Chapter 31: Basic Principles of Agency

Agency is a relationship in which an Agent (A) acts on behalf of and under the control of a Principal (P) when dealing with a
Third-Party (T).
1. Principal (P) – The person or entity who authorizes an agent to act.
2. Agent (A) – The person acting on behalf of the principal.
3. Third-Party (T) – The external party with whom the agent interacts.
Types of Principals (P) from a Third-Party's Perspective
1. Disclosed Principal – T knows P’s identity and understands that A is acting on P’s behalf.
2. Undisclosed Principal – T is unaware of P’s existence and believes A is acting independently.
3. Partially Disclosed Principal – T knows that P exists but does not know P’s identity.
Types of Agents (A) & Their Roles:
1. Brokers – Agents with limited authority to procure customers for a P to complete a sale or exchange of property.
2. Factors – Agents who possess and control another’s personal property and have authority to sell it.
o Key difference from brokers: Factors sell property in their own name, whereas brokers do not.
3. General Agents – Have broad authority to transact all business of a particular kind for the P.
4. Special Agents – Have limited authority to act only in a particular transaction or in a specific manner.
o Key difference from general agents: The scope of authority is much narrower.
5. Independent Contractors – Have full control over how they work, with P only concerned about the result.
o Key takeaway: P is not liable for A’s contractual or tortious misconduct towards T.

Formal Requirements for Agency Creation

 Agency relationships are based on mutual consent and can be established orally or in writing.
 Expressed or Implied Agency
 Statute of Frauds Exception –
o If the agent is handling a contract that must be in writing (e.g., real estate, guaranty contracts), then the agency
agreement itself must also be in writing.
 Power of Attorney (POA) – A formal, written agency relationship signed by P in the presence of a notary public.
o General Power of Attorney – Grants A authority to act in all respects for P.
o Special Power of Attorney – Grants A authority to act in a specific matter only.

Duties of Agents (Besides express duties, some duties are implied in the working relationship):
1. Duty of Loyalty: The agent (A) must be 100% loyal to the principal (P), any hidden transaction, private profit or conflict of
interest is a breach of the duty of loyalty, the principal can take legal measures to recover the loss.
 Conflct of interest: A can’t engage in any business venture that competes with or interferes in any way with P’s business.
 No Self-Dealing: A can’t represent P’s identity in a contract with themselves. If such a contract is necessary, A must first
obtain P’s approval and act in utmost good faith, as the deal is not at arm’s length.
 No Dual Agency Without Consent: A can’t represent two principals in the same transaction if their interest conflict, as
this prevents A from being fully loyal to either P.
o Exception: If both principals are aware of and consent to the dual representation, A can act only as a neutral
"go-between" rather than actively negotiating, to avoid conflicts of interest.
Remedies for Breach of Loyalty:
 P may rescind any transactions where A violated this duty, even if the transaction was beneficial to P.
 P may claim any profits or damages A earned or made from breaching loyalty.
2. Duty to Protect Confidential Information: Agents (A) must ensure that they don’t use their client's confidential information
for personal gain under any circumstances.
What is considered confidential information (trade secrets)?
 Business plans, processes, tools, mechanisms, formulas, compounds, and data that give P a competitive advantage.
 Such information is known only to P and a limited number of authorized persons.
To enforce confidentiality, P should:
 Clearly inform A that certain information is confidential and must not be disclosed.
 Take reasonable measures to keep trade secrets protected.
How to determine if information qualifies as confidential?
1. Did P take active steps to protect the information?
2. Is the information publicly available? If yes, it is not confidential.
3. Does it involve general knowledge that an employee could naturally acquire? If yes, it may not be protected.
3. Duty to Obey Instructions: The agent (A) must strictly implement the lawful instructions of the principal (P), and may make
reasonable judgments under special circumstances, but shall not violate or exceed his power without authorization.
  P cannot arbitrarily change A’s duties beyond what was agreed in their employment contract.
 A can’t ignore or question P’s instructions simply because they seem unusual, impractical, or depart from standard
procedures.
o If A disregards P’s instructions and causes a loss, A is fully liable for P’s losses.
 Bad Motive ≠ Illegal Instruction:
o A must follow P’s instructions even if P has a bad motive, unless the instructions are illegal or unethical.
 A should always act within their authority.
o If A exceeds their authority and causes losses, both A and P may be held liable.
Exception – Emergency Situations:
 If circumstances change so that previous instructions would lead to serious harm, A may exercise their best judgment if
P is unavailable. In such cases, A’s deviation from instructions may be justified to protect P’s interests.
4. Duty to Inform: The agent (A) must always ensure that the principal is in a state of information symmetry so that the principal
(P) can make the best business decision.
 The A must communicate all relevant information to the P, regardless of whether be compensated or gratuitous agent.
 The duty to inform extends beyond conflicts of interest or potential breaches of loyalty. The A must disclose any
information that materially impacts the P’s interests, not just information related to a specific transaction.
 The duty to inform applies even when the A is not actively working on behalf of the P.
5. Duty Not to Be Negligent: An agent (A) must perform their duties with reasonable care, as negligence may result in liability
for both the agent and the principal (P).
 Respondeat Superior Doctrine:
o Under this doctrine, P can be held liable for A’s negligent actions if A acts within the scope of employment.
o A holds primary liability, while P holds vicarious (or secondary) liability, even if P was not directly at fault.
o If P is held liable to a third party due to A’s negligence, P has the right to seek compensation from A.
 Implied Duty of Care: A has an implied duty in the employment contract to act in good faith and exercise reasonable
care and diligence when performing tasks.
6. Duty to Account: An agent (A) must manage the principal’s (P) finances responsibly, ensuring fund transparency, proper
record-keeping, and handling of erroneous payments to avoid legal consequences.
 Proper Financial Records: A must maintain accurate records of all receipts and expenditures to provide a complete
financial accounting to P.
 Separation of Funds: Any money collected by A on behalf of P must not be mingled with A’s personal funds.
 No Duty to Account to Third Parties: If A collects money on behalf of P, A only owes an accounting duty to P, not to
the third party (T).
 Unauthorized Collection: If A collects money from T without P’s authorization and fails to turn it over to P, T has the
right to sue A to recover the amount.
 Handling Erroneous Payments: Responsibility for refunds depends on who holds the funds
1. If the money is still in A’s possession, A must return it to T.
2. If A has already transferred the money to P, P is responsible for refunding it.
 Liability in Undisclosed Principal Situations: If A represents an undisclosed P, T is unaware of P’s existence, meaning A
is personally liable for returning funds in the event of overpayment or errors.

Duties of Principals (Fiduciary Relationship as a Two-Way Obligation):

1. Duty to Compensate: The compensation of agents (A) must align with the contract and industry standards. Neither party may
unilaterally change the calculation method or refuse to pay a legitimate commission.
General Principles: Compensation is typically stipulated in the employment contract, where key A may receive a percentage of
profits for their performance.
 Consistency Rule: Neither A nor P can modify earnings calculations to unfairly benefit themselves.
Commission for Real Estate Brokers (A) (if no express contract exists):
1. They secure a purchaser who is ready, willing, and able to meet the terms outlined in the listing agreement.
2. A contract is signed between the buyer and seller, but the buyer fails to fulfill the contract.
3. If the buyer conditions their purchase on loan or credit approval, the A receives the commission only if the approval is
granted. *If the loan or credit is denied, the A is not entitled to payment.
Multiple Listing Agreements: In multiple listing agreements, a property is listed with several as who share information and
divide commissions.
 Benefits: Increases exposure for the property & enhances transaction opportunities by expanding the buyer pool.
 Exclusive Right-to-Sell Clause: Most multiple listing agreements grant exclusive right-to-sell to a listing A. Regardless
of who closes the sale, the listing A receives a commission.
Sales Representatives: The method and conditions of commission payments must be based on contractual terms.
General Principles: A sales representative earns a commission only for sales they directly solicit and induce, unless the contract
provides broader rights.
 Typically, commission is earned once an order is placed by a qualified buyer, unless the contract states:
o Payment depends on the delivery of goods, or payment depends on the buyer completing payment.
 If payment is contingent on the buyer’s performance, P can’t terminate A’s employment before payment collection to
avoid paying commissions. Once the buyer pays, P is obligated to pay A’s commission.
Advance Payments Against Future Commissions:
 If A receives weekly or monthly advances against future commissions, they are not required to return excess advances
unless explicitly stated in the contract.
 Courts typically consider excess advances as a minimum salary, rather than a loan that must be repaid.
2. Duty to Reimburse: The principal (P) must reimburse the agent (A) for reasonable and necessary expenses incurred while
performing their duties.
Reimbursement Rules:
1. Reasonable Expenditures: Expenses must be work-related and not personal.
2. Necessary Expenditures: Expenses must not result from the agent’s negligence or misconduct.
3. Contractual Exceptions: If the contract specifies different reimbursement terms, those terms apply.
Undisclosed Principal’s Responsibility:
 If A represents an undisclosed P in a transaction, P remains responsible for all work-related expenses.
 If A pays out-of-pocket, P must reimburse A.
3. Duty to Indemnify: The principal must protect the agent (A) from liability damages incurred while lawfully performing their
duties. However, if the A’s negligence causes the loss, they are not entitled to indemnification.
When Does Indemnification Apply?
 A is not at fault, and their liability results from following P’s lawful instructions.
 A has the right to assume that P’s instructions are legally valid and will not cause harm to third parties.
 If A is sued due to executing P’s instructions, P must indemnify A for any damages or legal costs.
When Does Indemnification NOT Apply?
 If A’s own negligence caused the loss, P is not responsible for indemnification.

Termination by operation of law: these situations would automatically terminate P-A relationship
 Death: the death of P or A would terminate relationship, even if the other party is unaware of the death.
 Insanity: like death, but the insanity doesn’t always provide a distinctive time of termination.
 Bankruptcy: only end the relationship if the subject matter of the relationship is affected.
 Destruction or illegality of subject matter ends the relationship, such as a house after fire or wind.
Chapter 32: Agency Liability Concepts
Basic Aspects of Contract Liability
1. Actual Authority: A principal (P) may grant actual authority to an agent (A) either intentionally or unintentionally.
Actual authority consists of:
 Express Actual Authority:
o Authority explicitly given to the agent through the principal’s written or oral instructions.
 Implied Actual Authority:
o Authority that is necessarily incidental to the express authority or arises from custom, industry usage, or prior
dealings between the parties.
o Courts determine the existence of implied authority based on past habits or similar transactions between the
parties. Implied authority may vary by locality and industry.
o If a third party is aware that a particular authority does not apply in the present case, it cannot rely on past
transactions or customs to infer the agent has such authority.
Limitations on Implied Actual Authority for Third Parties:
 Implied authority cannot be derived from the agent’s own words or conduct.
 Third parties must exercise reasonable diligence to verify whether the agent is acting within their authority.
 If a third party seeks to hold the principal liable for a contract, they must prove:
1. The existence of an agency relationship.
2. The nature and scope of the agent’s authority.
3. Otherwise, the burden of proof falls on the third party in case of a dispute.
2. Apparent (Ostensible) Authority: It arises when a principal, either intentionally or through lack of ordinary care, causes or
allows a third party (T) to reasonably believe that an agent possesses certain authority.
Key Takeaways:
 Apparent authority is based on the conduct or words of the principal, not the agent.
 Liability of the principal for apparent authority is based on the doctrine of estoppel, which prevents the principal from
denying the agent’s authority if their own actions led the third party to believe it existed.
Key Elements of Apparent Authority:
1. Principal’s conduct or statements that suggest the agent has authority.
2. Third party’s reasonable reliance on this representation.
3. Third party’s injury or damages resulting from that reliance.
Scenarios Where Apparent Authority May Create Principal Liability:
1. No actual agency relationship exists, but the principal’s conduct leads the third party to believe otherwise.
2. An actual agent exceeds their authority, but the principal’s conduct leads the third party to reasonably believe the agent
had broader authority.
3. Agency relationship has ended, but the principal fails to inform relevant third parties, causing continued reliance on the
agent’s authority.
3. Ratification: It occurs when a principal retroactively approves an unauthorized contract after knowing all material details. Once
ratified, the contract is treated as if the agent had authority from the beginning, curing the defect of lack of authority and
establishing a binding principal-agent relationship.
Legal Effects of Ratification:
 The contract is backdated to the time of its original execution.
 The principal becomes legally bound, as though the agent had the authority at the outset.
Conditions for Effective Ratification:
1. Capacity Requirement:
o Both the principal and agent must have had legal capacity to enter the contract at the time it was signed and at
the time of ratification.
2. Agent Must Have Acted on Behalf of the Principal:
o Ratification is valid only if the agent originally represented themselves as acting for the principal.
o If the agent signed the contract in their own name, it cannot be ratified by the principal.
3. Full Knowledge Requirement:
o Ratification is effective only if the principal knows all material facts about the contract.
o If the principal expressly ratifies a contract without investigating details, they cannot later claim ignorance.
o If ratification is implied, the principal must have full knowledge; otherwise, the ratification is invalid.
Forms of Ratification:
 Express Ratification: The principal explicitly approves the contract through: words of approval, a promise to perform,
acting in accordance with the contract.
  Implied Ratification: The principal’s conduct indicates acceptance, such as: receiving benefits from the contract, filing a
lawsuit based on the contract’s validity, failing to object for an unreasonable amount of time despite knowing the agent’s
actions.
Important Legal Principles of Ratification:
 A principal cannot selectively ratify parts of a contract. They must accept both the benefits and the obligations.
 If a contract was fraudulently obtained by an unauthorized agent, the principal can still be held liable for the fraud if
they knowingly accept the benefits of the contract.
 To avoid liability, a principal must return any benefits received and take corrective action within a reasonable time after
discovering the true facts.

Contract Liability of Principals: Varying Responsibilities Based on Principal Type

The liability of a principal (P) depends on whether they are disclosed, partially disclosed, or undisclosed. Courts generally treat
undisclosed and partially disclosed principals similarly.
1. Disclosed Principal’s Liability
a. Liability to the Agent (A)
 When an agent (A) acts within their granted authority, the disclosed principal (P) is responsible for the contract and
must protect the agent from liability.
 If a disclosed P ratifies an unauthorized action by the agent, the same protection applies—P assumes liability as if the
action had been originally authorized.
 However, if an agent exceeds their authority, the A becomes personally liable and cannot seek indemnification from P.
b. Liability to the Third Party (T)
 A disclosed principal is contractually liable to T if the agent acts within their authority.
 Either actual authority or apparent authority makes P responsible for the contract.
 Unauthorized acts & ratification implications are above
o T has the right to withdraw from the contract before ratification:
1. Based on mutuality of obligation, if one party isn’t bound, the other party shouldn’t be either.
2. Once P ratifies, T loses the right to withdraw, whether ratification is express or implied.
3. P does not need to notify T of the ratification for it to be effective.
2. Undisclosed Principal’s Liability
a. Liability to the Agent (A)
 Even if T is unaware of P’s identity or existence, it does not affect the agency relationship between P and A.
 A still owes a fiduciary duty to P, and P must indemnify A for liabilities incurred within actual authority.
 P is liable for contractual breaches only if A acted within their actual authority.
o Apparent authority and ratification do not apply because they require a P-T relationship, which does not exist
when P is undisclosed.
 Sequence of liability:
 T first seeks damages from A, since A appears to be the contracting party.
 A can then seek reimbursement from P, provided A acted within their authority.
 If A exceeds their actual authority, P has no liability—A is personally responsible.
b. Liability to the Third Party (T)
 Undisclosed P is liable to T only if A had actual authority when entering the contract.
 Quasi-contract liability: Even if P is not directly bound by the contract, if P knowingly accepts and retains contract
benefits, P may still be liable under unjust enrichment principles.
 Contract assignability:
1. Even if the contract was signed within actual authority, if it involves personal services, the undisclosed
principal is not liable.
2. Contracts based on an agent’s personal skill, ability, or reputation cannot be arbitrarily transferred
to P without T’s consent.

Tort Liability Concepts in the Law of Agency

The principles of tort liability in agency law establish when and how liability is assigned:
Fundamental Principles of Tort Liability
1. Agents, employees, and independent contractors are personally liable for their own torts.
2. An employer is liable under the doctrine of respondeat superior for the torts of an employee if the employee was acting
within the scope of their employment.
3. A principal, proprietor, employer, or contractee is generally not liable for the torts of an independent contractor.
1. Tort Liability of Agents, Employees, and Independent Contractors
 All individuals who commit a tort are personally liable to the direct victim, even if acting on behalf of the principal.
 The liability of the agent/employee is joint and several with the liability of the employer, but an agent or employee is
not liable for the torts of the employer.
📌 Can an Employer Sue an Employee for Damages?
Technically, an employer can sue an employee to recover damages after being held jointly liable. However, such lawsuits are rarely
pursued for the following reasons:
1. Financial Considerations: Employees may not have the resources to pay damages.
2. Risk Management: Employers typically insure against employee negligence.
3. Business Morale: Suing employees could damage labor-management relations and workplace morale.
📌 Exception: When Employees Can Seek Indemnification from Employers
An employee may seek reimbursement from an employer if the employee followed the employer’s direct instructions and was
unaware that their actions were unlawful.

2. Employer’s Liability Under Respondeat Superior

Under respondeat superior, an employer is vicariously liable for an employee’s negligence or intentional torts committed within
the scope of employment, even if the employer did not direct willful act or assent to it.
📌 Why Do Employers Bear Liability?
 Social Policy: Employers are in a better financial position to compensate victims (Deep Pocket Theory).
 Business Policy: These costs should be borne by the business, not by innocent third parties or society.
📌 Punitive Damages and Employer Liability
There are two competing legal standards for determining whether an employer is liable for punitive damages:
a. Vicarious Liability Rule
 Employers are always liable for punitive damages awarded against employees, if the wrongful act occurred within the
scope of employment.
 Employers are also liable for unpaid (gratuitous) employees if:
1. The unpaid employee acted under the employer’s instruction or control.
2. The main purpose of the action was to serve the employer.
b. Complicity Rule (Modern Trend)
 Employers are NOT automatically liable for punitive damages.
 To hold an employer liable, the plaintiff must prove one of the following:
1. The employer authorized the employee’s wrongful act.
2. The employer was reckless in hiring or retaining the employee.
3. The employee held a managerial position, thus representing the employer.
4. The employer ratified the wrongful conduct after it occurred.
📌 Can an Employer Avoid Liability by Prohibiting Certain Acts?
 No. Even if an employer instructs an employee not to perform a particular act, if the act occurs within the scope of
employment, the employer remains liable.
 Similarly, employer miscommunications or employee misunderstandings do not absolve employer liability if the
employee was still performing job duties.
Scope of Employment: When Does Employer Liability Apply?
To determine whether an employer is liable, courts consider whether the employee was acting within the "scope of employment"
at the time of the tort.
📌 Factors Considered:
1. Nature of the employee’s job duties
2. Employer’s control over the work
3. Location and timing of the tort
4. Whether the act furthered the employer’s business
📌 Intentional Torts
 If an intentional tort is committed entirely due to personal hatred, ill will, or misconduct, the employer is NOT liable.
 Key Issue: Did the employee’s act, either explicitly or implicitly, fall within their job duties?
Frolic vs. Detour: Employee Deviations and Employer Liability
Frolic (No Liability): the employee pursues personal interests instead of the employer’s business.
Detour (Need to measure): the employee fails to follow the employer’s instructions.
📌 How to Determine If It’s Frolic or Detour?
 If the employee returns to work-related tasks, employer liability resumes.
 If the employee has not yet fully resumed work, the employer remains exempt.
📌 Dual Purpose Doctrine
  If an employee handles personal matters while also performing job duties, the employer may still be liable since the
employee is still serving the employer to some extent.
Tort Litigation Procedures
 Employers and employees are jointly and severally liable—a third party can sue either or both until paid.
 If the employee is found NOT liable, the employer is automatically absolved.
 The third party is limited to one recovery—they cannot recover damages twice from both employer and employee.

3. Tort Liability of Independent Contractors

Control Over Independent Contractors
Employer-Employee Relationship
 Control: The employer not only controls the result of the work but also has the right to direct how the work will be
performed.
 Responsibility: The employer is responsible for the actions of the employee under Respondeat Superior, as employees
work under the employer’s management and supervision.
Proprietor-Independent Contractor Relationship
 Control: The independent contractor retains full control over how the work is performed.
 Responsibility: The independent contractor is solely responsible for achieving the contractually agreed-upon result.
 Key Principle: The degree of control determines whether a worker is classified as an employee or independent
contractor.
General Rule: No Liability for Independent Contractors
 The Doctrine of Respondeat Superior and Vicarious Liability do not apply to independent contractors.
 Why? The employer does not control the work details, and the relationship is based on a contract, not supervision.
Are Doctors and Lawyers Independent Contractors?
 For highly skilled professionals (e.g., doctors, lawyers, pilots, chemists, engineers), the employer usually cannot control
their work manner, as they rely on their personal skills and professional expertise.
 However, courts often apply the Doctrine of Respondeat Superior to professional persons, meaning they can be
considered employees depending on the circumstances.
 If a hospital employs a doctor as an employee, the hospital may be liable for malpractice.
 If a hospital contracts with a doctor as an independent contractor, the hospital may not be liable.
Exceptions: When Employers Are Liable for Independent Contractors
 Work That Is Inherently Dangerous to the Public: If the work poses significant danger to the public, an employer
cannot avoid liability simply by hiring an independent contractor.
 Work That Is Illegal: Employers cannot escape liability by hiring independent contractors to perform illegal tasks.
 Non-Delegable Duties: Certain responsibilities are legally considered “non-delegable,” meaning they cannot be outsourced
to avoid liability.
 Work That Is Ratified by the Employer: If an employer learns of an independent contractor’s wrongful actions and
approves, benefits from, or refuses to correct them, the employer becomes jointly liable.
 Negligent Hiring or Supervision of an Independent Contractor: If an employer hires an unqualified or reckless
contractor, they can be held liable for negligence.
Chapter 33: Employment and Labor Law
Theory of Employment at Will
Employment at will is the foundation of employment relationships in the U.S., allowing either the employer or employee to terminate
the relationship at any time for any reason. This principle, based on reciprocity, provides flexibility for both parties. However, many
other countries require termination only for good cause, offering employees greater protection.
Exceptions to Employment at Will
1. Contractual Exceptions
 Fixed-term contract: Employment is set for a specific duration.
 Conditional contract: Employment is dependent on certain conditions being met.
2. Statutory Exceptions:
 Anti-discrimination laws: Prevent termination based on protected traits (e.g., gender, race).
 Protection against wrongful termination: Employees cannot be fired for exercising legal rights, such as filing a workers’
compensation claim or whistleblowing.
3. Judicial Exceptions:
 Public Policy Exception: Employees fired for refusing to perform illegal acts or for engaging in actions that benefit society
may seek damages under tort law, including lost wages, benefits, and punitive damages. Courts apply this exception
cautiously, requiring a clear legal basis (e.g., constitutional provisions, laws, regulations).
 Good Cause Exception: If an employer’s actions or policies imply job security, the relationship may shift from at-will to
requiring good cause for termination. Factors considered include:
o Explicit contract terms specifying termination only for just cause.
o Implied agreements, such as progressive discipline policies or long service periods.
o Employer’s conduct, such as promotions or reassurances of job security.
o Compensation under this exception is limited to contract damages.
o Employer Strategy: To maintain at-will status, companies may require employees to sign an annual at-will
employment statement.
Ancillary Torts in Employment Termination: Even if termination is lawful, the manner of dismissal matters. Employers may be
liable for:
1. Invasion of Privacy: Publicly disclosing termination reasons or personal employee information.
2. Intentional Infliction of Emotional Distress: Publicly humiliating an employee during termination.

Conditions of Employment
1. Determining Employment Status: One of the key issues in employment law independent Contractors are not subject to the same
employment laws and protections as employees.
Advantages of Hiring Independent Contractors:
1. Lower Tax Liability, No Benefits Obligation, Wage and Hour Flexibility, Reduced Legal Risks, No Vicarious
Liability, Lower Risk of Wrongful Discharge Claims, and Reduced Administrative Costs
Disadvantages of Hiring Independent Contractors:
1. Misclassification Penalties, Litigation Risk like Class-action lawsuits, and Retrospective Compensation
Tests for Determining Employment Status:
1. Common-Law Test: Focuses on control—whether the employer controls how the work is done, not just the result.
2. Economic Realities Test: Evaluates factors like: control, skill, tools/equipment, length of the work relationship, payment
terms, and intentions of the parties
3. IRS 20-Factor Test: Categorized into: Behavioral Control (e.g., training, supervision), Financial Control (e.g., payment
method, expense reimbursement), and Relationship Type (e.g., contracts, benefits, duration)
2. Pay and Benefits: Given employers' superior bargaining positions, Congress has passed laws to ensure fair pay and benefits.
a) Fair Labor Standards Act (FLSA) – 1938: Applies to businesses involved in interstate commerce with two or more employees.
 Child Labor Regulations:
o Prohibits employment of children under 14.
o Regulates hours and work types for employees aged 14-18.
 Minimum Wage & Workweek Regulations:
o Establishes a minimum wage.
o Sets a 40-hour standard workweek.
o Overtime pays at 1.5x regular rate for hours worked over 40/week.
 Exemptions from FLSA:
o Certain professions are exempt from overtime/minimum wage rules, such as:
 Agricultural workers, child actors
 Executive, administrative, professional, outside sales, and certain computer positions
b) Equal Pay Act (EPA) – 1963: Employers must pay men and women equally for "substantially equal" work.
 Four-Part Test to determine “substantially equal” work:
1. Effort – Level of physical/mental exertion required.
2. Skill – Education, experience, and training necessary.
3. Responsibility – Level of accountability or supervisory duties.
4. Working Conditions – Similar hazards or environment (e.g., exposure to chemicals).
 Employer Defenses under EPA: seniority system, merit-based pay, pay based on productivity (quantity/quality), and any
other factor unrelated to sex
c) Employee Benefits Legislation:
1. Employee Retirement Income Security Act (ERISA) – 1974:
o Employers must disclose plan details but are not required to offer pensions or insurance.
2. Consolidated Omnibus Budget Reconciliation Act (COBRA) – 1985
o Allows employees to continue group health insurance after job loss (up to 18 months) at their own expense.
3. Family and Medical Leave Act (FMLA) – 1993: Applies to employers with 50+ employees.
o Employees with 12+ months of service can take up to 12 weeks of unpaid leave for personal medical issues, care
for a family member, birth or adoption of a child
o Job protection is guaranteed during the leave period.
4. Unemployment Insurance: Funded by employer-paid taxes.
o To qualify, workers must have worked for a minimum period, have lost their job without fault (not due to
egregious misconduct), and be capable of work and actively seeking employment.
5. Affordable Care Act (ACA): Employers with medium & large company must provide health insurance or face penalties.
3. Worker Safety: This is regulated at both federal and state levels, primarily through OSHA and workers’ compensation laws.
a) Occupational Safety and Health Act (OSH Act) – 1970: Establishes national safety standards enforced by the OSHA.
 General Duty Clause: Employers must provide a workplace free from recognized hazards likely to cause injury or death.
 Specific Duty Clause: Employers must comply with industry-specific safety standards
 Enforcement Methods: 1) employee complaints, 2) surprise inspections, 3) post-accident investigations
b) Workers’ Compensation: Provides insurance for employees injured on the job.
 Exclusive Remedy Doctrine: Employees can’t sue employers for workplace injuries if workers' compensation is applicable.
 Exceptions to the Exclusive Remedy Doctrine: Intentional harm by the employer or self-inflicted injuries and injuries
caused by defective products, allowing employees to sue the manufacturer.
 Coverage Limitations:
o Independent contractors, agricultural workers, and domestic workers are generally excluded.
o Injury must arise out of employment.
4. Privacy in the Workplace: Balancing employee privacy expectations with employers’ rights to monitor behavior.
a) Substance and Medical Testing
 Alcohol & Drug Testing: States allow testing but regulate when and how it's conducted.
 Medical Testing: Under the Americans with Disabilities Act (ADA), employers cannot require medical testing
(including AIDS tests) without valid reasons.
b) Electronic Monitoring
 General Rule: Employees have limited privacy expectations at work.
 Employer Rights:
o May monitor emails, phone calls, and internet usage for work-related purposes.
o Monitoring of private communications requires written consent.
 Limits & Legal Risks:
o Monitoring private spaces (e.g., bathrooms) is illegal.
o Invasion of privacy lawsuits can arise if monitoring exceeds reasonable limits or is done without notification.

Labor Law Overview & Collective Bargaining Process

Labor law provides the legal framework that governs the relationship between employees, unions, and employers, ensuring a
balanced system where all parties can operate fairly. One of the core purposes of labor law is to empower employees through unions,
giving them collective strength to negotiate for better working conditions, pay, and benefits.
1. National Labor Relations Act (NLRA) – 1935
The National Labor Relations Act (NLRA), also known as the Wagner Act, is one of the most important labor laws in the United
States. It established key rights for employees and outlined rules for employers and unions.
Key Rights Granted Under NLRA:
1. Right to Organize – Employees can form or join unions without fear of retaliation.
2. Right to Collective Bargaining – Employees can negotiate employment terms collectively through their union.
 3. Right to Strike – Employees can legally strike under certain conditions to press their demands.
Prohibited Unfair Labor Practices (ULPs) by Employers: The NLRA explicitly forbids employers from engaging in Unfair Labor
Practices (ULPs) that could undermine employees' rights. These include:
1. Refusing to Bargain with the employee’s chosen union representatives.
2. Retaliating against employees who file charges or participate in NLRA-related activities.
3. Discriminating against union members based on their affiliation.
4. Interfering with the internal operations of a union.
5. Discouraging employees from forming, joining, or supporting a union.
2. The Collective Bargaining Process:
 Showing Interest:
o The union needs to collect authorization cards signed by at least 30% of employees within a specific community
of interest (a bargaining unit based on shared job functions, work location, etc.).
o Employer Rights: Employers can legally limit union solicitation activities to non-work times (e.g., lunch breaks)
and non-work locations (e.g., break rooms or cafeterias).
 Representation Election:
o After reaching the 30% threshold, the union can request that the employer voluntarily recognize it as the
bargaining agent. Most employers refuse this voluntary recognition.
o The union can then petition the National Labor Relations Board (NLRB) to conduct a representation election.
o Employees will vote in the election to decide if they want the union to represent them.
 Union Certification:
o If the union receives a majority vote (50% +1) in favor, the NLRB certifies the union as the exclusive bargaining
representative.
o From this point, individual employees cannot negotiate employment terms directly with the employer; all
negotiations must occur through the union.
3. Job Actions, Strikes, and Lockouts
If collective bargaining fails to produce an agreement, employees and employers have legal tools to apply pressure on one another.
(A) Job Actions: Union-organized activities designed to pressure the employer without initiating a full strike.
 Examples of Job Actions: Wearing union-branded clothing (e.g., T-shirts, buttons).
(B) Strikes: A complete stoppage of work by employees to pressure the employer. Two Types of Legal Strikes under NLRA:
1. Economic Strikes: To demand better wages, benefits, or improved working conditions.
o Employer Rights:
 Can hire permanent replacement workers during an economic strike.
 Is not obligated to rehire striking employees once the strike ends.
2. Unfair Labor Practice (ULP) Strikes: To protest illegal practices by the employer, such as refusing to bargain in good
faith or discriminating against union members.
o Employee Protections:
 Striking workers generally have the right to reclaim their jobs once the strike concludes.
(C) Lockouts: A tactic used by employers where they deny employees access to the workplace to pressure the union.
 Legal Lockouts: Lockouts are generally legal if used to push unions toward a compromise during stalled negotiations.
 Illegal Lockouts (Unfair Labor Practices): A lockout becomes illegal if its purpose is to discourage union membership
or retaliate against union activities.
Chapter 34: Employment Discrimination
Employment Discrimination Laws and Workplace Protections
Over the years, two major historical events—the abolition of slavery after the Civil War and the civil rights movement of the 1960s—
have played a crucial role in shaping public policy to combat workplace discrimination. In response, Congress enacted various laws
to prohibit employment discrimination, ensuring equal opportunities for all individuals.
Key Legislative Acts:
1. Civil Rights Act of 1866 – One of the earliest laws addressing employment discrimination based on race.
2. Title VII of the Civil Rights Act of 1964 – A more comprehensive law prohibiting discrimination based on race, color,
religion, national origin, and gender.
3. Expanded Protections – Over time, additional laws have extended these protections to include age (Age Discrimination in
Employment Act - ADEA), disability (Americans with Disabilities Act - ADA).

Scope and Applicability of Title VII

Title VII applies to employers engaged in interstate commerce with 15 or more employees. It specifically covers employees but
does not apply to independent contractors. Additionally, Title VII protections extend to employees of U.S. companies working
abroad, provided compliance does not violate the host country's laws.
The Equal Employment Opportunity Commission (EEOC) enforces Title VII by investigating workplace discrimination claims.
The standard process includes:
1. Investigation of the Complaint – If the EEOC finds sufficient evidence, it attempts to reach a voluntary settlement.
2. Right-to-Sue Letter – If no resolution is reached or the EEOC declines to investigate, the complainant receives the right to
file a private lawsuit.

Remedies for Employment Discrimination

Successful discrimination claims can result in equitable relief or monetary compensation:
 Equitable Relief: Courts may order corrective actions, such as:
o Issuing an injunction to prevent an employer from engaging in discriminatory hiring practices.
o Mandating adjustments, such as awarding additional points to female candidates on entrance exams.
 Monetary Damages: Compensation may include:
o Back Pay – Lost wages and benefits for up to two years before the claim was filed.
o Front Pay – Future wages lost due to wrongful termination.
o Attorney’s Fees – Legal costs incurred during litigation.
o Compensatory and Punitive Damages – Available for cases of intentional discrimination, with caps based on
company size (e.g., $50,000 for companies with fewer than 100 employees, up to $300,000 for those with over
500 employees).

Proving Workplace Discrimination

To successfully prove discrimination under Title VII, plaintiffs must establish a prima facie case through one of two legal theories:
1. Intentional Discrimination (Disparate Treatment)
 This occurs when an employer deliberately discriminates against an applicant or employee.
 Because intent is difficult to prove, courts require four key elements to establish a prima facie case:
1. Membership in a Protected Class (e.g., race, gender, religion).
2. Adequate Qualifications for the position.
3. Rejection Despite Qualifications.
4. Position Remained Open or Was Given to Someone Else.
However, proving a prima facie case does not guarantee a win. The burden shifts to the employer, who must provide a legitimate,
non-discriminatory reason for their decision. If the employer presents such a justification, the plaintiff must then prove that the
stated reason is a mere pretext for discrimination.
 Mixed-Motive Cases: If both legitimate and discriminatory motives influenced the employer’s decision, the plaintiff must
demonstrate that discriminatory intent played a significant role. Courts often rule in favor of the employee in such cases,
as any evidence of illegal intent strengthens their claim.
2. Unintentional Discrimination (Disparate Impact)
 Disparate impact refers to employment policies that appear neutral but disproportionately disadvantage certain
groups.
 A common tool for assessing disparate impact is the "80% Rule", which states that if the hiring rate for a protected group is
less than 80% of the hiring rate for the majority group, a prima facie case of discrimination may be established.
 Employers can defend against these claims by proving that the employment practice is job-related and necessary for
business operations.
  Plaintiffs can counter this by demonstrating that alternative employment practices could achieve the same business goals
without discrimination.

Constructive Discharge
 When an employee voluntarily resigns due to an intolerable work environment created by the employer, they may seek
protection under Title VII.
Retaliation
 If an employee reports discrimination internally or to the EEOC, the employer cannot take adverse actions against them
(e.g., termination, demotion, negative performance reviews).
Protected Categories of Discrimination
 Race, Color, and National Origin – Title VII protects all races, including white employees, against discriminatory
actions.
 Sex – Employers cannot discriminate based on sex, but Title VII does not explicitly cover sexual orientation or
transgender status.
o Pregnancy Discrimination Act (PDA) – Requires employers to treat pregnancy and childbirth like any other
temporary medical condition.
 Religion – Employers must reasonably accommodate religious practices unless doing so causes undue hardship.

Defenses to Discrimination Claims

Employers may justify employment decisions based on:
1. Seniority and Merit – Employment actions based on seniority systems or merit-based performance are lawful if applied
consistently.
2. Bona Fide Occupational Qualification (BFOQ) – Employers may legally discriminate based on religion, gender, or
national origin if necessary for business operations (e.g., a theater casting a female actor for a female role). However,
BFOQ cannot be applied to race or color.

Age and Disability Discrimination

 Age Discrimination in Employment Act (ADEA) – Protects applicants and employees aged 40 and above from age-
based discrimination. Employers may favor older employees over younger ones without violating the law.
 Americans with Disabilities Act (ADA) – Prohibits discrimination against individuals with physical or mental disabilities
that substantially limit major life activities.
o Employers must provide reasonable accommodations unless doing so creates undue hardship.

Workplace Harassment
Sexual harassment is the most common form of workplace harassment, divided into two categories:
1. Quid Pro Quo Harassment – Supervisors demand sexual favors in exchange for job benefits, then individual suffers a
tangible job detriment if they rejected.
o Same-gender harassment is also covered under Title VII.
2. Hostile Work Environment – Occurs when severe or pervasive unwelcome conduct creates an intimidating, offensive
workplace. Sometimes, there is no tangible economic impact.
o To win a lawsuit, plaintiffs must prove:
1. The conduct was unwelcome.
2. The behavior was severe or pervasive enough to create an abusive work environment.

Employer Liability for Harassment

 Supervisor Harassment – If harassment by a supervisor leads to tangible job loss, the employer is strictly liable.
o However, for those hostile environment cases not involving a tangible job loss, the employer might be not liable
when they exercised reasonable care to prevent and the employee unreasonably failed to take advantage of any
preventive or corrective opportunities provided by the employer to otherwise avoid them.
 Coworker or Non-Employee Harassment – Employers are liable only if they knew or should have known and failed to
take corrective action.
Chapter 35: Forms of Business Organization
1. Sole Proprietorship: A business owned by a single individual who has full control over operations, employees, and revenue.
 Formation: Requires local business licenses.
 Advantages: Complete control over business decisions and not subject to corporate taxes; income is taxed as personal
income.
 Disadvantages: The owner assumes 100% personal liability for all business debts.
2. Franchising: A business model where an individual (franchisee) operates under the trademark and business framework of an
established company (franchisor).
 Structure: The franchisee owns the business but pays fees to the franchisor in exchange for branding, operational support,
and marketing advantages. The franchisee earns revenue from sales, while the franchisor profits from franchise fees.
 Advantage: Reduces the risk of failure by following a proven business model.
 Disadvantage: Franchisees must comply with strict contractual agreements and ongoing fees.
3. General Partnership: A business owned and managed by two or more individuals under an oral or written agreement.
 Advantages:
o Easy and inexpensive to form.
o No corporate taxes; income is passed through to partners.
o Equal voice in management for all partners.
o Can operate in multiple states without extensive legal requirements.
o Fewer government regulations compared to corporations.
 Disadvantages:
o Limited number of owners.
o Dissolution risk: If a partner joins or leaves, the partnership dissolves.
o Unlimited personal liability for contract and tort claims.
o Tax liability on earnings, even if profits are not distributed.
4. Joint Ventures: A business arrangement where two or more parties share profits, losses, and management responsibilities for a
specific project or transaction.
 Legal Aspects:
o Follows similar legal principles as partnerships.
o Has less implied or apparent authority than partnerships.
o Automatically dissolves upon completion of the project.
 Advantage: Temporary collaboration allows companies to share resources and expertise without a long-term commitment.
 Disadvantage: Potential for disputes over profit-sharing and decision-making.
5. Limited Partnership (LP): A partnership structure with two types of partners:
o General Partners: Manage the business and have unlimited liability.
o Limited Partners: Invest in the business but do not participate in management; their liability is limited to their
capital contribution.
 Legal Aspects: If a limited partner actively participates in management and third parties are aware, they may lose their
limited liability.
 Tax Benefits: Often used as a tax shelter, particularly in real estate and investment projects.
6. Business Corporation: A separate legal entity from its shareholders.
 Advantages:
1. Can raise substantial capital by issuing shares.
2. Favorable tax provisions in certain areas.
3. Control can remain with minority investors through nonvoting or preferred stock.
4. Flexible ownership structure with divided, unequal shares.
5. Limited liability for shareholders.
6. Perpetual existence unaffected by changes in ownership.
7. Certain laws, like usury laws, may not apply to corporations.
8. Shareholders who are employees can receive benefits like workers' compensation.
 Disadvantages:
1. High formation and maintenance costs.
2. Subject to special taxes and franchise fees.
3. Double taxation: Company profits are taxed, and dividends are taxed again as personal income.
4. Must qualify to do business in every state where it operates.
5. More government regulations compared to other business forms.
Avoiding Double Taxation (Strategies to reduce corporate tax burdens):
 Reasonable salaries: Salaries paid to corporate employees are tax-deductible.
  Capital structure optimization: Instead of issuing only stock, a company can take interest-bearing loans from
shareholders, allowing deductible interest payments.
 Retaining earnings: Companies can avoid dividend taxation by reinvesting profits instead of distributing them.
 Subchapter S Corporation (S Corporation): Allows small, closely-held businesses to be taxed as a partnership, avoiding
corporate tax altogether.
7. Subchapter S Corporation (S Corp): A hybrid entity that combines corporate benefits with pass-through taxation.
 Key Features:
o Treated as a corporation under state law but taxed like a partnership.
o Profits and losses pass directly to shareholders without being taxed at the corporate level.
 Restrictions:
o Limited to 100 shareholders. All shareholders must sign an election to be taxed as a partnership.
o Can issue only one class of stock.
 Tax Benefits:
o Shareholder-employees can minimize salary in favor of stock distributions, reducing self-employment and
payroll taxes.
8. Professional Service Associations: Designed for licensed professionals (e.g., doctors, lawyers, accountants) to enjoy corporate tax
benefits while practicing their profession.
 Key Features:
o Allows professionals to form corporate-like associations.
o Provides qualified pension and profit-sharing benefits.
o Unlike corporations, does not shield professionals from malpractice liability.
 Legal Limitations:
o Business corporations cannot provide professional services.
o Higher liability risk in areas like employment discrimination.
10. Limited Liability Company (LLC): Combines limited liability with pass-through taxation.
 Key Features:
o Protects owners from business debts unless personally guaranteed.
o Taxed like a partnership: No entity-level tax, and losses can be passed to owners.
o Easier to form and operate than corporations.
 Advantages:
1. Limited liability: Owners are not personally liable for business debts.
2. Pass-through taxation: Income is taxed only once at the owner level.
3. Simpler than corporations: Fewer regulatory requirements.
4. Tax-efficient loss allocation: Losses can be deducted against personal income.
 Disadvantages:
1. Uncertain legal precedents: Since LLCs are relatively new, fewer court cases provide legal guidance.
2. Management conflicts: LLC success depends on trust among members. Disputes may lead to legal action.