In agreeing to act on behalf of the principal, the agent becomes a fiduciary.

The common law of agency governs the relationship between the agent and the principal and their tort and contractual liability to third parties.   An agency relationship is created when the agent agrees to act on behalf of another (the principal), as authorized by the principal and with the principal’s consent.   The law imposes a high level of trust on the agent called fiduciary duties, which require the agent to perform the assigned tasks with loyalty and care when acting on behalf of the principal.  This duty of loyalty means that the agent must not act in ways that are adverse to or conflict with the interests of the principal, take advantages of opportunities that belong to the principal, or compete with the principal.  The duty of care requires agents to comply with the law and avoid negligent or intentional conduct that can expose the principal to contractual or tort liability to others.  In this module, you’ll learn about the agent’s duties to the principal (e.g., these fiduciary duties, as well as the duty to notify the principal of information that comes into the agent’s possession), as well as the duties the principal owes to the agent, such as the obligation to compensate, reimburse and/or indemnify the agent and when such duties arise.

Agency relationships arise in a number of contexts.  As you learned from the Business Entities module, partners are agents of each other and the partnership, while officers and directors of corporations and managing members of LLCs are also agents of their respective entities.  In each of these relationships, the agent owes the fiduciary duties of loyalty and care to the principal.
Agency relationships can also arise in the employment context, when the employer (as principal) authorizes the employee (as agent) to represent the employer and act on the employer’s behalf when dealing with third parties.   Thus, employees may be authorized to negotiate and enter into contracts with individuals or other businesses on behalf of an employer, creating a contract between the employer and the third party.  In this module, you’ll examine when the agent can also be liable to the third party on the contract; such liability depends on whether the principal is fully disclosed, partially disclosed, or remains undisclosed to the third party.

While acting on behalf of an employer, an employee may engage in conduct that injures a third party.  Although employees are always liable for the torts (personal injuries) they cause, the injured party may sue the employer under the doctrine of respondeat superior (let the master answer).   If the employee was acting within the “scope and course of employment,” the employer/principal may be vicariously liable for the consequences of the employee/agent’s conduct.   While this rule may sound simple, it is not always easy to determine “scope of employment.”  Generally, an employee’s act falls within the scope of employment if the employee committed the act during work hours and at the employer’s place of business and the act was the kind of act the employee was hired to perform.   A court may also consider whether the employer asked the employee to commit the act (or otherwise authorized it) and whether the employee was furthering the employer’s purpose when the act was committed.  For example, is an employee acting within the scope of employment when he or she intentionally injures a customer on the employer’s business premises?  Does the employee’s motive matter, e.g., the employee is a bouncer who is serving the employer’s interest by throwing the drunk patron out of the bar versus a checkout clerk who throws merchandise at a customer out of frustration or anger?

Agency law also recognizes two exceptions to “course and scope of employment” rules that may also protect the principal (employer) for torts committed by the employee:  “frolic and detour” and “coming and going” rules.    For example, is an employer liable for an accident caused by a delivery employee who has left the delivery route to purchase gas or complete a personal errand before resuming the delivery?  In these situations, the employer may be liable to the injured third party if the employee’s “frolic and detour” was not substantial and took the employee only slightly off the delivery route and for a short amount of time.  But what if the employee had lunch with an old friend thirty miles off the delivery route and caused an accident while driving back to the delivery route after lunch?  This “frolic and detour” is more substantial and may relieve the employer from liability.  Similarly, employers are generally not liable for accidents caused by their employees on their way to or from the workplace, but again there may be circumstances when the employer is still liable.

Not all employment relationships, however, involve agents.  Employers may not (and typically do not) authorize all employees to enter into contracts with third parties on their behalf.  In addition, employers may hire independent contractors to perform specific tasks, but without the same degree of control that an employer exerts over its traditional workers.   The distinction between employees and independent contractors is very important to business – employers are required to pay certain taxes for employees (e.g., FICA taxes) and employees are protected by federal and state employment laws, such as workers compensation and employment discrimination statutes.  In contrast, when workers are classified as independent contractors, they do not receive these benefits or protections – and employers are usually not going to be liable for the torts committed by independent contractors they have hired.

With the creation of companies such as Uber in the growing “gig economy,” correctly classifying workers as either employees or independent contractors are become an important legal issue, with significant economic consequences to the employer.    In classifying workers, the common law of agency focused on how much control the employer has over the worker – does the employer supply the tools need and the place the work is performed?  Does the employer have the right to control how, where and when the work is accomplished?  Does the worker receive a regular salary or hourly wages or is he or she paid by the task or job?  Concerned that employers have been misclassifying workers as independent contractors, rather than employees, the Department of Labor (DOL) issued new guidelines in July 2015 to expand upon the common law standard.  In this module, you’ll examine DOL and IRS rules for classifying workers as employees and independent contractors and have the opportunity to apply them to some employment problems.

Use these questions to help guide you in the selection of content materials and to assess your understanding of these basic legal concepts.

When a person is authorized to act on behalf of another person is called a principal?

When an agent has a fiduciary duty towards the principal it means that the agent must?

Who is liable for the contracts entered into by the agent on behalf of his principal?

What are the fiduciary duties of an agent to her principal quizlet?