Law School Resources
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 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.
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,