When Your Team Screws Up, Are You Liable? Employer Risks Uncovered

Welcome to Your Business, Accelerated! Digitally remastered with AI, Your Business, Accelerated! is the go-to podcast for entrepreneurs ready to scale smart. Hosted by Attorney Shaune B. Arnold, it delivers strategic business insights, legal frameworks, and real-world solutions to help you operate with clarity and confidence. Get actionable guidance to protect, grow, and optimize your business...one smart move at a time.

What happens when your employee—or your contractor—makes a costly mistake? In this eye-opening episode of Your Business, Accelerated!, Attorney Shaune B. Arnold breaks down the real risks of agency liability, vicarious responsibility, and legal exposure. Learn how to protect yourself and your business before someone else’s bad day becomes your lawsuit. 

Transcript

Hello everyone, and welcome to your business accelerated. I am your host, attorney, Shaune B Arnold, and I'm really excited to be here with you today, as I am every single week here on your business accelerated.

We have a really hot topic that we're going to talk about tonight, and that is …just where does your liability fall if someone is working for you? If somebody that's working for you, blows it. If they make a mistake, if they cause some damages to someone else, are you on the hook for it? That's what we're talking about tonight.

But before we get started, I just want to give you some information about me. I am a California business attorney. I've been practicing in Los Angeles for more than 30 years. That means everything I say that is legally oriented tonight, you need to take it in the context of my being a California business attorney. If you have any of these issues actually coming up in your business, then you should give me or some other attorney a call and make sure these principles actually apply to your particular circumstances, in the jurisdiction where you live and work.

I also want to invite you to listen to my other podcast, LegalBiz Café. Over there, we talk about mindset issues that can stop you dead in your tracks and make it nearly impossible to move forward in your business. That’s right. LegalBiz Café deals with your mindset. Here, on Your Business Accelerated, we discuss hard core business issues that can absolutely wreck your business, no matter what your mindset is. When you listen to LegalBiz Café and Your Business Accelerated, you’ll get what you need to build a strong business and build your mental health while you’re doing it.

My aim tonight, folks, is to keep you out of trouble when you hire employees and even when you hire consultants as your agent. I'm going to give you some basic legal framework on agency law as it pertains to employees and independent contractors and even gratuitous agents that do things on your behalf. I'll give you some basic information on how the law looks at it, and then we will dig into some specifics that I think will really help you tonight.

So, the first question is, what is an agent?

An agent can be an employee, a consultant, or a gratuitous third party that's doing you a favor, ostensibly for free. Basically, when we talk about agency, we're talking about a legal relationship where the parties agree, in some form or another, that one of the parties is going to act on behalf of the other party. The party that is getting the benefit of those actions is called the principal, and the party that is actually doing the actions is the agent. The agent is subject to the control of the principal, and that is really basic to the agency relationship.

So, there are three different kinds of agents that you might bring into your business. One of them is an employee, one of them is an independent contractor, and one of them is just a gratuitous agent. And we can dispense with the gratuitous agent really, really quickly. This is somebody who is acting on your behalf, with you as the principal, but they're not getting paid anything. They're just doing you a favor. So, is there any liability in that? You know, sometimes there may be.

If you tell somebody to do something that's illegal, and they go out and they do it, and you receive the benefit of that, then, yeah, there's going to be some liability. It's vicarious liability, but it's not because they are an employee. It's because you did some wrong and you will be held responsible for it.

There is a lot of confusion in the business marketplace as to whether someone is an employee or whether they are an independent contractor, and the difference is really based on the amount of direction and control that the principal has over the agent in terms of scoping their work, setting their work schedule and pay rate, providing their tools, and whether the principal is supervising them daily.

Now, the IRS and the courts have some very specific definitions as to what an employee is and what an independent contractor is. And if you're wondering about that definition, because you're trying to figure out how to classify somebody within your business, then you look to the IRS guidelines on whether someone's an employee or a contractor. 

Generally, anyone who performs services for you as a principal is considered an employee if you as the principal can control what will be done and how it will be done. Conversely, that same individual will be considered an independent contractor, if you, as the principal, have the right to control or direct only the result of the work and not the means and the method by which they accomplish the result.

So, say you invite somebody to come in and paint your home. You might tell them they have to be there at nine o'clock because you have to leave and you have to let them enter the house, but you are not following them around the house, showing them where to put the primer, showing them how to do the paint. You're not supervising their actions. You're just letting them in, and you're allowing them to employ their expertise. That is going to make that painter an independent contractor, because you don't control what's done and how it's done. You can control it in the sense that you're asking them to paint your house, but the expertise is all theirs, and the means and the methods of accomplishing that paint job is all theirs. So, they will be an independent contractor.

The court and IRS will also look at the financial arrangements between the principal and the agent, because if you're taking taxes out of their money, then you're talking about an employer employee arrangement.

Finally, the IRS is going to look to the type of working relationship that the parties have in terms of the benefits and the promises of continuing employment. So, if you tell them that they are just painting the inside of your house, that's one thing. But if you own 50 houses in this marketplace and you're telling them that they're going to paint 47 of those houses on the inside, then the IRS might start to really look at you very closely to see what kind of dominion and control you have over that painter's time and over their work product. 

I know it seems a little bit confusing. It can be, but very briefly, if you control how they do their work, then the IRS is going to determine them to be an employee of yours, and it doesn't matter what your employment or independent contractor agreement actually says. The IRS has that final word. If your transaction with an individual involves you hiring them to transact business on your behalf, then you know you have an agency. Then look to the amount of control you have over their work to find out whether it is an employment agency or an independent contractor agency.

Now, the courts have a slightly different two prong test that they use for agency, and I'd like you to be aware of that. The courts look at agency as a fiduciary relationship that results from the principal offering to form an agency relationship, and the agent consenting to that agency relationship.

The courts are going to look for an offer, consent, and will apply the IRS definition of agent to the circumstances. They’re going to look to the amount of control the principal has to have some sense that the principal is actually defining the tasks and the objectives of that agency relationship.

If those tasks and objectives are being defined by the by the principal, then we are talking about an an employer-employee, agency relationship.

So, what does all of this mean? What difference does it make if the agent is an employee or consultant? It means if the agent is a gratuitous agent, you're not responsible for them unless they can show some sort of nefarious activity on your part, some sort of fraud, some sort of direction to someone who didn't have the ability to say no, then that falls under a whole different scenario. That's not agency.

What we really want to look at is the liability that will befall you if you have either an independent contractor working for you or an employee working for you, and we're going to look at what that actually means. So first of all, vis-a-vis the public, if you have somebody working for you, they have authority to bind you in business. This is why the liability will actually attach, because they have some authority to bind you in your business. They will either have actual authority because you expressly gave it to them, for example, you hired them, or you brought them on as an independent contractor, deliberately and affirmatively, there could be some apparent authority where they're wearing your uniform, even after you fired them if the person who's out there in the marketplace doesn't know you fired them.

So, there's some apparent authority if something like that happens. And then, of course, there's ratification, where you ratify somebody's actions after they already took them. You see this a lot in corporate governance, where they will pass resolutions ratifying the officers' and directors' actions in doing business in some way. So, now that the public is looking at this independent contractor or this employee, and they're seeing that authority either its actual authority or its apparent authority. Is that going to subject you to liability if they do something stupid? Let's dig into some specifics for you.

Let's assume, for example, that you own a flower shop, and that your flower shop has a delivery van. Are you going to be liable if somebody gets in an accident in your delivery van? Well, sometimes, aside from some of the underlying issues, like, are you functioning as a DBA or a general partnership? In either of those cases, you will not get any limited liability protection.

You will be personally liable for anything that someone does on your behalf. If you have a corporate structure around your business, then we're not talking about personal liability. We're talking about the liability of your business for the actions taken by this agent. If we have Bob the delivery driver, and he is delivering flowers for your business, and let's assume that Bob actually finished for the day. Bob is on his way home. He's still in his uniform, and he has your van, and Bob has been drinking. He stopped off with his buddies at the bar and had a couple of beers and a couple of slices of pizza, and now he's on his way home, and Bob runs a red light and he gets in a car accident in your van. Are you responsible for that? Well, that's a very good question.

If he is an independent contractor, then your argument would be, no, he got drunk on his own, and although he was in your van, you didn't direct any of the things that he was doing that caused him to actually get in that car accident. You would say you had no liability for his actions. That isn't necessarily going to fly with the person who's in that other car. It's not going to stop them from suing you. It's not going to stop them from joining you in a lawsuit, but it might stop them from actually keeping you in that lawsuit.

If he was your employee, then we know most courts will say that he got in an accident

while he left a bar. He's in your uniform, he's in your van. The court is going to ask whether it's foreseeable that somebody in your uniform, in your van, might drink and then hit somebody on the way home. And if the court finds that it's foreseeable that Bob the driver would get drunk and hit somebody while they're in your van, then the court is going to hold you liable for that.

But there are some things that Bob could do that might not subject you to any liability. Let’s assume then, that Bob wasn't drinking. Let's assume that he didn't go to the bar. Let's assume instead, that he delivered the flowers, and while he was at the delivery address, he assaulted somebody. This is something that actually happened to Best Buy years ago, a member of the Geek Squad actually assaulted a woman while he was in her home fixing her computer, and it was found that they were not liable because it was not foreseeable that their employee could assault somebody.

So, what would have made it foreseeable? Well, there are some things that you can do to actually protect yourself. For example, if you simply did a background check on Bob before you hired him, and Bob did not have any record of DUIs. He did not have any record of assault. You had no way of knowing that he was going to do what he did. That will definitely go a long way towards protecting you.

You can get insurance on the van for extra liability protection. You can also bond and insure your driver. This will protect your business against things that are foreseeable. Note that if Bob goes out and assaults somebody, your insurance is probably not going to kick in because the insurance is going to say that's a deliberate act and it's not covered and not foreseeable. Well, you'd have to look at your declaration page and read the policy to find out whether you are covered, but chances are slim.

In closing tonight, those are some of the things I would love for you to know about hiring people and bringing consultants into your business. I wish you good business.

Ladies and gentlemen, I also want to thank you for joining me today on this week’s episode of Your Business, Accelerated! I’m attorney Shaune B. Arnold. I invite you to follow me on Facebook, LinkedIn and Twitter X. In all of those places, I’m known as S.H.A.U.N.E dot Arnold.

In the meantime, and in between time, I am, …as always, reminding you to MAXIMIZE your COMPETENCE to get the CONFIDENCE YOU NEED to succeed.

I’ll see you right back here next week, on Your Business, Accelerated! Bye-bye, friends.