Rights of indemnity in the employment relationship.(Employment Law)

* Employees may have a right of indemnity from employers if they have been directed to undertake unlawful acts that they did not know were unlawful

* Employers may have a right of indemnity from employees where the employees have breached the implied contractual term requiring them to take proper care in the performance of their duties

* Employees with significant assets or in senior positions may wish to have these issues specifically addressed in the employment contract

Two questions seldom addressed in employment contracts are:

1 what rights does an employee have to an indemnity from an employer in relation to conduct in the course of the employment relationship and

2 what rights does an employer have to an indemnity from an employee if the employer suffers a loss as a result of conduct by the employee in the course of the employment relationship?

This article provides an overview of some of the issues in this complex area. However, it should be noted that the law varies from state to state and legislation changes the position in some circumstances where these principles may otherwise apply.

Employees' right to an indemnity

Employment contracts often make specific provisions for an employee to be reimbursed for expenses legitimately incurred in the course of their employment. However, it has been held that this obligation arises on the basis of an implied term in the contract of employment (see Pupazzoni v Fremantle Fisherman's Co-operative Society Ltd ((1981) 23 AILR 168). In some circumstances the obligation may extend to legal costs and even fines and penalties incurred by the employee in the course of the employment.

It is an implied term of the contract of employment that an employer will not compel or direct an employee to carry out a direction that would require the employee to do anything 'unlawful', in …