Lucrative guaranteed income arrangements, such as management-fee agreements, hold for many companies the promise of additional income with relative ease, leveraging a company’s already established brand and reputation. We commonly see such arrangements in the hotel industry with respect to food and other on-premises services. Other companies seek to avoid various employment-related headaches by hiring outside cleaning, maintenance, or other vendors. All of these arrangements, unfortunately, are fraught with risk, potentially exposing such companies to liability under relevant employment and wage laws.
The courts generally construe the concepts of “employer” and “joint employer” broadly with respect to employment and wage laws. These concepts are then frequently applied or asserted against managers in management-fee arrangements or companies that engage vendors, holding them liable for violations committed against individuals providing services under these types of agreements. In many of these cases, the company may not even pay the employees involved or be authorized to manage their employment and wage practices, however any violations committed by the vendor or owner creates a liability risk.
One solution that is frequently proposed is entering into an “iron-clad” indemnification agreement, where the owner or vendor agrees to indemnify all employment and wage related liability associated with the project or arrangement. Unfortunately, what many companies do not know is that the enforceability of such contractual indemnification clauses is uncertain in some jurisdictions, such as New York. Some courts have reasoned that contractual indemnification of employment or wage liability is against public policy, i.e. an employer cannot contract away its responsibility to pay and manage their employees lawfully and thereby skirt the purposes of the employment and wage statutes. See, e.g., Goodman v. Port Authority of New York and New Jersey, 850 F. Supp. 2d 363, 388-89 (S.D.N.Y. 2012). Although the law here is still unsettled, the reliability of contractual indemnification provisions with respect to employment and wage claims is uncertain at best. Moreover, with the possibility of class and collective actions, as well as steep liquidated damages penalties, punitive damages, and liability for plaintiffs’ attorneys’ fees, caution is advisable.
While management-fee and vendor relationships are relatively easy methods to draw in additional revenue or relieve certain operational burdens, an entity looking to enter into such arrangements cannot always contract away employment and wage related liability. Improper employment and/or wage practices engaged in by a vendor or owner in such a venture could easily result in a lawsuit. Vetting your potential partner is key.