CHAPTER 13
Employment Relationships
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Introduction
• Agency=Principal and Agent.
• Agency is the most common and most
important legal relationship.
• Understanding agency is crucial to
understanding the legal environment
of business.
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Introduction
• Principals use agents to be able to
conduct multiple business operations
simultaneously in various locations.
• The principal has the right to control
the agent in matters entrusted to the
agent.
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Agency Relationships
• Agency is a “fiduciary” relationship
based on trust and confidence.
• Distinguish Employee vs. Independent
Contractor Relationships.
Employer
Employee
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Independent
Contractor
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Employees vs. Independent
Contractors
E’ee
I.C.
Does the Employer exercise a great degree of control over
the details of the work?
Yes
No
Is the worker engaged in an occupation or business
distinct from Employer?
No
Yes
Is the work usually done under Employer’s supervision?
Yes
No
Does Employer provide the tools?
Yes
No
Has the worker been employed a long time?
Yes
No
Is the worker paid at the end of the job?
No
Yes
Is there a great degree of skill required?
No
Yes
Factors Courts Consider:
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Employer Liability
• Determining whether the worker is an
employee or an independent contract
affects liability of Principal/Employer.
– Tax Liability: Employer liable if employee.
– Case 13.1 Nu-Look Design, Inc. v. IRS
(2004).
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Employer Liability
• Contract Liability: Employer not
necessarily liable.
• Tort Liability: Employer liable for torts of
employee within scope of employment.
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Agency Formation
• Consensual Agreement.
• No consideration required.
• Principal needs contractual capacity,
Agent does not.
• For any legal purpose.
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Types of Agencies
•
•
•
•
Agency by Agreement.
Agency by Ratification.
Agency by Estoppel.
Agency by Operation of Law.
– Necessaries for family.
– Emergency.
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Agency By Agreement
• Formed through express consent (oral
or written), or implied by conduct.
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Agency by Ratification
Principal either by act or by
agreement ratifies conduct of a person
who is not in fact an agent.
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Agency by Estoppel
• Principal causes a third person to
believe that another person is the
Principal’s Agent, and the third person
acts to her detriment in reasonable
reliance on that belief.
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Agency by
Operation of Law
• Agency based on social duty is
formed in certain situations when the
Agent is unable to contact the
Principal.
– Necessaries.
– Emergencies.
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Agent’s Duties
to the Principal
• Performance: reasonable diligence
and skill (special skills).
• Notification to P.
• Loyalty (no conflict of interest).
• Obedience.
• Accounting.
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Principal’s Duties
to the Agent
•
•
•
•
Compensation (Express or Implied).
Reimbursement and Indemnification.
Cooperation.
Provide safe working conditions.
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Agent’s Authority
• Actual Authority:
– Can be Express or Implied. 
– Oral or written.
• “Equal Dignity Rule”: if law requires written
contract, Agent’s authority must be in writing.
Failure to comply with the rule renders contract
voidable. Exceptions:
• Officer acting for Corporation.
• Agent acts in Principal’s presence.
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Implied Authority
• Inferred or conferred by custom,
Agent’s position or what is reasonably
necessary to carry out express
authority.
• What the Agent reasonably thinks the
Principal means.
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Apparent Authority
• Principal, by either word or act, causes 3rd
party to reasonably believe that Agent has
authority to act for Principal.
• If 3rd party changes legal position by
relying on Principal’s representations,
Principal is estopped from denying Agent
had authority to contract.
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Liability in Agency
Relationships
Principal’s liability for Agent’s
contract depends on whether
Agent’s actions were authorized
or unauthorized.
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Liability for Contracts
Principals are classified as:
– Disclosed: identity known to 3rd P.
– Partially Disclosed: 3rd P knows he is
dealing with Agent, but doesn’t know
Principal’s identity.
– Undisclosed: 3rd party does not know he
is dealing with an Agent, and Principal’s
identity is totally unknown.
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Liability for
Authorized Acts
• Disclosed or partially disclosed
Principal is liable to 3rd party if Agent
acts within scope of authority.
• Agent has no liability to 3rd P for
disclosed Principal’s nonperformance. (Agent may be liable if
Principal is partially disclosed).
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Liability for
Authorized Acts
If undisclosed Principal, no liability
unless:
– Principal expressly excluded.
– Contract is a negotiable instrument.
– Agent’s performance is personal.
– 3rd party would have contracted if he
knew the Principal’s identity.
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Unauthorized Acts
• Unauthorized acts outside of Agent’s
express, implied or apparent authority.
• If Agent has no authority, Principal is
not liable, but Agent is liable.
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Liability for
Torts and Crimes
• Agent is liable to 3rd party for his own
torts.
• Principal may be liable for Agent’s torts
if they result from:
– Principal’s own tort.
– Principal’s authorization of tort.
– Agent’s unauthorized but fraudulent
conduct made within scope of agency.
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Respondeat Superior
• Applies only to EmployerEmployee relationships.
• Principal/Employer is vicariously
liable for Agent/Employee’s
negligent torts. committed within
the Agent’s “course and scope of
employment.”
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“Course and Scope of
Employment”
Factors (p. 449) For Principal to Be Liable,
Agent’s Act must have occurred within the
Course and Scope of Employment.
Was Employee’s act authorized by Employer?
Employer
Liable
Employer
NOT Liable
Yes
No
?
?
Was act commonly performed by Employees?
Yes
No
Did act advance Employer’s interests?
Yes
No
Did Employer furnish instrumentality (tools)?
Yes
No
Did Employer have reason to know Employee
would do the act?
Yes
No
Did the act involve a serious crime?
No
No
The Time place and purpose of act (factually based)
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Liability for Employee’s
Intentional Torts
• Principal liable for intentional torts
committed with the scope of employment.
• Employee is a tortfeasor as well.
• Employer is liable for Employee’s acts
which Employer knew or should have
known the Employee had a propensity to
commit.
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Liability for Independent
Contractor’s Torts
• First determine whether worker is employee
or independent contractor.
• General rule: Employer is not liable for acts
of independent contractors because
Employer no right to control.
• Exception: hazardous activities.
• Independent Contractor is liable for her own
torts.
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Liability for
Agent’s Crimes
General Rule: Agent is liable, Principal
is not, unless:
– Principal authorized or participated in
crime.
– Some jurisdictions hold Principal liable
for violating statutes.
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Wage-Hour Laws
• Davis-Bacon Act -- the prevailing wage act.
• Walsh-Healey Act -- beginning of minimum
wages.
• Fair Labor Standards Act (FLSA):
– Extension of wage and hour regulation to
workers in interstate commerce.
– Child Labor: FLSA prohibits oppressive child
labor practices.
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Labor Unions
• Norris-LaGuardia Act.
– Protects peaceful strikes by limiting
the injunction powers of federal
courts.
• National Labor Relations Act.
– Establishes the right of workers to
strike and engage in collective
bargaining.
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Labor Unions
• Labor Management Relations Act.
– Prohibits certain unfair union practices
such as closed shops.
• Labor-Management Reporting and
Disclosure Act.
– Regulates the internal operations of
unions and outlaws hot-cargo
agreements.
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Worker Health and Safety
• The Occupational Safety and Health
Act. (OSHA).
– The fundamental federal law aimed
toward safety in the workplace.
– Enforcement is by OSHA, NIOSH,
and the OSHRC.
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Workers’ Compensation
• These laws reduce employer liability to
employees for workplace injuries, and
provide a measure of assurance that
workplace injuries will be compensated,
regardless of the solvency of the employer,
by: 
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Workers’ Compensation
– Requiring that injured employees make
a claim against the employer’s workers’
compensation insurance policy, instead
of suing the employer.
– Requiring most employers to carry
workers’ compensation insurance.
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Income Security
• The primary income security laws are
– Social Security and Welfare.
– Unemployment Insurance.
• Case 13.2 Lewis v. Director,
Employment Security Dept. (2004).
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Income Security
– Private Pension Plans.
• Employee Retirement Income Security Act
(ERISA) gives employee a vested right to
receive pension benefits at a future date
when she stops working.
– Unemployment Compensation.
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COBRA
• COBRA prohibits the discontinuance of
insurance benefits of workers who have
voluntarily or involuntarily been separated
from work, unless the involuntary
separation was on the basis of gross
misconduct.
• Employers must comply if they have more
than 20 employees.
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Family Medical Leave Act
• The FMLA requires employers with over 50
employees to provide unpaid leave to employees
who need to care for a spouse, child, or parent
suffering with a serious medical condition.
• The employee cannot be terminated for taking
leave under the policy, and has the right to
restoration to the same or a similar position
upon return to work.
• Case 13.3 Nevada Dept. of Human Resources
v. Hibbs (2003).
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Employee Privacy Rights
• Workplace:
– Electronic Communications Privacy Act
allows employers to monitor electronic
communications in the workplace.
– But it prohibits intentional interception
of personal communications
– ECPA does permit employers to monitor
employee electronic communications in
the course of business.
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Employee Privacy Rights
• Privacy Expectations and Email systems
– Courts generally hold for employers.
• Other Types of Monitoring
– Lie Detector Tests. Prohibited, except under the ongoing
investigation exception.
– Drug Testing. Most government employees are subject to
testing and the rights of private employees vary from state to
state.
– AIDS Testing. Some state statutes restrict AIDS testing.
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Employee Privacy Rights
• Other Types of Monitoring.
– Electronic Performance Surveillance.
Most limitations can be avoided if the
employer informs employees that
surveillance will occur.
– Screening Procedures. Application
question must have some reasonable
connection to the job sought.
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