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The importance of AGENCY RELATIONSHIP

As you known, the ownership of hospitality businesses can be maintained
utilizing a variety of organizational structures. As well, these businesses are managed
under a variety of operating structures. Sole proprietorships, partnerships,
and corporations are all subject to the federal and state laws governing employer -
employee relationships.
It is also true that owner - operators, franchisors, franchisees and management
companies are subject to the laws governing employer - employee relationships.
This is important to understand because the conduct of a business ’ s employees,
regardless of organizational or operating structure, will directly affect the liability
(or potential liability) of a business. Hospitality owners need to keep laws regarding
employee relationships in mind when deciding on an organizational or operating
structure for their business, and then choose the structure that will best allow them
to absorb any liabilities incurred by the employees of the organization.
In the United States, regardless of the business structure selected, the relationship
between businesses and their hired help usually takes the form of one of three
concepts:
 Master - servant
 Agent - principal
 Independent contractor (Independent contractor:A person or entity that contracts with another to perform a particular task but whose work is not directed or
controlled by the hiring party.)

Figure 3.3 summarizes the characteristics of each relationship.
Returning to the previous example of John Graves, the man who wanted to
begin his own restaurant, we can examine these relationships and the special rights
and responsibilities they involve. It is highly unlikely that John will be able to operate
his new restaurant entirely by himself. John would more than likely need to hire
bartenders, wait staff, and kitchen help. When he hires people to fill these positions,
he is creating a master - servant relationship: John is the master and his employees
are the servants. Traditionally, in the law, the term servant was used to describe
employees who performed manual labor. They were not generally in a position
to act and/or make decisions on behalf of the master or employer when dealing
with third parties. The master - servant relationship implies that the employee is
under the direct control of the employer, and since the employers are presumed
to be in control of their employees, employers are generally held responsible for
the behavior of the employees when they are working. To illustrate, assume that
a groundskeeper was directly hired by John to maintain the grassy areas, parking
lots, and landscaping around his restaurant. This employee would likely be
assigned a variety of groundskeeping tasks, including cutting grass. Assume further
that, while mowing, the worker inadvertently ran the mower over a rock; and that
the rock was discharged, with great force, into the parking lot where it struck the
side of a parked car, resulting in significant damage to that customer ’ s car. John, as
this groundskeeper ’ s employer, will be directly responsible for the actions of this
employee and the damage he or she has caused.

[ by Frank at 3-23-2009 22:21 edited ]
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Figure 3.3 Three types of employer-employee relationships.

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3-24-2009 06:06

Figure 3.3 Three types of employer-employee relationships.

[ by Frank at 3-24-2009 06:06 edited ]
John may also hire someone to act as his general manager. In this instance,
some of the general manager ’ s work may be under the direct control of John, but
the general manager may also be empowered to make decisions on behalf of the
restaurant and to enter into contracts on behalf of the restaurant. When employees
act on behalf of the principal, they are usually referred to as agents of the principal.
Agents (Agent:  A person authorized to act for or to represent another, usually referred to as the principal.)
have a duty (responsibility) to act in the best interests of the principal. In
this instance, the agent would be the general manager, and the principal would be
John and his restaurant business. In general, a contract is used to specify the specific
terms of a principal - agent relationship.
In many cases, the distinction between the agent - principal relationship and
the master - servant may be quite blurred. As empowerment becomes more widespread
in hospitality workplaces, this distinction may fade altogether. Servants who
are given more discretion and more authority will be more frequently categorized
as agents. The distinction becomes important when you are trying to assess the
responsibility of the employer for the acts of the employee. For example, assume
that a restaurant customer becomes violently ill from food poisoning that is later
linked to unsanitary practices by a kitchen employee in John ’ s restaurant. In a
master - servant relationship, John would be held legally responsible for the guest ’ s
injuries under the concept of respondeat superior . (Respondeat superior: Literally; “let the master respond,” a legal theory that holds the employer (master) responsible for the acts of the employee. )
However, it would be very rare
for a court to hold John responsible if that same kitchen employee made, with third
parties, any significant contracts or promises on behalf of the restaurant.
In this example, the servant in the master - servant relationship does not
have the ability to speak on behalf of John or the restaurant. However, in the
agent - principal relationship, the principal is ordinarily responsible for the behavior
of the agent, as well as for any significant or even insignificant promises or obligations
undertaken by the agent on behalf of John or the restaurant. Thus, if the
general manager of the restaurant (the agent) enters into a long - term contract to
purchase meat from a particular purveyor, John and the restaurant will be responsible
for fulfilling the obligations undertaken by the contract (assuming that the
contract is in proper form, as discussed in following thread , “ Business Contracts. ”
Because principles are held responsible for the actions of their agents, agents
have a fiduciary responsibility (Fiduciary responsibility: The requirement that agents act in the best interest of their principals.)
to act in the best interest of their principals.
The duties of an agent generally include the following:
1. Utmost care : The agent is bound to a very high standard to ensure the maximum
protection of the principal ’ s interest.
2. Integrity : The agent must act with fidelity and honesty.
3. “ Honesty and duty of full disclosure “ : Honest and full disclosure of all facts that
could influence in any way the principal ’ s decisions, actions, or willingness
to follow the advice of the agent.
4. Loyalty : An obligation to refrain from acquiring any interest adverse to that
of a principal without full and complete disclosure of all material facts and
obtaining the principal ’ s informed consent. This precludes the agent from
personally benefiting from secret profits, competing with the principal or
obtaining an advantage from the agency for personal benefit of any kind.
5. Duty of good faith : Includes total truthfulness, absolute integrity, and total
fidelity to the principal ’ s interest.
Because of the master - servant and agent - principle relationships, it is very
important that hospitality operators carefully select and train their employees. If
you, as a hospitality owner or manager, are responsible for selecting employees who
will represent or make decisions on behalf of your operation, you must trust the
decision - making capability of those individuals, as well as their integrity to act in
the best interests of the operation when they are making decisions and/or entering
into contracts.
In other threads , “ Legally Selecting Employees, ” and  , “ Legally Managing
Employees, ” you will learn how to properly select and manage employees under current
federal and state employment laws, and see some ways that you can minimize
the risk of liability by using effective employee selection and training techniques.
Back to John. From time to time, he may also need to hire individuals or other
companies to come in and perform specialized tasks that are outside the day - to - day
operations of his restaurant. For instance, he may need to repaint the exterior walls
of the building that houses the restaurant. John could hire an individual painter or
a company that provides painting services. This type of relationship would involve
an independent contractor relationship.

ANALYZE THE SITUATION- Mini Case Study

THE GREAT FOX WATER PARK AND RESORT, located in the Wisconsin Dells area of
Wisconsin has received an invoice from Lion Distributing of Reisterstown,
Maryland. The invoice is for 10 cases of pool chemicals delivered to the resort
two weeks ago. The invoice states Mr. Mark Bell, the resort’s head lifeguard,
ordered the chemicals. The price on the invoice is three times the normal price
paid for chemicals of this type (which are normally purchased from a local
vendor).
When questioned by the hotel’s accounting office about the purchase,
Mr. Bell states that all he recalls is that he was working one day and received a
telephone call in which the caller asked for the “right” shipping address for the
resort. The confirmation of address was needed the caller maintained, because
an office mix up had resulted in some shipments of products purchased by
its customers being misdelivered. Mr. Bell provided the caller with the hotel’s
correct shipping address.
Despite the obvious overcharge, the vendor refuses to accept the shipment
back, claiming Mr. Bell, as an agent of the resort, had authorized the purchase of
the chemicals. The vendor threatens a lawsuit if their invoice is not paid. Upon
investigation, it is determined that one of the 10 cases of product has, at this
time, already been used.
1 . Assume that Mr. Bell did not ordinarily purchase pool chemicals for the
resort. Is the resort responsible for paying the invoice?
2. Assume that Mr. Bell did in fact ordinarily purchase pool chemicals for
the resort. Is the resort then responsible for paying the invoice?
3. What steps would you suggest that the resort’s owners take to prevent
being victimized by potential invoice frauds of this type?
Usually, employers are not liable for the behavior of independent contractors,
and independent contractors cannot ordinarily bind employers to obligations that
they have made. The general rule is that the more control that the worker retains,
the more likely that the worker will be characterized as an independent contractor.
Figure 3.4 displays some of the characteristics utilized by courts and government
agencies to help determine whether a specific relationship is one of an employer -
employee (master - servant) or that of an employer - independent contractor.
To illustrate the importance of understanding the differences in employer -
employee relationships, return to the previous lawn - mowing example. This time,
however, assume that John hired a lawn service company to care for the grass
around his restaurant. In this case, John ’ s relationship with the lawn service company
would be that of an employer - independent contractor. As a result, if an
employee of the lawn service company inflicted the same damage to a customer ’ s
car that was described earlier, it would be the lawn service, not John ’ s restaurant,
that would be liable for repairing the damages to the customer ’ s vehicle.
other threads examine the different types of circumstances under which
hospitality operations may be held liable in a court of law, and identify some preventive
measures that managers can take to minimize the risk of litigation. While we
strive throughout this book to emphasize managerial practices that will promote safe
and legal operations (and prevent the possibility of a lawsuit), accidents or misunderstandings
will invariably occur, and at those times, a well - chosen business structure
may provide the hospitality owner with a higher degree of protection against liability
than one that was poorly chosen.

Figure 3.4 Methods of assessing employer liability.

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3-24-2009 06:06

Figure 3.4 Methods of assessing employer liability.

[ by Frank at 3-24-2009 06:06 edited ]
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