Lecture Notes for Regulation of Employment Relationships
I. The Principal-Agency Relationship
A. Agency indicates the relation which exists when one person, the agent, is employed to act for another, the principal and and subject to the principal’s control; the agent may contractually bind the principal/employer to third parties in relation to the his/her business.
1. The fundamental doctrine is that: "he who acts through another acts himself";
This relationship is sometimes referred to as a master-servant relationship
especially if the employer controls in detail “how” the emplyee performs
2. Agency is generally, but not necessarily, a contractual relationship.
3. Agency is also a consensual relationship; the fiduciary (trust) element is very
important in the agency relationship.
4. A principal may be disclosed (i.e. the third party with whom the agent deals
knows he/she is dealing with an agent and knows the identity of the principal) or undisclosed.
B. Key Features of Agency
1. Ordinarily no particular formality is essential for the appointment of an agent.
1. Agency may be created by conduct as well as words.
2. An agent's authority may be either express, implied or apparent.
a. Express authority is created by the words of the employer (oral or written).
b. Implied authority comes from express authority and is the authority the
agent must reasonably
possess in order to complete the task (s) he/she has been expressly
authorized by the employer
1) An agent’s express and implied authority combined are often
referred to as actual
c. Apparent authority is the authority that the agent appears to have from the
perspective of a
third party; thus apparent authority is actual authority as far as the third
C. An agent is a fiduciary (i.e. one in a position of trust who thus owes the other a
duty try to protect his/her interests) and owes the following duties to the employer:
2. Due care and diligence
3. Obey reasonable orders
4. Account for all receipts and profits
5. Provide complete and accurate information
a. Generally an employer is bound by any knowledge or notice received by
agent in reference to matters over which his authority extends.
D.The principal also owes duties to the agent including the duty to compensate,
reimburse for reasonable expenses, and to cooperate with the agent.
E. Ratification is the affirmance by the employer of a prior act performed on his/her behalf by another without authority.
1. The act must be affirmed in its entirety.
2. Third person may withdraw until employer ratifies.
3. Employer must have knowledge of all material facts regarding the
unauthorized act at time of
4. Act ratified must have been done by one professing to be employer's agent.
5. Employer can ratify any act he/she would have been competent originally to
authorize, provided he/she is still competent.
F.Contractual Liability of Agent
1. An agent is not personally liable for an authorized contract made for a
2. If an agent makes contract for a disclosed employer outside of apparent
authority, the agent becomes personally liable to the other contracting party.
G. Contract Liability of Employer
1. An employer is liable for all contracts executed by the agent within his/her
apparent authority in
relation to the firm.
a. Note that non-public limitations on the agent’s authority which are
communicated by the employer to the agent, do not limit the agent’s apparent
authority from the perspective of third parties who deal with the agent in
relation to the employer’s business.
H. Tort Liability of Employer
1. Vicarious liability is the responsibility of one person, imposed by law without
any wrongful conduct on his/her part, for the tort of another.
a. It is based on the public policy that an employer is usually more able to
compensate for financial injuries and to distribute losses to the public
through adjusted prices or liability insurance. (Deep pocket theory).
2. If an employee injures a person "while acting within the scope of
employment," the injured person may sue employee alone, employer alone, or
both in one action (joint and several tort liability).
a. It is often difficult to determine when an employee who committed a
tort was in fact acting within the scope of employment; courts consider
the following factors in deciding such:
1) Whether the employee’s act was authorized by the employer;
2) The extent to which the employer’s interests were advanced by the act;
3) Whether the employer furnished the instrumentality that caused the
4) Whether the employer had reason to know the employee would
perform the act.
I. Types of Termination of Agency Relationships
1. By Acts of the Parties
a. This includes an agency for a specified duration and/or an agency for a
b. If termination is by act of the parties, employer must notify all 3rd parties
who have learned of the existence of the agency; otherwise agent still
possesses apparent authority.
2. By Operation of Law
a. This includes death of employer, insanity of employer, and destruction of
subject matter of the agency.
b.No notice need be given either the agent or third parties.
II. Independent Contractors
A. An independent contractor is one who contracts to do certain work according to his/her own methods, and without being subject to the control of the employer, except as to the final product; one is an independent contractor, when the employer may prescribe what shall be done, but not how or who shall do it.
1. Test -- Does the employer reserve the right to control the means and manner
of performance of the work the result?
a) If answer is yes, then employee is not an independent contractor and may
be an agent or
a servant type employee (one who work is very controlled by the employer
has minimal or no authority to contractually bind the employer with third
b) Right to control is important but it is immaterial whether employer
actually exercises this right.
c) A statement in the employment agreement that the party is an independent
contractor is not necessarily controlling; actual facts are determinative.
2. An independent contractor may be authorized by the employer to enter into
contracts for the employer; if so, then will resemble an agent but still have
more freedom from the employer’s control of the how and when details of
3. One who employs an independent contract is not liable for the torts of the
independent even where those torts were committed while the independent
contractor was attempting to do work for the employer.
a. Courts normally recognize an exception to above rule for “inherently
dangerous’ types of work.
4. One who employs an independent contractor does not pay social security taxes or benefits for that worker; thus there are cost as well as liability issuess to be considered.
III. Regulation of Employment Contracts
A. Employment-At-Will: History & Trends
1. Employment contracts usually do not specify for what reasons employees
may be terminated and how much notice is required; in the late 1870's
state courts developed the employment-at-will doctrine.
a. Unless otherwise specified, employment contracts are for an
b. Unless otherwise explicitly specified, employers could terminate
employees for any reason.
2. Until recently, there were very few exceptions to the employment-at-will
doctrine; the main exceptions were:
a. Unionized employees under the National Labor Relations Act
which prohibits termination because of union activity.
b. Title VII which prohibits termination because of race, sex, religion
c. Most public employees since they are covered by civil service
type systems which provide for job tenure, require just cause for discharge,
and specify detailed procedures for appeal and review of termination
d. Private sector employees with employment contracts that specify a
specific term for the contract and how it can be terminated as well as for
3. The current trend of the law is erosion of the employment-at-will doctrine
though there is a lack of uniformity among the states (see the proposed
Uniform Employee Termination Act);
a. Relief has sometimes been granted under a breach of contract
1) The court recognizes an implied covenant of good faith and fair
dealing as part of the employment contract (A few state courts
particularly those in California recognize this implied
2) The court implies a contract from either the provisions of an
employee handbook or from an employer's conduct or oral
representations (A growing number of states recognize implied
3) Many courts however, limit recovery under these breach of
contract theories to economic losses (i.e. out-of-pocket costs
and lost wages).
b. Most states have now adopted some form of public policy execption to the employment at will doctrine which makes a dismissal wrongful if it results from employee conduct that is consistent with public policy as expressed in statutes, constitutions, etc.
1) This exception often protects workers who are fired
for pursuing a lawful claim (such as worker's compensation)
or for fulfilling a civic duty (such as jury duty) in addition
a) Employees discharged after refusing to perform an
unlawful act mandated by the employer;
b) Employees discharged for complying with a duty
imposed by the government;
c) Employees discharged after reporting unlawful or
dangerous employer behavior to the government
(these employers are often called "whistleblowers").
c. One consequence of the trend to limit recoveries under the breach of contract theories to economic losses is that dismissed employees are turning increasingly to tort actions where the potential financial recovery is much greater and may include punitive damages.
1) These torts are often called "tag-a-long torts and include
defamation, intentional infliction of emotional distress,
and invasion of privacy.
d. A few states have considered bills that would establish a statutory
right of fair dismissal; and in Montana legislation provides that
employees have a right to be discharged for just cause only.
4. European managers who come to the United States to work for U.S. companies are often amazed by the lack of job security and employment legislation.
a. In Europe, employees enjoy detailed written employment contracts.
b. European countries provide employees with the right of fair dismissal.
VI. Regulation of Employee Welfare and Privacy
A. Federal Statutes Affecting Employee Welfare
1. The Fair Labor Standards Act of 1938 (FLSA).
a. The Act establishes minimum wages; requires the payment of overtime
where the work week exceeds forty hours; and regulates the employment of
b. FLSA not only requires employers to pay the "minimum wage" but also
requires payment of time and one-half for work over 40 hours in one week
and the maintenance of records for each worker to demonstrate compliance.
1) FLSA does not require payment of overtime for working more than
eight hours in a day, or sick pay, holiday pay or even vacation pay.
2) While most private sector employees are now subject to FLSA's
minimum wage and overtime requirements, certain employees are
; Executive, administrative, and professional employees,
including teachers in elementary and secondary schools.
; Employees of seasonal amusement or recreational businesses.
; Employees of small newspapers that have a circulation of less
; Sailors employed on foreign vessels.
; Employees engaged in fishing operations.
; Certain farm workers.
; Casual babysitters and people employed as companions to the
elderly or infirm.
c . Willful violators may be fined up to $10,000 for the first offense and up to $10,000 and imprisoned for up to six months for subsequent willful offenses.
d. Civil actions may be brought by injured employees for a sum equal to
twice the unpaid compensation; alternatively the Secretary of Labor may
seek such damages on behalf of injured employees plus an injunction.
2. The Federal Unemployment Tax Act of 1954 (FUTA).
a. This Act established a state system (with administration costs paid by the
that provides unemployment compensation to eligible individuals;
unemployment insurance is
funded by employer payments to a fund with the proceeds paid to eligible
b. Presently, the federal unemployment tax is imposed on any employer, with
respect to any calendar year, who during any quarter in that or the
preceding calendar year paid wages of $1500 or more; the tax is also
levied on employers who, on each of twenty days during the current or
preceding calendar year, each day being in a different week, employed at
least one person for some portion of the day regardless of the amount of
c. While unemployment compensation laws vary from state to state, the
following generalizations can be made:
1) An applicant must have worked a minimum number of weeks in a
covered industry or have earned a certain minimum amount of wages.
2) The applicant must wait one week before applying for benefits,
must register with the state employment agency, and be ready, willing,
and able to undertake suitable employment.
3) The applicant will be denied benefits if he/she refuses suitable work,
was discharged for proper cause, quit work voluntarily, or is on strike
due to a labor dispute.
4)All states have adopted experience rating systems which reduce the
premiums payable to the state plan for employers with good records.
3. The Occupational Safety and Health Act of 1970
a. Administered by the Department of Labor's Occupational Safety and Health Administration (OSHA).
b. Requires employers to furnish each employee a workplace free from
recognized hazards that are causing or are likely to cause death or serious
physical harm to the employee; employers and employees must also
comply with occupational and safety standards promulgated by the
Secretary of Labor.
c. The Act applies to any employer with at least one employee and who is engaged in a business affecting interstate commerce.
d.Enforcement is controversial and is by means of OSHA inspectors who may conduct unannounced inspections.
e. Employers must keep and preserve records relating to accidents and injuries and conduct periodic inspections to ensure compliance with the standards.
f. The Act forbids discharge or any other discrimination against an employee who exercises rights under the Act.
g. The Act provides for discretionary civil penalties of up to $10,000 for each willful and/or repeated violation of the standards and up to $1 000 for other violations.
1)Criminal penalties include fines of up to $10,000 or imprisonment for up
to six months or both for either a willful violation which causes an
employee's death or knowingly falsifying records required by the Act.
h. OSHA has been sharply criticized by the business community, especially small business, for imposing heavy paperwork burdens and promulgating "nitpicking" rules.
4. Pension Laws
a. The Social Security Act of 1935 created a federal social insurance system
designed to provide income when a family's earnings have been reduced
or stopped due to retirement, death or disability; presently nearly 90% of
the workforce is covered by Social Security.
1) The compulsory retirement plan of the Act is the Old Age, Survivors,
and Disability Insurance (OASDI); however, funding problems exist
for the plan as life expectancies increase while the ratio of employed
workers to retired is falling.
2) The Social Security Act provides extensive health and medical care
insurance for persons age 65 or older who are eligible to receive
OASDI benefits or Railroad retirement benefits; this program is
known as Medicare.
3) The Act also provides payments for disabilities and to the survivors of
b. The Employee Retirement Income Security Ac of 1974 (ERISA) was
designed to bring uniformity to private sector pension plans and to protect employees from abuses of such plans; the Act includes the following features:
1) Funding requirements to assure participants that money will be
available to pay promised benefits at retirement.
2) Mandatory plan termination insurance as provided by the
Department of Labor's Pension Benefit Guaranty Corporation.
3) The imposition of strict rules requiring plan fiduciaries to exercise
that degree of care that a prudent person would exercise in
handling his or her own affairs in the management, investment, and
disposition of a fund's assets.
4) The creation of vesting requirements.
a) Benefits attributable to an employee's own contributions to the
plan must be fully and immediately vested while benefits
attributable to an employer's contributions must vest either
gradually over a five to fifteen year period or fully after ten
years of service.
5) The imposition of record-keeping and reporting requirements.
6) Remember that the Act does not govern public sector pension plans
and does not require a private sector employer to provide a pension
plan for employees.
7)ERISA has been criticized as overly complex and costly to comply
with thereby allegedly causing many small businesses in the private
sector to not offer or terminate its existing pension plan.
5. Medical Coverage Statutes
a. The Consolidated Omnibus Budget Reconciliation Act (COBRA) permits
employees who are terminated, voluntarily change employment, or lose health coverage because of reduced hours to purchase group coverage for themselves and their families for up to 18 months.
1) The Act applies to employers of 20 or more workers that sponsor a group health plan.