercise caution.  Economically, lawsuits against employees rarely payoff for the employer.  Employees are generally without funds to recover.  Filing a lawsuit can be an expensive, and unsatisfactory, exercise for the company. 

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