Download Chapter 17: Management of Employee Conduct: Agency

Chapter 17: Management of Employee
Conduct: Agency
A- Names and Roles: Agency Terminology:
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Agency:
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In the employer-employee relationships, the employers are the principals.
Agents:
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In an agency relationship, the principal grants authority to an agent.
The agency is a consensual relationship, where both sides agree to it and a
fiduciary relationship with duties and responsibilities on both sides.
Principals:
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A principal – agent relationship is one in which one party acts on behalf of
another.
Power of Attorney: form of agency relationship that grants a person authority to
enter into transactions.
 Special Power of Attorney: is limited in time or scope
 General Power of Attorney: an individual gives another the rights to
manage his financial affairs in everything.
Agents are hired by a principal to do a task on behalf of the principal.
If the agent negotiates a contract, the principal, and not the agent, is bound by
and is a party to the contract.
All employees are agents of the principal employer, but not all agents are
employees.
Employers and Employees: Master-Servant Relationships:
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Master-servant relationship: the principal (master) exercises control over the
agent (servant).
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Independent Contractors:
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The factors used to determine whether a master-servant relationship exists are as
follows:
 Level of supervision of the agent
 Level of control of the agent
 Nature of the agent’s work
 Regularity of hours and pay
 Length of employment
Independent contractor: is hired by another to perform a task but is not under
the direct control of the hiring party.
Principals have less responsibility for independent contractors than for servants
because they have little control over a contractor’s conduct.
A principal’s liability for an agent’s actions varies depending on the agent’s
status as servant or contractor.
Agency Law:
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Agency law’s source is common law and not statutory law.
Restatement of Agency: a summary of the majority view of agency law in the U.S
that is followed by many courts in handling agency cases.
- The 3 components of agency law are:
1- Creation of Agency Relationship
2- Relationship Between Principals and Agents
3- Relationship of Principals and Agents to Third Parties.
B- Creation of Agency Relationship:
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Express Authority:
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An employee hired by agreement (oral / written) is an agent & has been given
express authority to act on behalf of the business.
Express contract: specifies the limitations of employee / agent’s authority.
The Record:
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An agency relationship is created by agreement, which need not be evidenced
by a record, although it is better for both employee and employer if it is.
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Capacity:
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Principals must have capacity to contract, in age and mental capacity.
One issue is the stalemate resulting when mental incapacity in one of the key
individuals in a small business occurs.
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Under the Uniform Durable Power of Attorney Act (UDPAA), these key individuals
can execute a type of power of attorney that comes into existence in the event
of disability of incapacity of the principal.
The UDPAA helps children trying to manage their parents’ financial affairs when
their parents become mentally or physically disabled.
The contractual capacity of the agent does not affect his ability to enter into a
contract.
However, the ability of the agent to operate or work with the public is an issue
that affects the employer’s liability to third parties, which is why most employers
conduct checks as a precondition to hiring employees.
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An unincorporated association is a group that acts as an entity but has no legal
existence. Ex: churches
Because these organizations are not incorporated and have no legal existence,
those who sign contract are not agents and are personally liable under contract.
The National Conference of Commissioners of Uniform State Laws proposed the
Uniform Unincorporated Nonprofit Association Act (UUNAA).
Under UUNAA, the contract and tort liability of members of nonprofit associations
would be eliminated if they were acting on behalf of their nonprofit
unincorporated association.
UUNAA also allows these unincorporated associations the right to bring suits and
be sued in their names as well as own property.
Implied Authority:
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Only if the contract requires a record or if a state statute requires an agent’s
authority to be in some record form, then some form of record is needed.
The record could be a written, faxed or PDF document signed by the principal.
An agent under contract also has implied authority which is the extension of
express authority
It can be limited by agreement between parties if they do not want custom and
practice to control their relationship.
Apparent Authority:
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Apparent authority or agency by estoppel holds a principal liable if the principal
makes someone else think he has an agent.
Apparent authority exists by appearance where a third party is led to believe
that an agent has the proper authority to deal with him.
Ratification:
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An agent may enter into a contract that the principal later ratifies.
Ratification occurs when the principal reviews a contract and voluntarily decides
that, even thought the agent did not have proper authority, the contract will be
honored as if the agent had full authority.
Once a contract is ratified, it is effective from the time the agent entered into in,
even though the agent had no authority until after the fact.
C- The Principal-Agent Relationship:
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The Agent’s Responsibilities:
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Principals and agents have a fiduciary relationship characterized by loyalty, trust,
care and obedience.
An agent in the role of fiduciary must act in the principal’s best interest.
1- Duty of Loyalty: General:
- An agent:
 Is required to act only for the benefit of the principal
 Cannot represent both parties in a transaction unless each knows
about and consents to the agent’s representation of the other
 Cannot use information gained or offers available to profit personally
2- Duty of Loyalty: Postemployment:
- Many companies have their employees sign contracts that include
covenants not to compete or not to disclose information about their former
employers should they leave their jobs.
- The laws on noncompete agreements vary from state to state.
- California’s stature prohibits employers from enforcing agreements that
prohibit employees from working in their chosen fields.
- Across all states, an underlying reason for the noncompete agreement must
be evident.
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Employer’s signatures on noncompete agreements are questioned,
especially when compensation is attached to surrender of rights.
California provides protection for employees who refuse to sign the
agreements and punishes the employers in wrongful termination cases
caused by the employee’s refusal to sign.
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Downsizings in the high-tech industry have brought back the issue of
noncompete and confidentiality agreements because when employees
were recruited by these firms and lured with stock options, it was difficult for
them to imagine a time when the company would need to downsize.
- Hence, most signed fairly restrictive covenants not to compete.
3- Duty of Obedience:
- An agent is required to operate according to the principal’s standards and
instructions, or else the agent would be held personally liable for the conduct.
- An agent is not required to do anything criminally wrong or commit torts.
4- Duty of Care:
Agents have a duty to use as much care and to act as prudently as they
would when managing their own affairs.
An agent who does not use reasonable care is liable to the principal for any
damages resulting from lack of care.
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The Principal’s Rights and Responsibilities:
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A principal has the right to expect that an agent will perform within the required
standards.
- The principal also has obligations which are:
1. Compensation: Some agents work for a fee. In a gratuitous agency, the agent
will not be compensated. (Ex: Charity)
2. Indemnification for expenses: Principals should repay agents costs incurred in
carrying out the principal’s order.
D- Liability of Principals for Agents’ Conduct: The Relationship with
Third Parties:
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Contract Liability:
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The liability of the principal for contracts made by an agent is controlled by the
perceptions created for and observed by the third party to the contract.
Those perceptions vary, so the liability of the contract varies depending on the
way in which the agent does business.
1- The Disclosed Principal:
- When the third party is aware a principal is involved and knows who the
principal is, the principal is liable to the third party and not the agent,
regardless of whether the agent has express, implied or apparent authority.
- If the agent has no authority, then the agent, not the principal, is liable.
2- The Partially Disclosed Principal:
- When the third party knows the agent is acting for someone else, but does
not know who, then he can hold either the principal or the agent liable.
- The agent assumes risk of personal liability by not disclosing the identity of the
principal.
3- The Undisclosed Principal:
- When the agent acts without disclosing either the existence of a principal or
his identity, the agent is directly liable to the third party.
If the third party discovers the identity of the principal, he could hold either
the principal or the gent liable.
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Liability of Principals for Agents’ Torts:
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The amount of liability of principals for torts committed by agents depends on
the status of agents. (servants or independent contractors)
1- Master-Servant Relationship:
- A distinction is made between the liability of a principal for the acts of a
servant and for those of an independent contractor.
- The principal is liable for the torts of a servant.
2- Scope of Employment:
- Employers (principals) are liable for the conduct of employees (agents /
servants) while they are acting in the scope of employment, under the
doctrine of respondent superior.
- Scope of employment means an employee is doing work for an employer at
the time a tort occurs
- Generally, intentional acts performed by employees not authorized by their
employers do not result in liability for the employers.
3- Negligent Hiring and Supervision:
- Negligent hiring required proof that the employer hired the employee whose
background made him ill-suited for the position.
- Negligent supervision results when an employer has told that an employee
has engaged in harmful behavior but leaves the employee in his position.
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Many firms undertake various forms of testing to prevent employees who
could cause injuries.
- The courts have upheld the employer’s right to test for the presence of drugs
and alcohol when the firms can show a public safety need.
4- Independent Contractors:
Principals are not generally liable for the torts of independent contractors.
Three exceptions apply:
A. Inherently dangerous activities: Concerning activities that cannot be
made safe, the principal is held liable for any damage.
B. Negligent hiring of an independent contractor: When the principal
negligently hires an independent contractor, he is held liable for any
damage.
C. Specifying the independent contractor’s procedure: When the principal
has provided the specifications for the independent contractor’s
procedures, he is to be held liable for any damage.
E- Termination of the Agency Relationship:
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An agency relationship can end in several ways:
 The parties can have a definite duration for the agency relationship.
(Ex: listing agreement for real estate property sale ends after 90 days)
 The agent can quit or the principal can fire him.
 When the principal dies or is incapacitated, an agency ends
automatically.
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An agency can have lingering apparent authority after his termination of the
agency in relation to third parties who are unaware of the agency termination.
The principal corporation can end lingering apparent authority by giving public
or constructive notice and private or actual notice.
Public notice is the publication of the resignation.
The principal must also give private notice to those firms that have dealt with the
agent.
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F- Termination of Agents Under Employment at Will:
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Most employees don’t have written contracts that specify the start and
duration of employment.
They have employment at will which means they work at the discretion of
their employees.
Some restrictions have been placed on the employer freedom to hire and fire
at will.
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Courts have been giving employees the benefit of their reliance.
Employees have based their protection rights implied contracts and public
policy.
The Implied Contract:
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Courts implied the existence of a contract because of the presence of
promises, procedures, and policies in an employee personnel manual.
- Personnel manuals constitute, both expressly and impliedly, employee
contracts or to become part of the employee contracts.
- One factor that determines whether a personnel manual constitutes a
contract is the reliance of an employee on its terms.
- Because the employee manual represents a potential contract for
employers, its nature & content are considered carefully. Hence there are
two approaches to employee manuals:
1- All rules, rights and expectations are carefully established in a detailed
manual.
2- Overall general policies and rights are established with details to be filled in
case individual issues arise.
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The Public Policy Exception:
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Courts afford protection to whistle-blowers who report illegal conduct and to
those who refuse to participate in conduct that is illegal.
For maintaining interest and saving expenses, companies have adopted a
peer review policy.
Peer review is a formal grievance procedure where employees present their
cases to a panel of fellow employees and managers who then issue a written
opinion with an explanation.
The peer review process should be in the employee handbook, should be
required prior to court action and should be publicized.
Capacity:
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Many states and the federal government have passed whistle-blower
protection statutes which prevent employers from firing employees who
report violations.
- Two federal statutes afford protection for federal employees and allow them
to recover pay and attorney fees:
1- Civil Service Reform Act of 1978
2- Whistleblower Protection Act of 1989
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The Energy Reorganization Act provides protection for employees of nuclear
facilities who report violations of federal laws at nuclear plants.
The False Claims Act allows employees of government contractors to collect
25% of fines and penalties resulting from their tips concerning illegal action.
Sarbanes-Oxley protects employees and analysts who raise concerns about
the financial reports of companies.
The research firms or investment houses the analysts work for cannot take
retaliatory action against the analysts for issuing negative reports on
companies that might be clients of the analyst’s employer, or they will face
fines as well as imprisonment.
G- Agency Relationships in International Law:
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One of the complexities developed in law because of global business
organizations is the liability of various subsidiaries, officers, and owners of
multinational organizations when the interrelationships and operations may
not be clear or known to them.