1
whole or in part.
Agency Formation
and Duties
One of the most common, important, and pervasive legal relationships is that of agency. In an agency
relationship between two parties, one party (the agent) agrees to represent or act for the other (the principal). A
principal has the right to control an agent’s conduct in matters entrusted to the agent. Generally, the law of agency is
based on the maxim that “one acting by another is acting for himself?”
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
feature is the employer’s right to control the employee in the performance of tasks involved in the
employment. An employee can be an agent if the employee has an appointment or contract for hire with
authority to represent the employer.
§ 2. Master; Servant; Independent Contractor
(1) A master is a principal who employs an agent to perform service in his affairs and who controls or has the
right to control the physical conduct of the other in the performance of the service.
(2) A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the
performance of the service is controlled or is subject to the right to control by the master.
performance of the undertaking. He may or may not be an agent.
Comment:
a. Servants and non-servant agents. A master is a species of principal and a servant is a species of agent.
§ 14 N. Agent and Independent Contractor
physical conduct is an agent and also an independent contractor.
§ 25. Applicability of General Agency Rules
The rules applicable generally to principal and agent as to the creation of the relation, delegability and
capacity of the parties apply to master and servant.
created in accordance with the same rules, and the rules * * * applicable to principals and agents are
applicable to masters and servants.
CHAPTER 8: AGENCY FORMATION AND DUTIES 3
whole or in part.
An employee is one whose physical conduct is controlled, or subject to control, by an employer. The key
feature is the employer’s right to control the employee in the performance of tasks involved in the
employment. An employee can be an agent if the employee has an appointment or contract for hire with
authority to represent the employer.
As an employer, you may at some time consider hiring an independent contractor. Hiring workers as
independent contractors instead of as employees may help you reduce both your potential tort liability and
your tax liability.
One reason for using an independent contractor is that doing so may reduce your susceptibility to tort
liability. If, however, an independent contractor’s words or conduct leads another party to believe that the
To minimize the possibility of being legally liable for negligence on the part of an independent contractor,
you should inquire about the contractor’s qualifications before hiring him or her. The degree to which you
should investigate depends, of course, on the nature of the work. A more thorough investigation is necessary
when the contractor’s activities present a potential danger to the public (as in delivering explosives).
Generally, it is a good idea to have the independent contractor assume, in a written contract, liability for
harms caused to third parties by the contractor’s negligence. You should also require the independent
contractor to purchase liability insurance to cover the costs of potential lawsuits for harms caused to third
Another reason for hiring independent contractors is that you need not pay or deduct Social Security and
unemployment taxes on their behalf. The independent contractor is the party responsible for paying these
taxes. Additionally, the independent contractor is not eligible for any retirement or medical plans or other
fringe benefits that you provide for yourself and your employees, and this is a cost saving to you.
4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
doubt, seek professional assistance in such matters.
CHECKLIST FOR THE EMPLOYER
1. Check the qualifications of any independent contractor you plan to use to reduce the possibility that you
sure that it is current, particularly when the contractor will be undertaking actions that are more than normally
hazardous to the public.
4. Make sure that independent contractors do not represent themselves as your employees to the rest of the
world.
C. DETERMINATION OF EMPLOYEE STATUS
Factors for determining whether a person is an employee or an independent contractor are listed in the
text.
1. Criteria Used by the Courts
• Does the employer supervise the work?
• Does the employer supply the tools at the place of work?
• What is the length of the employment?
• How is the individual paid (periodically or by project)?
• What skill does the work require?
whole or in part.
whole or in part.
Jersey, Inc. for road assistance by the driver of a car involved in an accident. Pershad got into a fight with
Nicholas Coker, a passenger in the car. Coker filed a suit in a New Jersey state court against Pershad, Five
Star, and AAA. The court ruled that Pershad was an employee of Five Star, not AAA, and that Five Star was
an independent contractor, and concluded that AAA was “not responsible for the alleged negligence of its
independent contractor, defendant Five Star, in hiring Mr. Pershad.” Coker appealed.
Notes and Questions
Why would AAA want to avoid liability for Coker’s injuries? AAA would want to avoid liability for the
injuries because of the cost. It is likely, of course, that AAA has insurance that would cover the expense
directly but its premiums could be increased or its coverage might be canceled in the wake of too many
QUESTION IN CASE 8.1
Five Star’s contract with AAA required Five Star to be available to provide service for AAA
members. Does this support Coker’s argument that Five Star was AAA‘s employee? Why or why not?
No, the contract provision that required Five Star to be available to service the members of AAA does not
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases in which the status of a worker as an employee or an independent contractor affected
whole or in part.
crew of farm laborers to a produce distributor was an “independent contractor” of the distributor, who did not
control the contractor or its crew, for purposes of determining (whether the distributor was liable for the
• Chuchuca v. Chuchuca, 67 A.D.3d 948, 890 N.Y.S.2d 573 (2 Dept. 2009) (an employer exercised only
incidental control over the owner-operator of a vehicle in the performance of her work delivering newspapers,
and the owner-operator was only an independent contractor and not an employee, precluding the employer’s
liability for a vehicle passenger’s personal injury).
• Viado v. Domino’s Pizza, LLC, 230 Or.App. 531, 217 P.3d 199 (2009) (pizza franchisee was not an
struck and injured a motorcyclist).
2. Criteria Used by the IRS
The IRS considers chiefly the degree of control that an employer exercises over the work.
3. Employee Status and “Works for Hire”
An employee’s work of intellectual property belongs to the employer, but an independent
oral agency agreements—
• Under the equal dignity rule, in many states an agent’s authority must be in writing if the agent is
empowered to enter into a contract that the Statute of Frauds requires to be in writing.
• A power of attorney must be in writing.
CASE SYNOPSIS—
Case 8.2: Laurel Creek Health Care Center v. Bishop
Gilbert Bishop was admitted to Laurel Creek Health Care Center. He indicated to Laurel Creek that he
whole or in part.
brother and personal representative, Colson Bishop, filed a suit in a Kentucky state court against Laurel
establish the agent’s consent to act on the principal’s behalf. Here, Anna signed all the admissions papers per
her husband’s request and therefore consented to act on Gilbert’s behalf. Third, by acting within such
authority, the agent affects the principal’s legal relations with third parties. Clearly here, Anna’s actions
affected Gilbert’s relations with Laurel Creek, a third party.”
so through an agent. A lack of sound mental capacity is a lack of mental capacity. In that circumstance,
Gilbert could not have authorized his spouse to sign admission papers on his behalf. Thus there would have
been no principal-agent relationship. The hospital’s policy was to have a person’s spouse sign the papers if
the person could not, however, so that the lack of capacity might not have affected the ultimate result in this
case. Only the legal arguments would have been different.
Which party benefited from the court’s ruling? Why? At the heart of this case was Laurel Creek’s
desire to arbitrate the negligence claim instead of having to defend against negligence in a lawsuit.
Economically, this makes sense from Laurel Creek’s perspective. After all, defending against a lawsuit is a
costly undertaking for a party, even if the party wins the suit. In contrast, arbitration is (usually) a less
expensive and less time-consuming process. Therefore, if the dispute could be settled through arbitration, it
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 8.2
Laurel Creek argued that even if there was no actual agency relationship, an implied agency
by Gilbert and Rachel on Gilbert’s admission to the hospital and the subsequent events evidenced the
creation of an implied agency. Rachel had offered to sign the admission paperwork, but the hospital staff told
her that it was the hospital’s policy to have the patient’s spouse sign the paperwork and requested that Anna
sign the papers. Gilbert’s actions in directing Rachel to bring Anna was communicated to Laurel Creek staff,
Agency is created by ratification when a principal affirms a contract made by a person who is not an
agent, or a person who is an agent acting outside the scope of his or her authority.
C. AGENCY BY ESTOPPEL
Agency is created by estoppel when a principal causes a third person to believe that another is the
2. Created by the Principal’s Conduct
The deeds or statements of the principal create an agency by estoppel.
D. AGENCY BY OPERATION OF LAW
Agency may be created by operation of law. The text points out that courts have granted agents
Designated Agents for Service of Process
For businesses, some state statutes make state officials (a state’s secretary of state) the businesses’
agents for service of process. This is an agency created by operation of law. Most states require a corporation
to designate a registered agent for service of process on the corporation. In some states, designation of
MCKINNEY’S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
BUSINESS CORPORATION LAW
CHAPTER 4 OF THE CONSOLIDATED LAWS
ARTICLE 3—CORPORATE NAME AND SERVICE OF PROCESS
whole or in part.
2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
feature is the employer’s right to control the employee in the performance of tasks involved in the
employment. An employee can be an agent if the employee has an appointment or contract for hire with
authority to represent the employer.
§ 2. Master; Servant; Independent Contractor
(1) A master is a principal who employs an agent to perform service in his affairs and who controls or has the
right to control the physical conduct of the other in the performance of the service.
(2) A servant is an agent employed by a master to perform service in his affairs whose physical conduct in the
performance of the service is controlled or is subject to the right to control by the master.
performance of the undertaking. He may or may not be an agent.
Comment:
a. Servants and non-servant agents. A master is a species of principal and a servant is a species of agent.
§ 14 N. Agent and Independent Contractor
physical conduct is an agent and also an independent contractor.
§ 25. Applicability of General Agency Rules
The rules applicable generally to principal and agent as to the creation of the relation, delegability and
capacity of the parties apply to master and servant.
created in accordance with the same rules, and the rules * * * applicable to principals and agents are
applicable to masters and servants.
CHAPTER 8: AGENCY FORMATION AND DUTIES 3
whole or in part.
An employee is one whose physical conduct is controlled, or subject to control, by an employer. The key
feature is the employer’s right to control the employee in the performance of tasks involved in the
employment. An employee can be an agent if the employee has an appointment or contract for hire with
authority to represent the employer.
As an employer, you may at some time consider hiring an independent contractor. Hiring workers as
independent contractors instead of as employees may help you reduce both your potential tort liability and
your tax liability.
One reason for using an independent contractor is that doing so may reduce your susceptibility to tort
liability. If, however, an independent contractor’s words or conduct leads another party to believe that the
To minimize the possibility of being legally liable for negligence on the part of an independent contractor,
you should inquire about the contractor’s qualifications before hiring him or her. The degree to which you
should investigate depends, of course, on the nature of the work. A more thorough investigation is necessary
when the contractor’s activities present a potential danger to the public (as in delivering explosives).
Generally, it is a good idea to have the independent contractor assume, in a written contract, liability for
harms caused to third parties by the contractor’s negligence. You should also require the independent
contractor to purchase liability insurance to cover the costs of potential lawsuits for harms caused to third
Another reason for hiring independent contractors is that you need not pay or deduct Social Security and
unemployment taxes on their behalf. The independent contractor is the party responsible for paying these
taxes. Additionally, the independent contractor is not eligible for any retirement or medical plans or other
fringe benefits that you provide for yourself and your employees, and this is a cost saving to you.
4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
doubt, seek professional assistance in such matters.
CHECKLIST FOR THE EMPLOYER
1. Check the qualifications of any independent contractor you plan to use to reduce the possibility that you
sure that it is current, particularly when the contractor will be undertaking actions that are more than normally
hazardous to the public.
4. Make sure that independent contractors do not represent themselves as your employees to the rest of the
world.
C. DETERMINATION OF EMPLOYEE STATUS
Factors for determining whether a person is an employee or an independent contractor are listed in the
text.
1. Criteria Used by the Courts
• Does the employer supervise the work?
• Does the employer supply the tools at the place of work?
• What is the length of the employment?
• How is the individual paid (periodically or by project)?
• What skill does the work require?
whole or in part.
whole or in part.
Jersey, Inc. for road assistance by the driver of a car involved in an accident. Pershad got into a fight with
Nicholas Coker, a passenger in the car. Coker filed a suit in a New Jersey state court against Pershad, Five
Star, and AAA. The court ruled that Pershad was an employee of Five Star, not AAA, and that Five Star was
an independent contractor, and concluded that AAA was “not responsible for the alleged negligence of its
independent contractor, defendant Five Star, in hiring Mr. Pershad.” Coker appealed.
Notes and Questions
Why would AAA want to avoid liability for Coker’s injuries? AAA would want to avoid liability for the
injuries because of the cost. It is likely, of course, that AAA has insurance that would cover the expense
directly but its premiums could be increased or its coverage might be canceled in the wake of too many
QUESTION IN CASE 8.1
Five Star’s contract with AAA required Five Star to be available to provide service for AAA
members. Does this support Coker’s argument that Five Star was AAA‘s employee? Why or why not?
No, the contract provision that required Five Star to be available to service the members of AAA does not
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases in which the status of a worker as an employee or an independent contractor affected
whole or in part.
crew of farm laborers to a produce distributor was an “independent contractor” of the distributor, who did not
control the contractor or its crew, for purposes of determining (whether the distributor was liable for the
• Chuchuca v. Chuchuca, 67 A.D.3d 948, 890 N.Y.S.2d 573 (2 Dept. 2009) (an employer exercised only
incidental control over the owner-operator of a vehicle in the performance of her work delivering newspapers,
and the owner-operator was only an independent contractor and not an employee, precluding the employer’s
liability for a vehicle passenger’s personal injury).
• Viado v. Domino’s Pizza, LLC, 230 Or.App. 531, 217 P.3d 199 (2009) (pizza franchisee was not an
struck and injured a motorcyclist).
2. Criteria Used by the IRS
The IRS considers chiefly the degree of control that an employer exercises over the work.
3. Employee Status and “Works for Hire”
An employee’s work of intellectual property belongs to the employer, but an independent
oral agency agreements—
• Under the equal dignity rule, in many states an agent’s authority must be in writing if the agent is
empowered to enter into a contract that the Statute of Frauds requires to be in writing.
• A power of attorney must be in writing.
CASE SYNOPSIS—
Case 8.2: Laurel Creek Health Care Center v. Bishop
Gilbert Bishop was admitted to Laurel Creek Health Care Center. He indicated to Laurel Creek that he
whole or in part.
brother and personal representative, Colson Bishop, filed a suit in a Kentucky state court against Laurel
establish the agent’s consent to act on the principal’s behalf. Here, Anna signed all the admissions papers per
her husband’s request and therefore consented to act on Gilbert’s behalf. Third, by acting within such
authority, the agent affects the principal’s legal relations with third parties. Clearly here, Anna’s actions
affected Gilbert’s relations with Laurel Creek, a third party.”
so through an agent. A lack of sound mental capacity is a lack of mental capacity. In that circumstance,
Gilbert could not have authorized his spouse to sign admission papers on his behalf. Thus there would have
been no principal-agent relationship. The hospital’s policy was to have a person’s spouse sign the papers if
the person could not, however, so that the lack of capacity might not have affected the ultimate result in this
case. Only the legal arguments would have been different.
Which party benefited from the court’s ruling? Why? At the heart of this case was Laurel Creek’s
desire to arbitrate the negligence claim instead of having to defend against negligence in a lawsuit.
Economically, this makes sense from Laurel Creek’s perspective. After all, defending against a lawsuit is a
costly undertaking for a party, even if the party wins the suit. In contrast, arbitration is (usually) a less
expensive and less time-consuming process. Therefore, if the dispute could be settled through arbitration, it
ANSWER TO “THE LEGAL ENVIRONMENT DIMENSION”
QUESTION IN CASE 8.2
Laurel Creek argued that even if there was no actual agency relationship, an implied agency
by Gilbert and Rachel on Gilbert’s admission to the hospital and the subsequent events evidenced the
creation of an implied agency. Rachel had offered to sign the admission paperwork, but the hospital staff told
her that it was the hospital’s policy to have the patient’s spouse sign the paperwork and requested that Anna
sign the papers. Gilbert’s actions in directing Rachel to bring Anna was communicated to Laurel Creek staff,
Agency is created by ratification when a principal affirms a contract made by a person who is not an
agent, or a person who is an agent acting outside the scope of his or her authority.
C. AGENCY BY ESTOPPEL
Agency is created by estoppel when a principal causes a third person to believe that another is the
2. Created by the Principal’s Conduct
The deeds or statements of the principal create an agency by estoppel.
D. AGENCY BY OPERATION OF LAW
Agency may be created by operation of law. The text points out that courts have granted agents
Designated Agents for Service of Process
For businesses, some state statutes make state officials (a state’s secretary of state) the businesses’
agents for service of process. This is an agency created by operation of law. Most states require a corporation
to designate a registered agent for service of process on the corporation. In some states, designation of
MCKINNEY’S CONSOLIDATED LAWS OF NEW YORK ANNOTATED
BUSINESS CORPORATION LAW
CHAPTER 4 OF THE CONSOLIDATED LAWS
ARTICLE 3—CORPORATE NAME AND SERVICE OF PROCESS
whole or in part.