Business Law Chapters 32 & 33: Agency

5/1/2023 1 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. B USINESS L AW B USINESS L AW T EXT AND C ASES T EXT AND C ASES CHAPTERS 32 & 33: AGENCYCHAPTERS 32 & 33: AGENCY © 2018 Cengage. May not be scann...

5/1/2023 1 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. B USINESS L AW B USINESS L AW T EXT AND C ASES T EXT AND C ASES CHAPTERS 32 & 33: AGENCYCHAPTERS 32 & 33: AGENCY © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. IntroductionIntroduction  One of the most common and important legal relationships is that of agency.  An agency is a relationship between two parties in which one party (the agent) agrees to represent or act for the other (the principal).  The principal has the right to control the agent’s conduct in matters entrusted to the agent. 1 2 5/1/2023 2 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agency RelationshipsAgency Relationships  The law further 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.”  In other words, 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. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agency RelationshipsAgency Relationships  The term “fiduciary” is at the heart of agency law.  As a noun, a “ fiduciary” is a person having a duty created by his or her undertaking to act primarily for another’s benefit in matters connected with the undertaking.  As an adjective, the term describes a relationship founded on trust and confidence. 3 4 5/1/2023 3 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employer–Employee RelationshipsEmployer–Employee Relationships  All employees who deal with third parties are deemed to be agents .  Because employees who deal with third parties generally are deemed to be agents of their employers, agency law and employment law overlap considerably.  Because agency relationships can exist outside an employer– employee relationship, agency law has a broader reach than employment law.  Agency law is based on common law, whereas much employment law is statutory law. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employer–Employee RelationshipsEmployer–Employee Relationships  Employment laws (state and federal) apply only to the employer–employee relationship.  Most statutes governing workplace issues apply only if an employer–employee relationship exists.  These laws do not apply to independent contractors. 5 6 5/1/2023 4 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employer – Independent Contractor Relationships Employer – Independent Contractor Relationships  An independent contractor is 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. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determination of Employee Status: Courts Determination of Employee Status: Courts  In deciding whether a worker is categorized as an employee or an independent contractor, the courts often consider the following questions: 1. How much control does the employer exercise over the details of the work? 2. Is the worker engaged in an occupation or business distinct from that of the employer? 3. Is the work usually done under the employer’s direction or by a specialist without supervision? 7 8 5/1/2023 5 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determination of Employee Status: Courts Determination of Employee Status: Courts 4. Does the employer supply the tools at the place of work? 5. For how long is the person employed? 6. What is the method of payment—by time period or at the completion of the job? 7. What degree of skill is required of the worker? © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determination of Employee Status: IRS Determination of Employee Status: IRS  The Internal Revenue Service (IRS) has established its own criteria for determining whether a worker is an independent contractor or an employee.  The most important factor is the degree of control the business exercises over the worker.  Why is this determination important? 9 10 5/1/2023 6 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determination of Employee Status: Why Important Determination of Employee Status: Why Important  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.  In contrast, when an employer hires an independent contractor —such as a freelance artist, writer, or computer programmer—the independent contractor normally owns the copyright. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Independent Contractor Relationship Is Under Attack Independent Contractor Relationship Is Under Attack  Critical benefits and protections we may take for granted depend on whether the person is an employee.  Minimum Wage & Overtime  Family & Medical Leave  Civil Rights Laws  Unemployment Insurance  Workers Compensation  Affordable Care Act  Right to Unionize (NLRB) 11 12 5/1/2023 7 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Independent Contractor Relationship Is Under Attack Independent Contractor Relationship Is Under Attack  Probably the main reason state governments endeavor to classify workers as employees is the loss of tax revenue .  Studies estimate that the federal government loses between $2.7B to $4.3B annually when workers are classified as independent contractors.  States’ studies have shown millions in annual losses of tax, unemployment and workers’ compensation revenue  Ohio, $498 million  Pennsylvania, $281 million  Massachusetts, $278 million  Illinois, $216 million © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Independent Contractor Relationship Is Under Attack Independent Contractor Relationship Is Under Attack  There are over 100 different legal tests in the U.S. to determine the status of workers.  Federal law alone has three different tests for determining IC status.  Layered on top of these, states may have up to six different tests under different laws. 13 14 5/1/2023 8 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Formation of the Agency Relationship Formation of the Agency Relationship  Agency relationships are almost always consensual.  They come about by voluntary consent and agreement between the parties.  The agreement need not be in writing, and consideration is not required.  A person must have contractual capacity to be a principal.  Any person can be an agent, regardless of whether he or she has the capacity to contract (including minors).  An agency relationship can be created for any legal purpose. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Formation of the Agency Relationship Formation of the Agency Relationship  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 15 16 5/1/2023 9 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agency by AgreementAgency by Agreement  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.  An agency agreement can:  Take the form of an express written contract  Be created by an oral agreement  Be implied by conduct © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agency by RatificationAgency by Ratification  If a person who is in fact not an agent (or who is an agent acting outside the scope of her or his limited authority) makes a contract on behalf of another (a principal), and the principal later approves or affirms that contract by word or by action, an agency relationship is created by ratification. 17 18 5/1/2023 10 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agency by EstoppelAgency by Estoppel  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.  The principal’s actions have created the appearance of an agency that does not in fact exist, creating an agency by estoppel. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agency by EstoppelAgency by Estoppel  The third person must prove that he or she reasonably believed that an agency relationship existed.  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.  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. 19 20 5/1/2023 11 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agency by Operation of LawAgency by Operation of Law  The courts may find an agency relationship in the absence of a formal agreement.  This may occur in:  Family relationships  Emergency situations © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Duties of Agents and PrincipalsDuties of Agents and Principals  Once the principal–agent relationship has been created, both parties have duties that govern their conduct.  The principal–agent relationship is fiduciary —based on trust.  Each party owes the other the duty to act with the utmost good faith. 21 22 5/1/2023 12 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agent’s Duties to the PrincipalAgent’s Duties to the Principal  Generally, the agent owes the principal five duties: 1. Performance 2. Notification 3. Loyalty 4. Obedience 5. Accounting © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agent’s Duties to the Principal: Performance Agent’s Duties 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.  You don’t have to be perfect. 23 24 5/1/2023 13 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agent’s Duties to the Principal: Performance Agent’s Duties to the Principal: Performance  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. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agent’s Duties to the Principal: Notification Agent’s Duties to the Principal: 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. 25 26 5/1/2023 14 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agent’s Duties to the Principal: Loyalty Agent’s Duties to the Principal: 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. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agent’s Duties to the Principal: Obedience Agent’s Duties to the Principal: 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). 27 28 5/1/2023 15 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agent’s Duties to the Principal: Accounting Agent’s Duties to the Principal: 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. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Agent’s Duties to the PrincipalAgent’s Duties to the Principal 29 30 5/1/2023 16 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal’s Duties to the AgentPrincipal’s Duties to the Agent  The principal has certain duties to the agent relating to: 1. Compensation 2. Reimbursement and indemnification 3. Cooperation 4. Safe working conditions © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal’s Duties to the Agent: Compensation Principal’s Duties to the Agent: 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. 31 32 5/1/2023 17 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal’s Duties to the Agent: Reimbursement Principal’s Duties to the Agent: Reimbursement  The principal has a duty to reimburse the agent:  Whenever an agent properly 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. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal’s Duties to the Agent: Indemnification Principal’s Duties to the Agent: Indemnification  The principal has the duty to indemnify an agent:  For liabilities incurred because of authorized and lawful acts and transactions  For the value of benefits that the agent confers on the principal  This rule applies to gratuitous agents as well. 33 34 5/1/2023 18 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal’s Duties to the Agent: Cooperation Principal’s Duties to the Agent: Cooperation  A principal has a duty to cooperate with the agent and to assist the agent in performing his or her duties.  At a minimum, the principal must do nothing to prevent that performance. © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal’s Duties to the Agent: Safe Working Conditions Principal’s Duties to the Agent: Safe Working Conditions  The common law requires the principal to provide safe working premises, equipment, and conditions for all agents and employees.  The principal has a duty to inspect working areas and to warn agents and employees about any unsafe conditions. 35 36 5/1/2023 19 © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Principal’s Duties to the AgentPrincipal’s Duties to the Agent © 2018 Cengage. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Rights and Remedies of Agents and Principals Rights and Remedies of Agents and Principals  For every duty of the principal, the agent has a corresponding right, and vice versa.  When one party to the agency relationship violates his or her duty to the other party, the nonbreaching party is entitled to a remedy. 37 38