Law School Resources

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Law School Resources

Agency Partnership


 Agency is a legal relationship that is crucial to any common law legal system because most of the work in the world is done by agents working for their principal.  The law of agency covers both personal activities and business activities.  You don’t need the formalities of a contract or consideration in order to have an agency relationship, though they are very often present.  For instance, in many states, the family errand doctrine says that a parent can be found liable for the negligence of a child who they send on an errand.  Under agency principles, many states will say that the child is an agent for the parent on family business.

 Most of the work of the world is done by agents working for principals.  Agency is a conductor of liability.  Plaintiffs’ lawyers are always looking for financially solvent parties who are reachable.  What is an agency?  Agency is an agreement by one person (an agent) to act for a principal at the principal’s direction and control.  We have established the definition of agency that we’ll work with: now let’s look at the three subdivisions of agency:  (1) the servant-agent, (2) the non-servant agent, and (3) the non-agent.

 The servant-agent

 The servant-agent means precisely the same thing as “common law employee”.  If the principal has legal power to control the agent’s time allocation as well as how and when the agent works, then the person is a servant-agent.  So where does this come up?  It comes up in tax and other statutes that refer to the word “employee”.  Both of the Supreme Court cases we read for today get into this issue.  Also, respondeat superior depends on this distinction.

 In the corporate scheme of things, how do board members fit?  If a person is a director and only a director, then that person is not any type of agent.  How come?  An agent is one who agrees to act for the principal and at the principal’s control and direction.  This definition doesn’t fit a director qua director, because they are the ones who determine the principal’s policies!  This has practical ramifications: there is no wage withholding from the pay of directors.  They get a check from the company and they have to pay by declaration of estimated tax.  Furthermore, in almost all states, a person who is a director and only a director is not covered by Workers’ Compensation or Equal Employment statutes.  It’s the same way with a partner in a general partnership.  The partners, acting together, determine the partnership policy.  Thus, a partner of a partnership is not an employee of the partnership and has no wage withholding.

There are two statutory “curlicues” for this.  In Ohio, and a number of other states, partners in general partnerships can elect to participate in Workers’ Comp.  Few people choose to do this, but Shipman thinks that’s a mistake: this is a great tax deal!  In California and several other states, by statute, directors are included in Workers’ Comp.  But that’s very rare.  A third “curlicue” or oddity: in Maryland and a couple of other states, in a closely held corporation, even if a person is both an officer and a director, there can be an opting out of Workers’ Comp (but that’s almost always a stupid thing to do).

Is the top officer of a corporation a servant-agent?  Yes.  If you carefully go through the definition, you’ll find that the principal is the board of directors in this case.  They have the legal power to allocate the time of the president.  The president of a corporation is a servant-agent.  The president’s salary is withheld, and the president is covered by Workers’ Comp and Equal Employment statutes.

The non-servant agent

Respondeat superior is built upon the premise that where there is a servant-agent over whom the principal has the legal power over their physical activities, the principal is liable whether or not he is negligent in hiring and training that agent.  On the other hand, respondeat superior doesn’t apply to a non-servant agent, though some other theory like negligent hiring may apply.  Officers of corporations are servant-agents, but directors or outside law firms are not servant-agents.  So we have defined agency.  It can be personal or business-related.  It can be contractual or not.  It need not be in writing, usually...more