Chapter 17
Employment Relationships
Chapter Objectives
1. Distinguish between employees and
independent contractors.
2. Outline the ways in which an agency
relationship can arise.
3. Specify the duties that agents and principals
owe to each other and describe the liability
of the principal and the agent with respect to
third parties.
4. Describe the major laws relating to health
and safety in the workplace.
5. Summarize the laws governing the rights of
employees with respect to pension plans,
family and medical leave, and privacy.
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Agency Relationships
In a principal-agent
relationship, an agent acts on
behalf of and instead of the
principal, using a certain degree
of his or her own discretion.
An employee who deals with
third parties is normally an
agent.
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Independent Contractors
An independent contractor is
not an employee, and the
employer has no control over
the details of physical
performance.
The independent contractor is
not usually an agent.
4
Case 17.1 Graham v. James
Richard Graham marketed CD-ROM disks containing
compilations of shareware, freeware, and public
domain software. Larry James agreed to create a
program for him in exchange for credit on the final
product. James built into the program a notice
attributing authorship and copyright to himself.
Graham removed the notice, claiming that the
program was a work for hire and the copyright was
his. James sold the program to another CD-ROM
publisher. Graham filed a suit against James,
alleging copyright infringement. The court ruled in
favor of James.
What are some other advantages of being an
independent contractor? What might be some
disadvantages?
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Agency Formation
There are four ways in which
an agency relationship can
arise:
By Agreement
By Ratification
By Estoppel
By Operation of
Law
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Agency by Agreement
Through express consent (oral
or written) or implied by
conduct.
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Agency by Ratification
The principal, either by act or
agreement, ratifies the conduct
of an agent who acted outside
the scope of authority or the
conduct of a person who is in
fact not an agent.
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Agency by Estoppel
When the principal causes a
third person to believe that
another person is his or her
agent, and the third person
deals with the supposed agent,
the principal is “estopped to
deny” the agency relationship.
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Agency by Operation of Law
Based on a social duty (such as
the need to support family
members) or created in
emergency situations when the
agent is unable to contact the
principal.
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Case 17.2 Williams v.
Inverness Corp.
Inverness manufactured an ear-piercing system
which they claimed was “The Only Completely
Safe, Sterile Ear Piercing Method.”
Barrera bought the system, took a course, and
set up shop.
When Williams, a customer, had her ear pierced,
which then became infected and led to
complications, her mother filed suit against
Inverness claiming, in part, that Inverness was
liable on a theory of agency by estoppel.
What are the policy reasons for holding a firm
liable on a theory of agency by estoppel?
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Duties of Agents
and Principals
Once the principal-agent
relationship has been created,
both parties have duties that
govern their conduct.
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Agent’s Duties to the Principal
Performance - The agent must use reasonable diligence and skill in
performing his or her duties.
Notification - The agent is required to notify the principal of all
matters that come to his or her attention concerning the subject
matter of the agency.
Loyalty - The agent has a duty to act solely for the benefit of his or
her principal and not in the interest of the agent or a third party.
Obedience - The agent must follow all lawful and clearly stated
instructions of the principal.
Accounting - The agent has a duty to make available to the principal
records of all property and money received and paid out on behalf of
the principal..
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The Duty of Loyalty
The duty of loyalty to one’s employer/
principal is fundamentally an ethical duty
that has been written into law.
What about when the ethical duty of
loyalty conflicts with another duty?
Agency law does not impose on the
principal a duty of loyalty to the agent.
Why is this? What would result if the law
did not impose a duty of loyalty on
agents?
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Principal’s Duties to the Agent
Compensation - Except in a gratuitous agency relationship, the
principal must pay the agreed-on value for an agent’s services.
Reimbursement and indemnification - This principal must
reimburse the agent for all sums of money disbursed at the request of
the principal and for all sums of money the agent disburses for
necessary expenses in the course of reasonable performance of his or
her agency duties.
Cooperation - A principal must cooperate with and assist an agent
in performing his or her duties.
Safe working conditions - A principal must provide safe working
conditions for the agent-employee.
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Liability for Agent’s Torts
Under the doctrine of respondeat
superior, the principal is liable for
any harm caused to another
through the agent’s torts if the
agent was acting within the scope
of his or her employment at the
time the harmful act occurred.
The principal is also liable for an
agent’s misrepresentation, whether
made knowingly or by mistake.
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The Doctrine of Respondeat Superior
A master (employer) must respond to
third persons for losses negligently
caused by the master’s servant
(employee).
The vicarious liability of the master for
acts of the servant has been supported
by theories of control and fault.
How does the doctrine of respondeat
superior relate to the doctrine of strict
product liability?
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Liability for Independent
Contractor’s Torts
A principal is not liable for
harm caused by an
independent contractor’s
negligence unless hazardous
activities are involved (in
which situation the principal is
strictly liable for any resulting
harm).
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Wage-Hour Laws
Davis-Bacon Act (1931)
 Requires the payment of “prevailing wages” to
employees of contractors and subcontractors
working on government construction projects.
Walsh-Healey Act (1936)
 Requires that a minimum wage and overtime pay
be paid to employees of firms that contract with
federal agencies.
Fair Labor Standards Act (1938)
 Extended wage-hour requirements to cover all
employers whose activities affect interstate
commerce.
 The act has specific requirements in regard to child
labor, maximum hours, and minimum wages.
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Torts by Independent Contractors
As a general rule, an employer is not
liable for the torts committed by the
independent contractor. This rule is
riddled with many exceptions, and
these exceptions come in many forms.
Have the exceptions become the rule?
What policy interest is furthered by
imposing liability on employers for the
torts of their independent contractors?
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Worker Health and Safety
The Occupational Safety and Health Act of
1970 requires employers to meet specific
safety and health standards that are
established and enforced by the
Occupational Safety and Health
Administration (OSHA).
State workers’ compensation laws
establish an administrative procedure for
compensating workers who are injured in
accidents that occur on the job,
regardless of fault.
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Case 17.3 Valdak Corp. v. OSHA
The Valdak Corp. operates a car wash
that uses an industrial dryer to spin-dry
towels. The lock that was supposed to
keep it closed during spinning usually did
not work. An employee’s arm was cut off
as a result. OSHA cited Valdak for a
willful violation of a machine-guarding
regulation and assessed a penalty.
For what policy reasons might an
employer set up a formal safety program
or issue a written safety manual?
22
Income Security
Federal and state governments
participate in insurance
programs designed to protect
employees and their families
by covering the financial
impact of retirement,
disability, death,
hospitalization, and
unemployment.
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Social Security and Medicare
The Social Security Act of 1935 provides
for old age, survivors, and disability
insurance.
Both employers and employees must
make contributions under the Federal
Insurance Contributions Act (FICA) to
help pay for the employees’ loss of
income on retirement.
The Social Security Administration
administers Medicare, a health-insurance
program for older or disabled persons.
24
Private Pension Plans
The federal Employee
Retirement Income Security
Act (ERISA) of 1974
establishes standards for the
management of employerprovided pension plans.
25
Unemployment Insurance
The Federal Unemployment Tax
Act of 1935 created a system
that provides unemployment
compensation to eligible
individuals.
Covered employers are taxed
to help cover the costs of
unemployment compensation.
26
COBRA
The Consolidated Omnibus
Budget Reconciliation Act
(COBRA) of 1985 requires
employers to give employees,
on termination of employment,
the option of continuing their
medical, optical, or dental
insurance coverage for a
certain period.
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Family and Medical Leave Act
The Family and Medical Leave Act
(FMLA) of 1993 requires employers
with fifty or more employees to
provide their employees (except for
key employees) with up to twelve
weeks of unpaid family or medical
leave during any twelve-month
period.
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For Review
1. How do agency relationships arise? What duties
does the agent owe to the principal? What duties
does the principal owe to the agent?
2. What criteria are generally used in determining
whether a worker is an employee or an
independent contractor?
3. In what circumstances will principals not be
liable to third parties under contracts formed by
an agent? Is the principal liable for an agent’s
torts?
4. What federal statute governs wages and worker
health and safety in the workplace? What is the
purpose of workers’ compensation laws?
5. How does the government provide for workers’
income security? What are some issues relating
to employees’ privacy rights?
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