When Is A Business Liable For The Wrongs Of Its Agents?

Roseville Attorney, Jeffrey Ochrach, answers the question, What is Vicarious Liabilty?

Rosevillel Business Attorney - Agents' LiabilityUnder California law and the law of most states, a company is liable for the wrongs of its employees that were committed within the scope of his employment.  This is called vicarious liability.  So, for example, if an employee is driving to pick up supplies

for work and causes an accident, the company for whom he works will be liable.

To avoid vicarious liability, companies will often hire people as “independent contractors,” believing this characterization will protect the company from liability.  However, companies are also liable for the wrongful acts of its independent contractors if committed within the scope of his employment.  For instance, most stockbrokerages hire their stockbrokers as independent contractors (calling them “registered agents”) and disclaim liability for bad advice or churning done by its agents.  Yet, it doesn’t matter what the company calls its workers; employees, agents or independent contractors.  If the agent does something wrong while acting within the scope of his employment, the company will be liable for the resulting damages.

How can my company be liable for the actions of an Independant Contractor?

Here’s what some may find surprising: the company will be liable even if the agent’s actions violated the company’s corporate policies or was criminal.  It doesn’t matter if the agent’s acts benefitted only him and did not benefit the company.  For example, if the agent defrauds a customer out of money, the company will be liable if the agent was acting within the scope of his employment.   In one case I handled, my client’s investment advisor conned my client into making a personal loan to the advisor by convincing the client that the loan was a good, safe and high return investment – better than mutual funds in which my client was already invested.  The investment advisory firm fought tooth and nail against our lawsuit, claiming that they couldn’t be liable because 1) they didn’t know the agent had defrauded clients; 2) the agent’s conduct violated the company’s rules and was, in fact, criminal; and 3) the company received no benefit (e.g., commission) from the loan.  These were good arguments.  Yet, the company was liable because the investment advisor used his role as investment advisor, working for a reputable firm, to con the client.

Public Protection against Agents’ Acts

Though it seems unfair to the company to be held liable for unauthorized or criminal acts of its agents, the law is based on the public policy premise that the company is better able to afford the loss, compared to the public, and because the company’s enterprise creates inevitable risks as a part of doing business.

I don’t always agree with public policy pronouncements like this.  But, in this case, I believe the law is just and fair.