MARIANNE M. JENNINGS
7th Ed.
Its Legal, Ethical, and
Global Environment
Chapter 18
Management of Employee
Conduct: Agency
Copyright ©2006 by West Legal Studies in Business
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Terminology
• Nature of Agency: Agency
relationship is one in which one
party agrees to act on behalf of
another.
– Examples: sales clerks, real estate
agents, sports agents.
• Agent: Party who acts for another.
• Principal: The party for whom the
agent acts.
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Terminology
• Master/Servant:
– Relationship in which the master/principal
exercises a great deal of control over the
servant/ agent. Most common form is
employer/employee relationship.
– Factors that control whether this type of
relationship exists:
•
•
•
•
Level of supervision.
Level of control.
Regularity of hours and pay.
Length of employment.
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Terminology
• Independent contractor:
– Hired to perform a task but is not
directly supervised. Example: Lawyer.
• Agency Law: Restatement of Agency.
• Common law followed by most courts.
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Terminology
• Three Parts to Agency Law:
– Creating the agency relationship.
– Relationship between principal and
agent.
– Relationships of agent and principal to
third parties.
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Agency Creation
• Creating the Agency Relationship: when
the principal hires someone.
• Express Authority Agency.
– Created by principal stating or writing that
agency exists and the authority thereof.
– Requires oral or written agreement - must be
in writing if required by statute of frauds.
• Example: Agency contract is longer than one
year.
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Agency Creation
• The Writing.
– If the agent’s contracts must be in
writing, the authority must be in writing.
• Principal Must Have Legal Capacity.
• Age and mental capacity.
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Agency Creation
• Capacity: unincorporated associations
do not have capacity:
– Have no legal existence.
– Members will be liable since there is no
principal.
• The capacity of agent becomes an
issue when it concerns:
• Authority to enter contracts.
• Potential liability to third parties.
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Agency Creation
• Implied Authority: the extension of express
authority by custom.
• Apparent Authority:
– Arises from the way agents present themselves
to third parties.
– Also called agency by estoppel or ostensible
authority.
• Examples: Failure to notify of an agent’s
retirement, allowing bank to use your name for
another’s loan.
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Apparent Authority
• Case 18.1 Montoya v. Grease
Monkey Holding Corp. (1995).
– What was the apparent authority
Sensenig had?
– What representations were made to
Montoya?
– Is this apparent or actual authority?
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Agency Creation
• Agency by Ratification.
– Principal reviews contract and decides to
honor it even though agent had no authority to
enter into it.
• Fiduciary Relationship.
– Agent acts in the principal’s best interests.
• Loyalty, trust, care, obedience.
– Loyalty.
• Agent can’t represent both sides.
• Can’t make a profit at principal’s expense.
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Fiduciary Duties
• Case 18.2
Silva v. Bisbee (1981).
– What did agent Bisbee fail to disclose?
– Was agent Bisbee representing both
sides in a transaction?
– Why is Midkiff also liable?
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Loyalty: Covenants
• Case 18.3
(1999).
Coady v. Harpo, Inc.
– What did Ms. Coady agree to at the time
of employment?
– Is there a difference between a
confidentiality agreement and covenant
not to compete?
– Was the Oprah covenant enforceable?
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Rights and Duties
• Agent: Obedience.
– Follows principal’s instructions .
– Need not do anything illegal.
• Agent: Duty of care.
– Give time and effort.
– Follow through.
• Principal: Duties and Rights.
– Duty to pay -- Except gratuitous agency.
– Duty to reimburse.
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Principal’s Liability
• Principal’s Liability to Third Parties.
– Contract liability and issues of
disclosure.
• Principal has full liability for authorized
acts of agent and those done with
apparent authority.
• Disclosed principal—principal is fully
liable; agent is not unless the agent had no
authority.
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Principal’s Liability
• Contract liability and issues of
disclosure.
– Partially disclosed principal—agent
indicates there is a principal but does not
tell who it is; third party can hold either
liable
– Undisclosed principal—agent does not
disclose there is a principal; agent stands
alone unless principal comes forward
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Principal’s Liability
• Liability of Principals for torts.
– Must have master-servant relationship,
not independent contractor.
– Liable for torts of servants in scope of
employment.
• Scope = doing master’s work.
• Doctrine of respondeat superior-let the
master answer.
• Not liable for torts committed while on
frolic.
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Scope of Employment
• Case 18.4 Faverty v. McDonald’s
Restaurant of Oregon, Inc. (1995)
– Why would a restaurant association have
an interest in the outcome of the case?
• Case 18.5 Lange v. National
Biscuit Co. (1973)
– What test does the court give for
determining scope of employment?
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Negligent Hiring
• Case 18.6 Doe v. Norwich Roman
Catholic Diocesan Corp. (2003).
– Does respondeat superior apply here?
– Why is negligent hiring an issue in this
case?
– What must the plaintiff prove to recover
against the church?
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Principal’s Liability
• Principles are generally not liable for the
torts of Independent Contractors.
• Exceptions:
– Inherently dangerous activities.
– Negligent hiring of independent contractor.
– Principal provided specifications for project or
Job.
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Agency Termination
• Due to:
–
–
–
–
Definite duration of time.
Agent quits/is fired.
Principal dies/is incapacitated.
Need to give public or constructive notice
(trade publication).
– Actual notice (letters).
– Without notice, agent will have lingering
apparent authority.
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Termination of At-Will
• Has no definite ending date.
• Usually there is no formal written
contract.
• Used to be they could be fired at any
time.
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Termination of At-Will
• The Do’s and Don’ts of Firing At-Will
Employees.
– Do:
• Conduct regular reviews of employees, using
objective, uniform measures of performance.
– Don't
• Make oral promises of job security to employees
who might later be laid off.
• Danger: Breach of contract suit.
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Termination of At-Will
• The Do’s and Don’ts of Firing At-Will
Employees.
– Do: Give clear, business-related reasons
for any dismissal, backed by written
documentation when possible.
– Don't: Put pressure on an employee to
resign in order to avoid getting fired.
• Danger: Coercion suit.
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Termination of At-Will
• Do:
– Seek legal waivers from older workers who
agree to leave under an early-retirement plan,
and make sure they understand the waiver
terms in advance.
• Don't:
– Make derogatory remarks about any dismissed
worker, even if asked for a reference by a
prospective employer.
• Danger: Defamation suit.
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Termination of At-Will
• Do:
– Follow any written company guidelines for
termination, or be prepared to show in court
why they're not binding in any particular
instance.
• Don't:
– Offer a fired employee a face-saving reason
for the dismissal that's unrelated to poor
performance.
– Danger: Wrongful discharge suit.
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Termination of At-Will
• The Implied Contract
– In some states personnel manuals will be
a contract if employees rely on its
procedures.
• Case 18.7 Dillon v. Champion
Jogbra, Inc. (2002).
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Public Policy
• The Public Policy Protection—WhistleBlowers:
– Whistle Blower Protection Act of 1978.
– False Claims Act.
• Protection for Whistle-Blowers—The Antiretaliation Statutes.
– Passed in many states and by federal agencies.
• Prohibit firing, demotion, reprimands, and pay cuts
of employees who report conduct of their
employers.
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Public Policy
• Protection for Whistle-Blowers—The
Anti-retaliation Statutes.
– Federal level—Energy Reorganization Act
affords protection for employees involved in
nuclear work.
– Whistle-Blowing for Both Employers and
Employees.
– Many companies have created a peer review
process for termination and other actions
against employees.
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Public Policy
• Case 18.8 Gardner v. Loomis
Armored, Inc. (1996).
– Does this case create an affirmative legal
duty for helping those in danger?
– Can an employee in Washington be fired
for assisting a citizen who is a crime
victim?
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International Law
• Pitfalls of Complex Global
Organizations.
– Complex interrelationships often evade
the law. Example: BCCI and its
complex structure.
– Disclosure of interrelationships becomes
important for conflicts, compliance.
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