Chapter 18
Management Of Employee
Conduct: Agency
MARIANNE M. JENNINGS
B U S I N E S S
Its Legal, Ethical &
Global Environment 6th Ed.
Copyright ©2003 by West Legal Studies in Business,
a division of Thomson Learning. All rights reserved.
Names and Roles:
Agency 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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Names and Roles:
Agency 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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Names and Roles:
Agency 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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Names and Roles:
Agency 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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Creation of the
Agency Relationship
 Creating the Agency Relationship
Created 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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Creation of the
Agency Relationship
The Writing
If the agent’s contracts must be in
writing, the authority must be in writing
Requirement of Capacity
Principal must have capacity
• Age and mental capacity
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Creation of the
Agency Relationship
 Requirement of Capacity
Unincorporated associations do not have
capacity
• Have no legal existence
• Members will be liable since there is no principal
When the capacity of agent becomes an issue
• Not an issue when it concerns authority to enter
contracts
• Is an issue when it concerns potential liability to
third parties
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Creation of the
Agency Relationship
 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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Creation of the
Agency Relationship
Case 18.1
Streetman v. Benchmark
Bank (1995)
What did the Streetmans say that Watts
promised them?
Would Watts have the authority to make
that promise?
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Creation of the
Agency Relationship
 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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The Principal-Agent Relationship
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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The Principal-Agent Relationship
Case 18.3
Coady v. Harpo, Inc.
(1999)
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?
13
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The Principal-Agent Relationship
 Obedience
Follows principal’s instructions
Need not do anything illegal
 Duty of care
Give time and effort
Follow through
 Principal’s Duties and Rights
Duty to pay -- Except gratuitous agency
Duty to reimburse
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Liability of Principals
for Agents’ Conduct
 The Relationship With 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
• 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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Liability of Principals
for Agents’ Conduct
 The Relationship With Third Parties
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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Liability of Principals
for Agents’ Conduct
Faverty v. McDonald’s
Restaurant of Oregon, Inc. (1995)
 Case 18.4
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?
17
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Liability of Principals
for Agents’ Conduct
 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
18
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Termination of the
Agency Relationship
 Ending an Agency Relationship
Definite duration of time
Agent quits/is fired
Principal dies/is incapacitated
Need to give public or constructive notice
(trade publication)
Also give actual notice (letters)
Without notice, agent will have lingering
apparent authority
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Termination of Agents
Under Employment at Will
Meaning of Employment at Will
Has no definite ending date
Usually there is no formal written
contract
Used to be they could be fired at any time
• Courts now afford some protection
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Termination of Agents
Under Employment at Will
 The Do’s and Don’ts of Firing 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 Agents
Under Employment at Will
 The Do’s and Don’ts of Firing 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
22
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Termination of Agents Under
Employment at Will
 The Do’s and Don’ts of Firing Employees
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 Agents Under
Employment at Will
 The Do’s and Don’ts of Firing Employees
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 Agents
Under Employment at Will
The Implied Contract
In some states personnel manuals will be
a contract if employees rely on its
procedures
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Termination of Agents
Under Employment at Will
Case 18.6 Guz v. Bechtel (2000)
Is Guz correct that implied contract rights
override legitimate business reasons?
What does Guz say is the relationship
between good performance and the
employer’s right to terminate employees
at will?
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Termination of Agents
Under Employment at Will
 The Public Policy Protection—Whistle-
Blowers
Whistle Blower Protection Act of 1978
False Claims Act
 Protection for Whistle-Blowers—The Anti-
retaliation 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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Termination of Agents
Under Employment at Will
 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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Termination of Agents
Under Employment at Will
Case 18.7
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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Agency Relationships
in 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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