978-1285770178 Lecture Note Unit 2

Unlock access to all the studying documents.

View Full Document

whole or in part.

2 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

B. DOES AN AGENT’S BREACH OF LOYALTY TERMINATE THE AGENT’S AUTHORITY?

For example, an agent may have the authority to access a principal’ s customer list. If, however, the

agent accesses the list only to use it in the employ of a different principal, has this purpose—

II. The Principal’s Duty to the Agent

Principals owe their agents a duty of cooperation. If this duty conflicts with the principal’s self-interest, is

it ethical for the principal to interfere with the agency (for example, by attempting to prevent an agent

from completing a sale that the principal hired the agent to complete, because the principal has had a

change of mind)? Another duty of principals is to provide safe working conditions. Other than compliance

with the law, what must be done to meet this duty? A principal’s duties do not include a duty of loyalty.

Some argue that this leads to less employee loyalty to employers. Employer loyalty to employees (not laying

off senior employees when business is slow, for instance) is based primarily on ethical considerations.

III. Respondeat Superior

Why should innocent employers be required to assume responsibility for the tortious actions of their

agent-employees? Arguably, when one of two innocent parties (employer v. party injured by an employee)

must bear a loss, the employer who is in the best position to prevent that loss (by controlling the employee)

should bear the burden. Also, holding employers responsible for their employees’ torts should act as a

deterrent—employers will supervise their employees more carefully to avoid liability. Another reason is that an

employer will be more likely to have the funds necessary to make the injured party whole.

IV. Immigration Reform

Unauthorized workers make up a small, but significant, percentage of the U.S. workforce, particularly in the

construction trade. Enforcement action against the workers and their employers leads to the deportation of

many immigrant workers and prison terms for some managers. Consequences also include family

separations, and business disruptions and other economic effects. Many U.S. citizens believe that reforming

the immigration laws, especially with respect to employment, is a “moral imperative.” Some believe that it is

unethical to target unauthorized workers—who are often impoverished and exploited—instead of those who

take advantage of them.

V. Problems with I-9 Verification

Form I-9 specifies the documents that an employer can accept to verify a job applicant’s employment

eligibility and identity. It can be a violation of employment discrimination laws to require an applicant to

provide a U.S. driver’s license or Social Security card. In any case, if any document that an applicant

proffered later proves to be fraudulent, an employer who hired the worker could be sanctioned.

VI. Discrimination against Transgender Persons

Most courts have held that federal employment discrimination laws do not protect transgender persons. Some

states ban discrimination based on gender identity, and at least one court has extended Title VII protection

against gender discrimination to transsexuals.

UNIT TWO: FOCUS ON ETHICS—AGENCY AND EMPLOYMENT 3

TEACHING SUGGESTIONS

1. In discussing the material on principals’ liability for agents and employees’ torts, it may be helpful to

mention arguments that courts reject on public policy grounds. For example, it has been argued that when-

ever an agent or employee commits a tort, the agent or employee is acting beyond the

scope of employment, because the individual was hired to work, not to commit torts. It has also been argued,

and rejected, that an employer is not liable, because the employee was given safety instructions and was

warned to take appropriate precautions.

2. Corporate responsibility for officers and employees’ crimes could be discussed with the material in this

Focus on Ethics. Generally, when a corporate employee’s crime is beyond the scope of his or her employ–

ment and does not inure to the benefit of the corporation, the corporation is not criminally liable. What is the

ethical basis for holding an employer liable for an agent’s unintentional tort while ordinarily ex–

empting the employer from liability for the agent’s crime?

3. Be clear about the differences between two important concepts of authority: an agent’s implied authority

and the agent’s apparent authority. Implied authority is derived from express authority. Apparent authority can

result from as little as the title or position that a principal gives an agent. What is the ethical basis for the

concept of apparent authority?

4. Johnson & Johnson, Inc., the world’s leading health-care products maker, was a pioneer in providing

good pay, shorter hours, and clean workplaces. Originally, the company’s credo stated that “[w]e are respon–

sible to our employees . . . . They must have a sense of security in their jobs. Compensation must be fair and

adequate, and working conditions clean, orderly and safe. . . . There must be equal opportunity for employ–

ment . . . . [The] actions [of management] must be just and ethical.” Later, this credo was amended to add that

“[w]e must be mindful of ways to help our employees fulfill their family responsibilities.” The company provides

on-site child-care, unpaid personal leave of up to a year, pretax salary set-aside for dependent care, and sup-

ports alternative work options. Ask the class to discuss the extent to which they believe ethical considerations

guide the conduct of other employers toward their employees. Is it possible to implement such policies as

the Johnson & Johnson credo and maintain profits? In more than a hundred years, Johnson & Johnson

has never posted a financial loss.

5. Laws designed to protect minority groups may harm majority groups. Antidiscrimination laws may result in

discrimination against majority groups. This raises the question of how far to go in remedying discrimination

against minorities. However this question is answered, some will believe that the answer conflicts with the

principle that all persons should be treated fairly. Laws prohibiting discrimination may conflict with other

societal goals, particularly when the trait of a protected class represents an arguably bona fide occupational

requirement. For example, should women be hired as fire fighters if they cannot fight fires with the

same strength and agility as men? Would the tradeoff be to jeopardize public safety?

Cyberlaw Link

What ethical standards apply to agency law in cyberspace? Should an employer be permitted to

invade the privacy of his or her employees in the interest of their safety by monitoring their use of the

Internet? How far should an employer be allowed to go in invading employee privacy rights in this

context in the interests of worker safety and efficiency?

4 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

ADDITIONAL QUESTIONS

1. Give examples of expectations concerning ethical conduct that have evolved into rules that, if

breached, can cause an agent to be held liable. It is expected that an agent refrain from representing two

principals in the same transaction, making a secret profit from the agency, or failing to disclose the agent’s interest in

2. What is the argument behind asserting that an agent owes a duty to the public? Some scholars argue

that in the name of a “duty” that requires placing a principal’s well-being above the public’s, much evil has been

3. What are some ethical conflicts arising from duties of principals to agents? If a principal’s duty to co–

operate with the principal’s agent conflicts with the principal’s self-interest, it may or may not be ethical for the

4. What has been said to be the most important factor in a court’s construing a relationship as

employer-employee when the parties contracted to create an employer–independent contractor relationship?

Employer control has been said to be the most important factor. In other words, it is not what parties call their relation-

ship but what they do. The parties’ perception of their relationship may be equally as important. What is an ethical

trade-off involved in this judicial interpretation? Social and ethical principles underlying the doctrine of freedom of

5. What are the prevailing rationales for the doctrine of respondeat superior? The prevailing rationale for

the doctrine of respondeat superior is that an employer is more likely to have the “deep pocket” that can pay for relief

to an injured party. Another rationale for the doctrine is that employers who might be held liable will take greater

precautions to deter their employees’ wrongful acts. How do these rationales weaken in the area of professional

6. What is the dilemma facing potential whistleblowers? When forced to choose between “blowing the

whistle” and ignoring employers’ unethical, unsafe, or illegal activities, an employee may compromise his or her

ethical standards in ignoring the activities, but may be disciplined or discharged on blowing the whistle. What is the

problem a whistleblower poses to a court? In a whistleblower’s suit for wrongful discharge, unless there is a

7. What are ethical questions involved in implying employment contracts (which arguably bolster

employment security but undercut the employment–at-will doctrine)? Courts increasingly make exceptions to the

employment-at–will doctrine by finding that an employer’s oral promises or written statements in an employment

UNIT TWO: FOCUS ON ETHICS—AGENCY AND EMPLOYMENT 5

whole or in part.

manual constitute an implied contract. From the point of view of an employer who had no intention of making such a

commitment, the ethical question is whether it is fair to hold the employer to such a contract. From the employee’s

implied contract. Would the answer be different if the manual stated that the relationship remained “at will”

and that either party could terminate it at any time?

8. How does the Americans with Disabilities Act (ADA) differ from other antidiscrimination laws? The

ADA differs from other federal antidiscrimination laws in that it requires employers to treat disabled employees

unequally as opposed to equally. Under the ADA, a disabled person is entitled to be reasonably accommodated by

9. To what extent should an employer be liable for the safety of his or her workers? Companies are re-

quired by law to protect the safety of workers in the workplace. Employers may also be held liable when their

worker falls asleep at the wheel on the way home from work and causes an accident. Should the employer be liable

for any injuries sustained as a result of that accident?

10. Should a court intervene when an employer makes an unethical, but lawful, decision? Given the large

number of at-will employees and the traditional deference of the courts to employers in the conduct of employment

relationships, the courts seem reluctant to decide matters that do not include evidence of fraud, bad faith, abuse of

ACTIVITY AND RESEARCH ASSIGNMENTS

1. There are a number of subject areas within the topic of agency law that lend themselves to research as–

involving undisclosed principals that prove interesting. Why would a principal prefer not to be known? What are

circumstances under which a principal would find this agency desirable? Perhaps more intriguing in those

cases would be answers to the following question: given the liability of the agent in that agency, why would he or

she agree not to disclose the identity of the principal? Have students share with the class what they find.

companies as places to work. Is there any correlation among an employer’s attempt to recognize ethical

obligations and social responsibilities, employees’ efforts on behalf of the company, and the bottom line?

3. The enforceability of arbitration clauses in employment contracts is an ongoing issue. Some cases favor

employees who would prefer to litigate claims of employment discrimination. Others suggest that arbitration

6 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

AGENCY AND EMPLOYMENT—

 ANSWERS TO THE LEGAL REASONING QUESTIONS 

1. How much obedience and loyalty does an agent-employee owe to an employer? What if the

employer engages in an activity—or requests that the employee engage in an activity—that violates

the employee‘s ethical standards but does not necessarily violate any public policy or law? In this

situation, does an employee’s duty to abide by her or his own ethical standards override the

employee’s duty of loyalty to the employer? The answer to this question is yes—an employee’s ethical

standards override the employee’s duty of loyalty to his or her employer. In other words, an employee should

abide by his or her won ethical standards when the employer acts, or asks the employee to act, in a manner

contrary to those standards.

The nature of the principal-agent relationship is trust. Because of this fiduciary relationship, an agent

owes certain duties to the principal. These duties include loyalty and obedience, as well as informing the

principal of material facts concerning the agency, accounting for property or funds received for the purpose of

the agency, and performing with diligence and skill. This principle prevents an agent from representing two

principals in the same transaction, making a secret profit from the agency relationship, or failing to disclose

the agent’s interest in property being bought by the principal. The expected conduct of the agent to honor the

fiduciary relationship is enforced by rules that, if breached, cause the agent to be held legally liable.

But the duty of loyalty has limits. An employee is not expected to violate his or her own personal ethical

standards by blindly doing what he or she is ordered to do. This is also true when those personal standards

include the duty of loyalty. A person should act in accord with his or her conscience, even if—or perhaps

especially when—that requires acting against the demands of an employ.

2. When an agent acts in violation of his or her ethical or legal duty to the principal, should that

action terminate the agent’s authority to act on behalf of the principal? Why or why not? Most courts

have ruled that an agent’s authority continues, even when there is a breach of loyalty. In one case, for

example, employees of Lockheed Martin Corporation copied confidential information and trade secrets from

Lockheed’s computer network. Lockheed had authorized the employees to access the files. When the

employees resigned and went to work for a competitor taking the trade secrets with them, Lockheed filed a

suit in a federal district court against the ex-employees, contending that they accessed the data without

authorization. The court found held that the individuals had authorization to access the network and

concluded that they did not lose this authorization despite their breach of the duty of loyalty.

It could be argued however, that when an agent acts in violation of his or her ethical or legal duty to the

principal, the agent’s authority to act on behalf of the principal should terminate. The principal’s duty to the

agent should likewise terminate, just as a breach of contract terminates the non-breaching party’s duty to

perform, thereby bringing their deal to an end.

3. If an agent-employee injures a third party during the course of employment, the doctrine of

respondeat superior applies. The employer may be held liable for the employee’s action even though

the employer did not authorize the action and was not even aware of it. Is it fair to hold the employer

liable in this situation? Would it be more equitable if the employee alone was held liable for his or her

UNIT TWO: FOCUS ON ETHICS—AGENCY AND EMPLOYMENT 7

tortious actions to third parties, even when the actions were committed within the scope of

employment? An employer should be required to assume responsibility for the wrongful actions of an agent

or employee. If one of two innocent parties must suffer a loss, the party in the better position to prevent that

loss should bear the burden. In an employment relationship, the employer has more control over the

employee’s behavior than a third party to the relationship does.

Another reason in support of the doctrine of respondeat superior in this situation is that an employer is

assumed to be better able to pay any damages suffered by a third party. One of our society’s shared beliefs is

that an injured party should be afforded the most effective relief possible. Thus, even though an employer

may be absolutely innocent, the employer has “deeper pockets” than the employee and will be more likely to

have the funds necessary to make the injured party whole.

4. How should immigration law be reformed? Does the United States have any ethical duties to

undocumented aliens who come here to work? How can the law be fair and balance the rights of

immigrants, their families, the companies that employ them, and U.S. citizens? Unauthorized workers

make up a small, but significant, percentage of the U.S. workforce, particularly in the construction trade.

Enforcement action against the workers and their employers leads to the deportation of many immigrant

workers and prison terms for some managers. Consequences also include family separations, and business

disruptions and other negative economic results. Many U.S. citizens believe that reforming the immigration

laws, especially with respect to employment, is a “moral imperative.”

Some believe that it is unethical to target unauthorized workers—who are often impoverished and

exploited—instead of those who take advantage of them. Toward this end, any reform of the immigration laws

would focus on those who entice non-citizens to immigrate illegally and those who use their status as

economic leverage, particularly their landlords and employers.

Others believe that it is the workers themselves who should be the target of changes in the law. There is

a perception that competition for jobs and the pay for those positions are impacted by those who are willing to

work for less, and that among their numbers are illegal immigrants. Along this line of belief, if the immigrants

were punished more harshly, their ranks would be less likely to swell.

Still others advocate that the law should be reformed to allow for the employment of non–citizens without

necessarily increasing the numbers of those who become U.S. citizens or permanent legal residents. This

alternative might narrow the range of activities that break the law, reduce the opportunities to those who

exploit disadvantaged aliens, and improve wages and working conditions, yet include greater penalties for

those who break the law.

5. Should the law prohibit discrimination against transgender persons? Why or why not? Some

states have laws that specifically ban discrimination based on gender identity, and there are those who

advocate that federal law—Title VII of the Civil Rights Act of 1964—should protect transgender persons from

discrimination. The reasons for this position vary. Arguably, a person’s gender identity is no more changeable

than the person’s skin color, race, or national origin. The legal reasoning could track the opinion of the court

discussed in the text. Others might argue, however, that social order needs well–defined roles for its citizens

and gender identification is an important component of those definitions.

