By: Nathaniel Ofori
The art of entrepreneurship and owning a small business usually starts with an idea conceived by a single person or a small group. Thus, many entrepreneurs find themselves handling all business-related tasks at the onset of their venture. To a small business owner, it is a commendable show of faith to allow employees to perform tasks pertaining to the business, but there are legal implications of an employee acting under the control of the business owner that this article will explore.
delegation and its benefits
Delegation is when responsibility is assigned to others in the workplace within prescribed limits. Naturally, some business owners strive to be self-sufficient and may believe they are the only ones capable of performing specific tasks correctly. However, such reasoning can often be detrimental to the business. As a business leader, it is important to delegate authority to focus efforts on high-level specific tasks that will guide and grow the business.
Delegation improves employee engagement, maximizes human resources, and encourages speedy decision-making. Employees are often placed in positions where they can easily take advantage of their employer, but despite these fears, the art of delegation easily sells itself. By extending responsibilities to employees, a business owner raises the worker’s skill levels and distributes the burden, which boosts the company’s long-term success.
llcs and the formation of agency relationships
Often, small businesses are formed as a Limited Liability Company (“LLC”). LLCs have grown in popularity because of their tax advantages, liability protection, and ease of formation. Similar to a corporation, an LLC is a separate legal person from its owners. An LLC is a distinct legal entity that may sue or be sued on its own. In the legal sense, an employee hired to work on an owner’s behalf in such a business is an “agent,” and the owner, the principal.
employee’s obligations to the business owner
As an agent, the employee owes the employer a duty of loyalty, obedience, and care in all matters relating to the business relationship. These duties serve as a check on an employee’s role in the business relationship. Employees are generally required to act within the scope of the authority granted them by their employers and to abide by all contractual obligations. The employee is obligated to place the owner’s interest above theirs’ in all matters concerning the business and may not exploit the business by using the owner’s property or confidential information for personal gain. Employees are also not allowed to compete with the principal’s business while under employment.
The agent or employee is expected to uphold the duty of care that requires the diligence and competence of a reasonable agent in similar circumstances. In the event that an employee has special skills, they may even be held to a higher standard of care, that is, be required to perform at a level comparable to a professional with similar skills.
legal concerns with delegation of authority
Given this ‘special’ principal-agent relationship, a business may be liable for contracts entered on by the agent on behalf of the owner if made in good faith. Even though an employee will be held liable to a third party harmed by his own tortious conduct, the employer may be liable directly or vicariously in some states. An employer will be vicariously liable under the doctrine of respondeat superior for the wrongful actions of an employee if the act occurs within the scope of the employment. This theory is a means of attributing liability to an employer for the actions of his employees while “on the job”. The underlying premise of respondeat superior is that the cost of torts committed in the conduct of a business should be anticipated as part of the costs of doing business and that the “master” should be able to answer for the “servant”. However, in several states, vicarious liability will not extend to the intentional or criminal conduct of the employee. Furthermore, in cases of employer-employee liability, damages will be divisible among both parties in court in view of the facts. (It must be noted though, that respondeat superior does not apply to independent contractors.)
key tips
To encourage effective delegation of authority in a small business, some key tips to consider would be to create an employee handbook first. Though simple, this can improve accountability immensely. A few things you should include are employee policies and other rules of procedure in performing tasks. These provisions should define desired outcomes and authority levels. Managers should also ensure that employees have the tools they need to complete tasks. They should be able to evaluate performances and monitor progress by setting up personnel files. Employees may be encouraged to accept more responsibility and learn more skills when provided constructive feedback.
It is additionally important to set up employee benefits and post required federal and state labor law notices. This improves transparency and can boost morale. Workplace safety measures should also be adopted to avoid the propensity for accidents. This could be in the form of providing training for different scenarios, providing a hazard-free workplace, and keeping detailed safety records. Establishing some form of punitive action for workplace indiscipline could also discourage employees who abuse their delegated power. Ideally, the purchase of business liability insurance could serve as a safety net for small business owners when all other options fail.
Admittedly, this is a non-exhaustive list, but it does offer some considerations to keep in mind when delegating authority in a business.
This post has been reproduced with the author’s permission. It was originally authored on February 10th, 2022, and can be found here.
Sources
https://www.law.cornell.edu/wex/respondeat_superior
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC2900989/
https://www.quimbee.com/keyterms/limited-liability-company
https://www.businessnewsdaily.com/8643-leader-delegation.html
https://hbr.org/2019/08/8-ways-leaders-delegate-successfully
https://online.hbs.edu/blog/post/how-to-delegate-effectively