Chapter 10 Agency and Employment Relationships McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter Overview The definition, categories, and sources of law that govern agency relationships. Liabilities, duties, and obligations that are created by an agency relationship. Agency laws that govern certain aspects of employment relationships.

DEFINITIONS Agency is a legal relationship in which the parties agree, in some form, that one party will act as an agent for another party, called the principal, subject to the control of the principal.

Employee Agents In order to be classified as an employee agent, the employee must have some source of authority to represent the employer. The non-agent employee relationship is sometimes referred to as the master/servant relationship in order to distinguish it from an employer/employee agent relationship.

Independent contractor agent Not considered an employee and has no legal protections of employees such as minimum wage and overtime laws. An equally important factor is that the principal generally has no liability for actions and omissions of an independent contractor agent.

Direction and Control In an employer/employee agent relationship, the employer typically sets: work hours, salary, working conditions and responsibilities.

Direction and Control Independent contractors usually work based on a deadline, but typically choose their own schedule. In terms of payment, independent contractors usually send an invoice on a monthly basis for services rendered.

IRS’s Three-Prong Test Behavioral aspects of the agency. (Does the company control what the worker does?) The financial arrangements between principal and agent. The type of working relationship the parties had in terms of benefits and continuing employment.

Estrada v. Fedex, Inc., 64 Cal. Rptr. 3d 327 (2007) [FedEx] company’s drivers worked full time, were paid weekly, had regular schedules and regular routes, received many standard employee benefits, wore uniforms, used company-specific scanners and forms, and were required to work exclusively for the company. Thus were employees, not independent contractors.

Creation of an Agency Relationship A fiduciary relationship that results from: manifestations of consent by the principal to the agent to act on the principal’s behalf. the agent must also give consent to perform the act.

Overlay of Agency Law with Other Areas of Law Note that the law of agency often overlays and interacts with other areas of the law, especially: contracts torts

LIABILITY OF THE PRINCIPAL FOR ACTS OF THE AGENT For agency purposes, legal liability can arise either through : a contract obligation vicarious liability in tort

Actual Authority Typically, an agent’s power to bind is through actual authority when the parties either expressly agree to create an agency relationship, or where the authority is implied based on custom or course of past dealings.

Apparent Authority Apparent authority arises from the actions of a principal that lead a third party to believe that an agent has the authority to act on the principal’s behalf.

Ratification Ratification occurs when the principal affirms a previously unauthorized act. That is, even though the agent did not have the authority to bind the principal initially, the principal may subsequently give after-the-fact authority.

Hannington v. U. of Pennsylvania, 809 A.2d 406 (Pa. Super. 2002) The doctrine of apparent authority permits a settlement agreement to be enforced where a third party reasonably believes that the principal’s lawyer, the agent, has the authority to settle the case even though the lawyer fraudulently represents that he has such authority.

Contract Liability to Third Parties An authorized agent who enters into a contract with a third party binds the principal to perform certain obligations and the third party may legally enforce the contract against the principal.

Fully Disclosed Agency In a fully disclosed agency relationship, only the principal is contractually obligated to the third party. Agent not liable.

Partially Disclosed Agency In a partially disclosed agency relationship, both the principal and the agent may be liable for the obligations under the contract.

Undisclosed Agency In an undisclosed agency relationship, the agent is fully liable to perform the contract. If principal’s identity is subsequently discovered, he/she may also be held liable.

Tort Liability to Third Parties In some cases, a principal may be held liable for an agent’s tort, even though the principal has not engaged in any wrongful conduct. This is particularly true when the agent is an employee.

Scope of Employment The doctrine of respondeat superior holds that a principal (employer) is liable for the agent’s (employee) tort when that act resulted in some physical harm or injury and occurred within the employee’s scope of employment.

Edgewater Motel, Inc. v. A.J. Gatzke, and Walgreen, 277 N.W. 2d 11 “A mere deviation by an employee from the strict course of his duty, such as smoking at work, does not release his employer from liability. An employee does not cease to be acting within the course of his employment because of an incidental personal act, or private purpose, if his main purpose is still to carry on the business of his employer.”

Intentional Torts Generally, intentional torts by an agent (such as committing an assault in the workplace) are thought of to be outside the scope of employment and, therefore, employers are not liable for such conduct.

Negligent Hiring Doctrine A majority of states recognize a tort-based theory of liability for employers for negligent or intentional torts of employees when the employer had reason to know that the employee may cause harm within his scope of employment.

Agent’s Duties to the Principal Fiduciary duty consists of five subduties: loyalty, obedience, care, disclosure, accounting.

Loyalty The duty of loyalty is the centerpiece of fiduciary obligation because the agent is obliged to advance the principal’s interest over her own interests.

Care This requires the agent to act in the same careful manner when conducting the principal’s affairs as a reasonable person would use in conducting her own personal affairs.

Disclosure Agents have an ongoing duty to keep the principal informed and disclose any and all relevant facts to the principal.

Accounting Unless the parties agree otherwise, the agent must keep appropriate written records for any money that the agent spends or receives in the course of the agent’s representation.

Principal’s Remedies for Breach Rescission Disgorgement

Duties and Obligations of the Principal to the Agent When an agent acts on behalf of its principal, the agent may incur expenses, make payments, suffer an injury, or cause damages to third parties. In such cases, the principal has a duty to reimburse and indemnify its agents.

Agent’s Remedies for Breach When a principal breaches a duty owed to an agent, the agent generally has the right to recover damages in court. The most common breach is when the principal refuses to reimburse or indemnify the agent.

TERMINATION OF THE AGENCY RELATIONSHIP Termination is an important issue for business owners and managers because the effect of a termination of the agency relationship also terminates the principal’s duties and obligations to the agent and to third parties.

Express Acts Either party may end the agency through termination by simply communicating the desire to terminate the relationship. Termination by the principal is known as revocation. When the agent initiates the termination, this is known as renunciation.

Operation of Law Destruction of an essential subject matter of the relationship Or if principal or the agent: dies files for bankruptcy, does not have the requisite mental capacity to continue the relationship.

EMPLOYMENT RELATIONSHIPS At-will doctrine permits employers to terminate an employee without advance notice and without just cause, subject to certain exceptions: (1) an express contract (2) an implied contract (3) specific statute or public policy

Whistleblowers One important statutory exception for business owners and managers are federal and state statutory protections of whistleblowers. Good opportunity to talk about Sarbanes Oxley Act

Haynes v. Zoological Society of Cincinnati, 652 N.E.2d 948 Defendants violated the Ohio Whistleblower law by demoting Ms. Hanes in retaliation for her reporting these unsafe working conditions to federal officials investigating the defendant.

learning outcomes checklist 10 - 1 Recognize, define, and give examples of an agency relationship. 10 - 2 Classify agents as either employees or independent contractors by applying the direction and control tests.

learning outcomes checklist 10 - 3 Explain the process for creating an agency relationship and the impact of that relationship on the liability of the principal. 10 - 4 List the sources of an agent’s authority to bind the principal in contract and give examples of each source.

learning outcomes checklist 10 - 5 Apply the doctrine of respondeat superior and identify its impact and limits. 10 - 6 Define the duties that collectively comprise a fiduciary obligation owed by the agent to the principal. 10 - 7 Articulate the duties owed by a principal to the agent and to third parties.

learning outcomes checklist 10 - 8 The two primary methods used to terminate agency relationships. 10 - 9 Recognize the dangers of the principal failing to notify third parties of an agent’s termination. 10- 10 Explain the employment-at-will doctrine, and its primary exceptions.