Chapter 8 (Agents & Principals)

How are employer-employee relationships the same as agent-principal relationships?

Most employees are also considered to be agents of their employers. Employment laws however, both state and federal, only apply to the employer-employee relationship.

Differentiate between an agency by agreement, by ratification, by estoppel, and by operation of law

Most agency relationships are based on an express or implied agreement that the agent will act for the principal and that the principal agrees to have the agent so act. An agency agreement can take the form of an express written contract or be created by an oral agreement. On occasion, a person who is in fact not an agent (or who is an agent acting outside the scope of her or his authority) may make a contract on behalf of another (a principal). If the principal approves or affirms that contract by word or by action, an agency relationship is created by ratification. Sometimes, 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. When this occurs, the principal is "estopped to deny" (prevented from denying) the agency relationship.

Independent Contractor

One who works for, and receives payment from, an employer but whose working conditions and methods are not controlled by the employer. An independent contractor is not an employee but may be an agent.

Describe an agent's duties to the principal

Performance, notification, loyalty, obedience, and accounting

Describe and differentiate between the rights and remedies of agents and principals

The agent has the right to be compensated, to be reimbursed and indemnified, and to have a safe working environment. An agent also has the right to perform agency duties without interference by the principal.

Describe the employer-independent contract relationship

The relationship between a principal and an independent contractor may or may not involve an agency relationship. To illustrate: A homeowner who hires a real estate broker to sell her house has not only contracted with an independent contractor (the broker) but also established an agency relationship for the specific purpose of selling the property. Another example is an insurance agent, who is both an independent contractor and an agent of the insurance company for which he sells policies. (Note that an insurance broker, in contrast, normally is an agent of the person obtaining insurance and not of the insurance company.)

How can you distinguish whether a person is an employee or independent contractor?

1. A: 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. This is perhaps the most important factor weighed by the courts in determining 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 degree of skill is required, this may indicate that the person is an independent contractor hired for a specialized job and not an employee.

How is an agency relationship formed?

A: consent and agreement between the parties. Generally, the agreement need not be in writing, and consideration is not required. A person must have contractual capacity to be a principal. Those who cannot legally enter into contracts directly should not be allowed to do so indirectly through an agent. Any person can be an agent, however, regardless of whether he or she has the capacity to contract (including minors). An agency relationship can be created for any legal purpose. An agency relationship created for a purpose that is illegal or contrary to public policy is unenforceable.

Describe a principal's duties to an agent

Compensation, reimbursement and indemnification, cooperation, and safe working conditions

What rights does a principal have?

Employment laws (state and federal) apply only to the employer-employee relationship. Thus, statutes that govern Social Security, withholding taxes, workers' compensation, unemployment compensation, and workplace safety apply only when an employer-employee relationship exists (see Chapter 10). Similarly, laws that prohibit employment discrimination (see Chapter 11) apply only to employers and employees. These laws do not apply to an independent contractor. The principal has the right to control the agent's conduct in matters entrusted to the agent.

Explain what an agent-principal relationship is

In a principal-agent relationship, the parties have agreed that the agent will act on behalf and instead of the principal in negotiating and transacting business with third parties. The term fiduciary is at the heart of agency law. This term can be used both as a noun and as an adjective. When used as a noun, it refers to a person having a duty created by his or her undertaking to act primarily for another's benefit in matters connected with the undertaking. When used as an adjective, as in the phrase fiduciary relationship, it means that the relationship involves trust and confidence. Normally, all employees who deal with third parties are deemed to be agents. A salesperson in a department store, for instance, is an agent of the store's owner (the principal) and acts on the owner's behalf. Any sale of goods made by the salesperson to a customer is binding on the principal. Similarly, most representations of fact made by the salesperson with respect to the goods sold are binding on the principal.