Chapter 32: Agency Formation

Agency

A relationship between two parties in which one party (the agent) agrees to represent or act for the other (the principal).

IRS Guidelines for Behavioral Control:

A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised.

Case 32.1 Riedel V. Akron General Health System

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Case 32.2 > Taser International, Inc. v. Ward

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Case 32.3 - NRT New England LLC v. Jones

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Constructive Trust:

Because anything that an agent obtains by virtue of the employment or agency relationship belongs to the principal, the agent holds such property in a constructive trust (an equitable trust imposed for reasons of fairness) for the principal.

In an agency, an agent will act on behalf and instead of the principal in:

negotiating and transacting business with third parties.

In a voluntary consent, the agreement need not be in writing, and consideration is:

not required.

Because employees who deal with third parties generally are deemed to be agents of their employers, agency law and employment law:

overlap considerably.

The principal has tort remedies if the agent engages in any of the following:

• Misrepresentation • Negligence • Deceit • Libel • Slander • Trespass

An agency agreement can:

• Take the form of an express written contract • Be created by an oral agreement • Be implied by conduct >SEE CASE IN POINT 32.4 LAUREL CREEK HEALTH CARE CENTER V. BISHOP (2010). > PATIENT COULD NOT WRITE > WIFE SIGNED ADMISSION FORMS - ARB CLAUSE

In an agency, by using agents, a principal can conduct:

multiple business operations at the same time in different locations.

When one party to the agency relationship violates his or her duty to the other party, the nonbreaching party is entitled to:

a remedy.

When a principal causes a third person to believe that another person is the principal's agent, and the third person acts to his or her detriment in reasonable reliance on that belief, the principal is:

"estopped to deny" (prevented from denying) the agency relationship.

Section 1(1) of the Restatement (Third) of Agency defines agency as:

"the fiduciary relation [that] results from the manifestation of consent by one person to another that the other shall act in his [or her] behalf and subject to his [or her] control, and consent by the other so to act."

Cooperation

- A principal has a duty to cooperate with the agent and to assist the agent in performing his or her duties. - The principal must do nothing to prevent that performance. - Example: If a principal violates an exclusive agency, he or she is exposed to liability for the agent's lost profits. - Exclusive agency - An agency in which a principal grants an agent an exclusive territory and does not allow another agent to compete in that territory.

Notification:

- An agent is required to notify the principal of all matters that come to her or his attention concerning the subject matter of the agency. - The law assumes that the principal is aware of any information acquired by the agent that is relevant to the agency—regardless of whether the agent actually passes on this information to the principal.

Performance:

- An implied condition in every agency contract is the agent's agreement to use reasonable diligence and skill in performing the work. - When an agent fails to perform his or her duties, liability for breach of contract may result. - The degree of skill or care required of an agent is usually that expected of a reasonable person under similar circumstances. - If an agent has represented herself or himself as possessing special skills, however, the agent is expected to exercise the degree of skill claimed. - An agent who acts gratuitously—that is, without payment: - Is subject only to tort liability - He or she cannot be liable for breach of contract because there is no contract. - Must perform in an acceptable manner - Is subject to the same standards of care and duty to perform as other agents

An agency by operation of law may occur in:

- Family relationships: Example: If a spouse purchases certain basic necessaries and charges them to the other spouse's account, the courts often rule that a spouse is liable for payment for the necessaries because of either a social policy or a legal duty to supply necessaries to family members. - Emergency situations: If an agent cannot contact the principal and failure to act would cause the principal substantial loss, the agent may take steps beyond the scope of her or his authority. Example: A railroad engineer may contract on behalf of his or her employer for medical care for an injured motorist hit by the train.

Indemnification:

- In certain situations, when a principal is sued by a third party for an agent's negligent conduct, the principal can sue the agent for indemnification—that is, for an equal amount of damages. - The same holds true if the agent violates the principal's instructions.

Financial Control considers:

- Significant investment in the equipment the worker uses in working for someone else. - Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees. - Opportunity for profit or loss is often an indicator of an independent contractor. - Services available to the market. Independent contractors are generally free to seek out business opportunities. - Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.

Loyalty

- The agent has the duty to act solely for the benefit of his or her principal and not in the interest of the agent or a third party. - Any information or knowledge acquired through the agency relationship is confidential. - Examples: Trade secrets and customer lists compiled by the principal - It is breach of loyalty to disclose such information during the agency relationship or after its termination.

Compensation

- The principal has a duty to pay the agent for services rendered and to pay that compensation in a timely manner. - Unless the agency relationship is gratuitous and the agent does not act in exchange for payment, the principal must pay the agreed-on value for the agent's services. - If no amount has been expressly agreed on, then the principal owes the agent the customary compensation for such services.

Reimbursement and Indemnification

- The principal has a duty to reimburse the agent: - Whenever an agent distributes funds at the request of the principal - For any necessary expenses incurred in the course of the reasonable performance of her or his agency duties - The principal has the duty to indemnify (compensate) an agent: - For liabilities incurred because of authorized and lawful acts and transactions - Example: If the agent, on the principal's behalf, forms a contract with a third party, and the principal fails to perform the contract, the principal is obligated to compensate the agent for any costs incurred by the agent as a result of the principal's failure to perform the contract. - For the value of benefits that the agent confers on the principal : - This rule applies to gratuitous agents as well.

Behavioral control categories are:

- Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee. - Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor. - Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee. - Training a worker on how to do the job -- or periodic or on-going training about procedures and methods -- is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

Accounting

- Unless the agent and principal agree otherwise, the agent must keep and make available to the principal an account of all property and funds received and paid out on the principal's behalf. - The agent has a duty to maintain a separate account for the principal's funds and must not intermingle these funds with the agent's personal funds. - If a licensed professional (such as an attorney) violates this duty, he or she will not only be liable to his or her client (the principal) for failure to account, but may also be subject to disciplinary action by the licensing authority (such as the state bar association).

Obedience

- When acting on behalf of the principal, an agent has a duty to follow all lawful and clearly stated instructions of the principal. - Any deviation from such instructions is a violation of this duty (except during emergency situations when the principal cannot be consulted).

IRS Guidelines for Relationship includes:

- Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker's status. - Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors. - The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship. - Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.

Fiduciary:

-A person having a duty created to act primarily for another's -A relationship founded on trust and confidence.

Agency relationships exist between:

-Employers and employees -Employers and independent contractors who are hired to perform special tasks and services

The remedies arise out of contract and tort law and include:

-Monetary damages -Termination of the agency relationship -An injunction -Required accountings

Statutes governing the following workplace issues apply only if an employer-employee relationship exists:

-Social Security -Withholding taxes -Workers' compensation -Unemployment compensation -Workplace safety -Employment discrimination

An agency relationship can arise in four ways::

1. By agreement of the parties 2. By ratification 3. By estoppel 4. By operation of law

The principal has certain duties to the agent relating to:

1. Compensation 2. Reimbursement and indemnification 3. Cooperation 4. Safe working conditions

In Criteria Used by the Courts, employee or an independent contractor, courts often consider the following questions:

1. How much control does the employer exercise over the details of the work? • If the employer exercises considerable control over the details of the work and the day-to-day activities of the worker, this indicates employee status. 2. Is the worker engaged in an occupation or business distinct from that of the employer? . • If so, this points to independent-contractor, not employee, status. 3. Is the work usually done under the employer's direction or by a specialist without supervision? • If the work is usually done under the employer's direction, this indicates employee status. 4. Does the employer supply the tools at the place of work? • If so, this indicates employee status. 5. For how long is the person employed? • If the person is employed for a long period of time, this indicates employee status. 6. What is the method of payment—by time period or at the completion of the job? • Payment by time period, such as once every two weeks or once a month, indicates employee status. 7. What degree of skill is required of the worker? • If a great deal of skill is required, this may indicate that the person is an independent contractor hired for a specialized job and not an employee.

Generally, the agent owes the principal five duties:

1. Performance 2. Notification 3. Loyalty 4. Obedience 5. Accounting

Demand for an Accounting:

An agent can withhold further performance and demand that the principal give an accounting.

Employee Status and "Works for Hire:"

Any copyrighted work created by an employee within the scope of her or his employment at the request of the employer is a "work for hire," and the employer owns the copyright to the work.

IRS Guidelines for Financial Control:

Does the business have a right to direct or control the financial and business aspects of the worker's job?

Independent contractor

One who works for, and receives payment from, an employer but whose working conditions and methods are not controlled by the employer. Example: A property owner who hires a contractor and subcontractors to complete a project does not control the details of the way they perform their work.

The Third Party's Reliance Must Be Reasonable:

The third person must prove that they reasonably believed that an agency relationship existed.

IRS Guidelines for Relationship:

The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:

Tort and Contract Remedies:

Remedies of the agent for breach of duty by the principal follow normal contract and tort remedies.

Criteria Used by the IRS:

The Internal Revenue Service (IRS) has established its own criteria for determining whether a worker is an independent contractor or an employee.

Safe Working Conditions:

The common law requires the principal to provide safe working premises, equipment, and conditions for all agents and employees.

Created by the Principal's Conduct:

The deeds or statements of the principal, rather than the acts or declarations of a purported agent in and of themselves, create an agency by estoppel.

Avoidance:

When an agent breaches the agency agreement or agency duties under a contract, the principal has a right to avoid any contract entered into with the agent.

No Right to Specific Performance:

When the principal-agent relationship is not contractual, the agent has no right to specific performance.

Most agency relationships are based on an agreement that the agent will:

act for the principal and that the principal agrees to have the agent so act.

Any breach of a fiduciary duty by an agent may justify the principal's termination of the:

agency

The principal's actions have created the appearance of an agency that does not in fact exist, creating an:

agency by estoppel.

Employees who deal with third parties are often deemed to be:

agents

In No Right to Specific Performance, an agent can recover for past services and future damages but cannot force the principal to:

allow him or her to continue acting as the principal's agent.

An independent contractor is not an employee but may be:

an agent. Example: An insurance agent is both an independent contractor and an agent of the insurance company for which he sells policies.

The IRS tends to closely scrutinize a firm's classification of its workers because employers can:

avoid certain tax liabilities by hiring independent contractors instead of employees.

In cooperation, exclusive agency is an agency in which a principal grants an agent an exclusive territory and does not allow another agent to:

compete in that territory.

Agency relationships normally are:

consensual

For every duty of the principal, the agent has a:

corresponding right, and vice versa.

In an agency, the principal has the right to control the agent's conduct in matters:

entrusted to the agent.

A principal also has contract remedies for an agent's breach of:

fiduciary duties.

The courts may find an agency relationship in the absence of a:

formal agreement.

In a fiduciary principal-agent relationship based on trust, the party owes the other the duty to act with the utmost:

good faith.

Once the principal-agent relationship has been created, both parties have duties that:

govern their conduct.

The laws governing workplace issues for employer-employee relationship do not apply to:

independent contractors.

In safe working conditions, the principal has a duty to:

inspect working areas and to warn agents and employees about any unsafe conditions.

Ratification involves a question of:

intent

In a reasonably believed third party and agency relationship, facts and circumstances must show that an ordinary, prudent person familiar with business practice and custom would have been:

justified in concluding that the agent had authority.

An agency relationship can be created for any:

legal purpose.

In Employee Status and "Works for Hire", when an employer hires an independent contractor—such as a freelance artist, writer, or computer programmer—the independent contractor normally:

owns the copyright. An exception is made if the parties agree in writing that the work is a "work for hire" and the work falls into one of nine specific categories, including: Audio visual works Collective works (such as magazines) Motion pictures Textbooks Tests Translations

Agency relationships, come about by voluntary consent and agreement between the:

parties

A person must have contractual capacity to be a:

principal

If a person who is in fact not an agent (or who is an agent acting outside the scope of her or his authority) makes a contract on behalf of another (a principal), and the principal approves or affirms that contract by word or by action, an agency relationship is created by:

ratification

Any person can be an agent, regardless of whether he or she has:

the capacity to contract (including minors).

Most important factor in the criteria used by the IRS is:

the degree of control the business exercises over the worker.

Employment laws (state and federal) apply only to:

the employer- employee relationship.

In an agency, the only way certain business entities can function is through:

their agents. Example: A corporate officer—an agent who serves in a representative capacity for a corporation—has the authority to bind the corporation to a contract; thus, the only way the corporation can enter into contracts is through its officers.

The principal-agent relationship is fiduciary—based on:

trust.

An agency relationship created for a purpose that is illegal or contrary to public policy is:

unenforceable

Intent can be expressed by either:

words or conduct.

The agent has the right to:

• Be compensated • Be reimbursed and indemnified • Have a safe working environment • Perform agency duties without interference by the principal

When terminating the agency, the main actions available to the principal are:

• Constructive trust • Avoidance • Indemnification