Lesson 2
his week our legal emphasis is on Immigration and Labor Law.
You must read Chapter 22 (Immigration and Labor Law) in The Legal Environment of Business (10th
Ed.)
When discussing the Mandatory Assignments 22-3 and 22-7 in the Business Case Problems at the
end of the chapter, note the question asked at the end of the fact pattern. This is this issue you must
answer.
State the issue at the beginning of your discussion. Then discuss the facts. Apply the law from the
chapter to the facts to reach your opinion on the answer to the question. Keep in mind this is the law
portion of the course. Your discussion should not include ethical issues.
You can then discuss whether in your opinion government, through legislation and regulations has
responded appropriately to the issue discussed in the Business Case Problem questions. If you
believe there has been an appropriate response, how might it be improved? If not, should society’s
representatives respond with new laws or regulations and what, in brief, should they say?
The Immigration Control and Reform Act of 1986 (IRCA) makes it illegal to hire, recruit, or refer for a
fee someone not authorized to work in the U.S. Chapter 22 includes material on employer
verification of the status of a candidate for employment under IRCA using Form I-9. The chapter also
discuss I-551 Alien Registration Receipts; the H-1B Visa Program; Form ETA 9035 and H-2,O, L
and E Visas.
Section 22-2 Federal Labor Laws discusses the National Labor Relations Act of 1935 establishing
the right of employees to engage in collective bargaining and the right to strike.
Lesson 2 Objectives
The objective of Lesson 5 is to have you become acutely aware of the prohibitions imposed by
Federal law on hiring practices involving immigrants. Similarly, managers need to know the basic
parameters established by law for collective bargaining, even if their current employer is not
unionized.
•
Read Chapter 22 (Immigration and Labor Law) in The Legal Environment of Business, 10th Ed.
Discussion Topic
MANDATORY ASSIGNMENT — Answer the questions in 22.3 “Spotlight on VerizonCollective Bargaining” (p.490) and 22-7 “A Question of Ethics: Immigration Work Status”
(p.490) based on you reading. Post your answers on the Discussion.
used the template format
WGB 614-AO
USE THIS FOMAT FOR THE MANDATORY ASSIGNMENTS AT THE END OF EACH
CHAPTER – EXCEPT THE SANLU CASE IN LESSON 3
NAME:
LESSON (insert Lesson number) MANDATORY ASSIGNMENT: (insert mandatory
assignment(s) e.g. 21-2 Wrongful Discharge)
FACTS:
ISSUE: (THE QUESTION OR QUESTIONS PRESENTED FOR YOU TO ANSWER IN EACH OF THE
MANDATORY ASSIGNMENTS
DISCUSSION: (APPLY LAW TO FACTS)
CONCLUSION: (YOUR ANSWER TO THE QUESTION OR QUESTUONS PRESENTED AT THE END OF
EACH MANDATORY ASSIGNMENT)
SHOULD THE LAW BE AMENDED TO IMPROVE IT?
IF YES, HOW?
IS THE LAW SATISFACTORY?
IF YES, BRIEFLY EXPLAIN WHY YOU THINK IT IS SATISFACTORY
CHAPTER 18
Corporations
413
Reviewing: Corporations
David Brock was on the board of directors of Firm Body Fitness, Inc., which owned a string of fitness clubs in New
Mexico. Brock owned 15 percent of the Firm Body stock and was also employed as a tanning technician at one of the
fitness clubs. After the January financial report showed that Firm Body’s tanning division was operating at a substantial
net loss, the board of directors, led by Marty Levinson, discussed terminating the tanning operations. Brock successfully convinced a majority of the board that the tanning division was necessary to market the clubs’ overall fitness
package. By April, the tanning division’s financial losses had risen. The board hired a business analyst, who conducted
surveys and determined that the tanning operations did not significantly increase membership.
A shareholder, Diego Peñada, discovered that Brock owned stock in Sunglow, Inc., the company from which Firm
Body purchased its tanning equipment. Peñada notified Levinson, who privately reprimanded Brock. Shortly thereafter, Brock and Mandy Vail, who owned 37 percent of the Firm Body stock and also held shares of Sunglow, voted
to replace Levinson on the board of directors. Using the information presented in the chapter, answer the following
questions.
1. What duties did Brock, as a director, owe to Firm Body?
2. Does the fact that Brock owned shares in Sunglow establish a conflict of interest? Why or why not?
3. Suppose that Firm Body brought an action against Brock claiming that he had breached the duty of loyalty by not
disclosing his interest in Sunglow to the other directors. What theory might Brock use in his defense?
4. Now suppose that Firm Body did not bring an action against Brock. What type of lawsuit might Peñada be able to
bring based on these facts?
Debate This . . .
The sole shareholder of an S corporation should not be able to avoid liability for the torts of her or his
employees.
Terms and Concepts
alien corporation 389
articles of incorporation 394
benefit corporation 394
bond 396
business judgment rule 403
bylaws 395
close corporation 392
commingle 399
common stock 396
crowdfunding 397
dividends 389
domestic corporation 389
foreign corporation 389
holding company 389
inside director 401
outside director 401
pierce the corporate veil 399
preemptive rights 408
preferred stock 396
private equity capital 397
proxy 406
public corporation 391
publicly held corporation 391
quorum 401
retained earnings 389
S corporation 393
securities 396
shareholder agreement 393
shareholder’s derivative suit 410
stock 396
stock certificate 408
stock warrant 408
ultra vires 398
venture capital 397
voting trust 407
watered stock 410
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414
U N I T F OU R
The Business and Employment Environment
Issue Spotters
1. Northwest Brands, Inc., is a small business incorpo-
rated in Minnesota. Its one class of stock is owned by
twelve members of a single family. Ordinarily, corporate
income is taxed at the corporate and shareholder levels. Is there a way for Northwest Brands to avoid this
double taxation? Explain your answer. (See Nature and
Classification.)
2. Nico is Omega Corporation’s majority shareholder. He
owns enough stock in Omega that if he were to sell it,
the sale would be a transfer of control of the firm. Discuss whether Nico owes a duty to Omega or the minority
shareholders in selling his shares. (See Shareholders.)
• Check your answers to the Issue Spotters against the
answers provided in Appendix D at the end of this text.
Business Scenarios
18–1. Preincorporation. Cummings, Okawa, and Taft are
recent college graduates who want to form a corporation to
manufacture and sell digital tablets. Peterson tells them he will
set in motion the formation of their corporation. First, Peterson makes a contract with Owens for the purchase of a piece
of land for $20,000. Owens does not know of the prospective
corporate formation at the time the contract is signed. Second,
Peterson makes a contract with Babcock to build a small plant
on the property being purchased. Babcock’s contract is conditional on the corporation’s formation. Peterson secures all
necessary subscription agreements and capitalization, and he
files the articles of incorporation. (See Formation and Powers.)
(a) Discuss whether the newly formed corporation, Peterson, or
both are liable on the contracts with Owens and Babcock.
(b) Discuss whether the corporation is automatically liable to
Babcock on formation.
18–2. Conflicts of Interest. Oxy Corp. is negotiating
with Wick Construction Co. for the renovation of Oxy’s corporate headquarters. Wick, the owner of Wick Construction
Co., is also one of the five members of Oxy’s board of directors. The contract terms are standard for this type of contract.
Wick has previously informed two of the other directors of his
interest in the construction company. Oxy’s board approves
the contract by a three-to-two vote, with Wick voting with
the majority. Discuss whether this contract is binding on the
corporation. (See Directors and Officers.)
Business Case Problems
18–3. Spotlight on Smart Inventions—Piercing the
Corporate Veil. Thomas Persson and Jon Nokes founded
Smart Inventions, Inc., to market household consumer products. The success of their first product,
the Smart Mop, continued with later products,
which were sold through infomercials and other
means. Persson and Nokes were the firm’s officers and equal
shareholders. Persson was responsible for product development, and Nokes was in charge of day-to-day operations. In
time, they became dissatisfied with each other’s efforts. Nokes
represented the firm as financially “dying,” “in a grim state,
. . . worse than ever,” and offered to buy all of Persson’s shares
for $1.6 million. Persson accepted.
On the day that they signed the agreement to transfer the
shares, Smart Inventions began marketing a new product—
the Tap Light. It was an instant success, generating millions
of dollars in revenues. In negotiating with Persson, Nokes
had intentionally kept the Tap Light a secret. Persson sued
Smart Inventions, asserting fraud and other claims. Under
what principle might Smart Inventions be liable for Nokes’s
fraud? Is Smart Inventions liable in this case? Explain. [Persson v. Smart Inventions, Inc., 125 Cal.App.4th 1141, 23 Cal.
Rptr.3d 335 (2 Dist. 2005)] (See Piercing the Corporate Veil.)
18–4. Duty of Loyalty. Kids International Corp. produced
children’s wear for Walmart and other retailers. Gila Dweck
was a Kids director and its chief executive officer. Because she
felt that she was not paid enough, she started Success Apparel
to compete with Kids. Success operated out of Kids’ premises,
used its employees, borrowed on its credit, took advantage
of its business opportunities, and capitalized on its customer
relationships. As an “administrative fee,” Dweck paid Kids
1 percent of Success’s total sales. Did Dweck breach any fiduciary duties? Explain. [Dweck v. Nasser, 2012 WL 3194069
(Del.Ch. 2012)] (See Directors and Off
Officers.)
18–5. Business Case Problem with Sample Answer—
Piercing the Corporate Veil. Scott Snapp contracted with
Castlebrook Builders, Inc., which was owned by
Stephen Kappeler, to remodel a house. Kappeler
estimated that the remodeling would cost around
$500,000. Eventually, however, Snapp paid Kappeler more than $1.3 million. Snapp filed a suit in an Ohio
state court against Castlebrook, alleging breach of contract
and fraud, among other things. During the trial, it was
revealed that Castlebrook had issued no shares of stock and
that personal and corporate funds had been commingled. The
minutes of the corporate meetings all looked exactly the same.
In addition, Kappeler could not provide an accounting for the
Snapp project. In particular, he could not explain evidence of
double and triple billing nor demonstrate that the amount
Snapp paid had actually been spent on the remodeling project.
Copyright 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-203
CHAPTER 18
Are these sufficient grounds to pierce the corporate veil?
Explain. [Snapp v. Castlebrook Builders, Inc., 2014 -Ohio- 163,
7 N.E.3d 574 (2014)] (See Formation and Powers.)
• For a sample answer to Problem 18–5, go to Appendix E at
the end of this text.
18–6. Business Judgment Rule. Country Contractors,
Inc., contracted to provide excavation services for A Westside Storage of Indianapolis, Inc., but did not complete the
job and later filed for bankruptcy. Stephen Songer and Jahn
Songer were Country’s sole shareholders. The Songers had
not misused the corporate form to engage in fraud. The firm
had not been undercapitalized, personal and corporate funds
had not been commingled, and Country had kept accounting records and minutes of its annual board meetings. Are the
Songers personally liable for Country’s failure to complete its
contract? Explain. [Country Contractors, Inc. v. A Westside Storage of Indianapolis, Inc., 4 N.E.3d 677 (Ind.App. 2014)] (See
Directors and Off
Officers.)
18–7. Torts. Jennifer Hoffman took her cell phone to a store
owned by R&K Trading, Inc., for repairs. Later, Hoffman filed
a suit in a New York state court against R&K, Verizon Wireless, Inc., and others. Hoffman sought to recover damages for
a variety of torts, including infliction of emotional distress and
negligent hiring and supervision. She alleged that an R&K
employee, Keith Press, had examined her phone in a back
room, accessed private photos of her stored on her phone, and
disseminated the photos to the public. Hoffman testified that
“after the incident, she learned from another R&K employee
that personal information and pictures had been removed
from the phones of other customers.” Can R&K be held liable
for the torts of its employees? Explain. [Hoffman v. Verizon
Wireless, Inc., 5 N.Y.S.3d 123, 125 A.D.3d 806 (2015)] (See
Nature and Classification.)
18–8. Rights of Shareholders. FCR Realty, LLC, and
Clifford B. Green & Sons, Inc., were co-owned by three
brothers—Frederick, Clifford Jr., and Richard Green. Each
brother was a shareholder of the corporation. Frederick was
Corporations
415
a controlling shareholder, as well as president. Each brother
owned a one-third interest in the LLC. Clifford believed that
Frederick had misused LLC and corporate funds to pay nonexistent debts and liabilities and had diverted LLC assets to
the corporation. He also contended that Frederick had disbursed about $1.8 million in corporate funds to Frederick’s
own separate business. Clifford hired an attorney and filed
an action on behalf of the two companies against Frederick
for breach of fiduciary duty. Frederick argued that Clifford
lacked the knowledge necessary to adequately represent the
companies’ interest because he did not understand financial
statements. Can Clifford maintain the action against Frederick? If so, and if the suit is successful, who recovers the damages? Explain. [FCR Realty, LLC v. Green, __ Conn.Supp. __,
__ Conn.L.Rptr. __, 2016 WL 571449 (Super. 2016)] (See
Shareholders.)
18–9. A Question of Ethics—Piercing the Corporate
Veil. In New York City, 2406-12 Amsterdam Associates LLC
brought an action in a New York state court against
Alianza Dominicana and Alianza LLC to recover
unpaid rent. The plaintiff asserted cause to pierce
the corporate veil, alleging that Alianza Dominicana had made promises to pay its rent while discreetly forming
Alianza LLC to avoid liability for it. According to 2406-12,
Alianza LLC was 90 percent owned by Alianza Dominicana,
had no employees, and had no function but to hold Alianza
Dominicana’s assets away from its creditors. The defendants
filed a motion to dismiss the plaintiff’s claim. [2406-12
[
Amsterdam Associates, LLC v. Alianza, LLC, 136 A.D.3d
512, 25 N.Y.S.2d 167 (1 Dept. 2016)] (See Piercing the Corporate Veil
Veil.)
(a) Assuming that 2406-12’s allegations are true, are there
sufficient grounds to pierce Alianza LLC’s corporate veil?
Discuss.
(b) Suppose that the parties to this dispute were small, close
corporations. How might that circumstance affect the
result in this case?
Legal Reasoning Group Activity
18–10. Corporate versus LLC Form of Business. The
limited liability company (LLC) may be the best organizational form for most businesses. For a significant number of firms, however, the corporate form or some other
form of organization may be better. (See Nature and
Classification.)
(a) The first group will outline several reasons why a firm
might be better off as a corporation than as an LLC.
(b) The second group will discuss the differences between
corporations and LLCs in terms of their management
structures.
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C H A P T E R 19
Agency Relationships
O
ne of the most common, important, and pervasive legal relationships is that of agency. In
an agency relationship involving two
parties, one of the parties, called the
agent, agrees to represent or act for
the other, called the principal. The
principal has the right to control the
agent’s conduct in matters entrusted
to the agent.
Agency relationships are crucial in
the business world. By using agents,
a principal can conduct multiple
business operations at the same time
in different locations. Indeed, the only
way that certain business entities can
function is through their agents. For
instance, a corporate officer is an
agent who serves in a representative
capacity for the corporation. The officer has the authority to bind the corporation to a contract. Only through
its officers can corporations enter into
contracts.
Most employees are also considered to be agents of their employers.
19–1 Agency Law
Section 1(1) of the Restatement (Third) of Agency1 defines
agency as “the fiduciary relation [that] results from the
manifestation of consent by one person to another that
the other shall act in his [or her] behalf and subject to his
[or her] control, and consent by the other so to act.” In
other words, in a principal-agent relationship, the parties
have agreed that the agent will act on behalf and instead
of the principal in negotiating and transacting business
with third parties.
The term fiduciary is at the heart of agency law.
When this term is used as a noun, it refers to a person
having a duty created by his or her undertaking to act
primarily for another’s benefit in matters connected with
the undertaking. When used as an adjective, as in the
phrase fiduciary relationship, it means that the relationship involves trust and confidence.
Agency relationships commonly exist between employers and employees. Agency relationships may sometimes
1. The Restatement (Third) of Agency is an authoritative summary of the
law of agency and is often referred to by judges in their decisions and
opinions.
416
Today, however, the United States is
experiencing a trend toward a socalled gig economy, which centers
on short-term, independent workers
who are not employees. Companies
like Uber and Lyft (discussed in this
chapter’s feature) provide evidence
of this trend. This type of on-demand
employment raises questions related
to agency, making agency an increasingly important topic for students of
business law and the legal environment to understand.
also exist between employers and independent contractors who are hired to perform special tasks or services.
19–1a Employer-Employee Relationships
Normally, all employees who deal with third parties are
deemed to be agents. A salesperson in a department store,
for instance, is an agent of the store’s owner (the principal) and acts on the owner’s behalf. Any sale of goods
made by the salesperson to a customer is binding on the
principal. Similarly, most representations of fact made by
the salesperson with respect to the goods sold are binding
on the principal.
Because employees who deal with third parties generally are deemed to be agents of their employers, agency
law and employment law overlap considerably. Agency
relationships, however, can exist outside an employeremployee relationship, so agency law has a broader reach
than employment law. Additionally, agency law is based
on the common law, whereas much employment law is
statutory law.
Employment laws (state and federal) apply only to
the employer-employee relationship. Statutes governing
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CHAPTER 19
Social Security, withholding taxes, workers’ compensation, unemployment compensation, workplace safety,
and employment discrimination apply only if an
employer-employee relationship exists. These laws do not
apply to independent contractors.
19–1b Employer–Independent
Contractor Relationships
Independent contractors are not employees because, by
definition, those who hire them have no control over
the details of their work performance. Section 2 of the
Restatement (Third) of Agency defines an independent
contractor as follows:
[An independent contractor is] a person who contracts
with another to do something for him [or her] but who
is not controlled by the other nor subject to the other’s
right to control with respect to his [or her] physical conduct in the performance of the undertaking. He [or she]
may or may not be an agent.
Building contractors and subcontractors are independent contractors. A property owner who hires a contractor and subcontractors to complete a project does not
control the details of the way they perform their work.
Truck drivers who own their vehicles and hire out on a
per-job basis are independent contractors, but truck drivers who drive company trucks on a regular basis usually
are employees. See this chapter’s Ethics Today feature for a
discussion of disputes involving the classification of drivers working for Uber and Lyft.
The relationship between a principal and an independent contractor may or may not involve an agency
relationship. To illustrate: A homeowner who hires a real
estate broker to sell her house has contracted with an
independent contractor (the broker). The homeowner
has also established an agency relationship with the broker
for the specific purpose of selling the property. Another
example is an insurance agent, who is both an independent contractor and an agent of the insurance company
for which he sells policies. (Note that an insurance broker,
in contrast, normally is an agent of the person obtaining
insurance and not of the insurance company.)
19–1c Determination of Employee Status
The courts are frequently asked to determine whether
a particular worker is an employee or an independent
contractor. How a court decides this issue can have a significant effect on the rights and liabilities of the parties.
Agency Relationships
417
Employers are required to pay certain taxes, such as Social
Security and unemployment taxes, for employees but not
for independent contractors. Therefore, workers may benefit from obtaining employee status in some situations.
Criteria Used by the Courts In deciding whether a
worker is categorized as an employee or an independent
contractor, courts often consider the following questions:
1. How much control does the employer exercise over the
2.
3.
4.
5.
6.
7.
details of the work? If the employer exercises considerable control over the details of the work and the
day-to-day activities of the worker, this indicates
employee status. This is perhaps the most important factor weighed by the courts in determining
employee status.
Is the worker engaged in an occupation or business distinct from that of the employer? If so, this points to
independent-contractor, not employee, status.
Is the work usually done under the employer’s direction
or by a specialist without supervision? If the work is
usually done under the employer’s direction, this
indicates employee status.
Does the employer supply the tools at the place of work?
If so, this indicates employee status.
For how long is the person employed? If the person is
employed for a long period of time, this indicates
employee status.
What is the method of payment—by time period or at
the completion of the job? Payment by time period,
such as once every two weeks or once a month, indicates employee status.
What degree of skill is required of the worker? If a great
degree of skill is required, this may indicate that the
person is an independent contractor hired for a specialized job and not an employee.
Whether a worker is an employee or an independent contractor can affect the employer’s liability for the
worker’s actions. An employer normally is not responsible for the actions of an independent contractor. ■ CASE
IN POINT 19.1 Terence Pershad was a tow truck driver
for Five Star Auto Service. Five Star had contracted to
perform towing and auto repair services for AAA North
Jersey, Inc. After one of its customers was involved in a
car accident, AAA called Five Star for assistance, and Five
Star sent a truck driven by Pershad. Pershad got into a
fight with Nicholas Coker, a passenger in the car, and
assaulted Coker with a knife.
Coker filed a suit in a New Jersey state court against
Pershad, Five Star, and AAA. The court determined that
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418
U N I T F OUR
ETHICS
TODAY
The Business and Employment Environment
Is It Fair to Classify Uber and
Lyft Drivers as Independent Contractors?
The transportation-for-hire world has changed
dramatically since Uber, Lyft, and other
transportation-sharing companies came onto
the scene. Uber started in San Francisco in
2009. Today, its services are available in one
form or another in about 60 countries and
more than 300 cities worldwide. Its main
competitor, Lyft, was launched in 2012 and
operates in more than 200 U.S. cities. The growth in
transportation sharing has not been without its setbacks, though. Most of them involve laws that have
prohibited Uber and Lyft from operating in certain
cities, as well as lawsuits by drivers claiming that they
were misclassified.
Classification of Workers
Workers in the United States generally fall into two
categories: employees and independent contractors.
Employment laws, including minimum wage and antidiscrimination statutes, cover employees. Such laws
do not cover most independent contractors. Enter
the digital age of on-demand workers who obtain job
assignments via apps.
Workers for Lyft, Uber, and similar companies
choose when and where they will perform their duties.
They do not choose how much they will be paid,
however. For them, employment is a take-it-or-leave-it
proposition. They electronically accept the platform
terms of the apps, or they obtain no work assignments.
Some critics of this contractual system argue that
there should be a new category of workers with
“dependent-contractor” status who receive some of the
protections traditionally given only to employees. Certain aspects of current labor law would be attached to
the relationships between dependent contractors and
their employers.
Worker Misclassification Lawsuits
A number of former or current Uber and Lyft drivers have pursued legal remedies to change their
job classification and to obtain better benefits. In
California, for instance, two federal court judges
allowed separate lawsuits to go before juries on the
Pershad was Five Star’s employee and that Five Star was an
independent contractor, not AAA’s employee. Therefore,
AAA was not liable (and Five Star was, so it entered into
a settlement agreement with Coker). Coker appealed,
but a state intermediate appellate court affirmed. AAA
could not be held liable for the actions of Five Star, its
question of whether on-demand drivers
should be considered employees rather than
independent contractors.a
In a similar case, rather than go to court,
Lyft settled a worker misclassification lawsuit
for $12.25 million. The suit, which was settled
in 2016, had been brought in 2013. The
settlement did not achieve a reclassification
of Lyft drivers as employees. Basically, Lyft agreed to
change its terms of service to conform to California’s
independent contractor status regulations. For instance,
the company can no longer deactivate drivers’
accounts without reason and without warning the drivers. Drivers have to be given a fair hearing first. Even
though the lawsuit and the agreement were California
based, the new terms of service will apply to all Lyft’s
drivers nationwide.
Competitors Sue Uber
In many cities, competitors, especially taxi drivers,
have sued Uber. These lawsuits have involved claims of
unfair competition, lack of minimum wages, and unsafe
vehicles. A taxi driver sued Uber in northern California,
for instance, but a federal district court ruled in favor of
Uber’s request for summary judgment.b
Another suit was brought in Pennsylvania. In this
one, Checker Cab of Philadelphia claimed that Uber
was violating Pennsylvania’s unfair competition law.
Checker Cab sought a preliminary injunction to prevent Uber from taking away its customers. The federal
district court refused to grant an injunction, however,
because Checker Cab failed to show irreparable harm.
That decision was upheld on appeal.c
Critical Thinking What choices do disgruntled Uber and
Lyft drivers have?
a. Cotter v. Lyft, Inc., 60 F.Supp.3d 1067 (N.D.Cal. 2015); O’Connor v.
Uber Technologies, Inc., et al., Case No. C-13-3826 EMC (N.D.Cal.
2015).
b. Rosen v. Uber Technologies, Inc., __ F.Supp.3d __, 2016 WL 704078
(N.D.Cal. 2016).
c. Checker Cab of Philadelphia v. Uber Technologies, Inc., __ Fed.Appx.
__, 2016 WL 929310 (3d Cir. 2016).
independent contractor, because “AAA did not control
the manner and means of Five Star’s work.”2 ■
Criteria Used by the IRS The Internal Revenue Service (IRS) has established its own criteria for determining
2. Coker v. Pershad
Pershad, 2013 WL 1296271 (N.J.Sup.Ct. 2013).
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CHAPTER 19
whether a worker is an independent contractor or an
employee. The most important factor is the degree of
control the business exercises over the worker.
The IRS tends to closely scrutinize a firm’s classification of its workers because, as mentioned, employers can
avoid certain tax liabilities by hiring independent contractors instead of employees. Even when a firm has classified a
worker as an independent contractor, the IRS may decide
that the worker is actually an employee. If the IRS decides
that an employee is misclassified, the employer will be
responsible for paying any applicable Social Security, withholding, and unemployment taxes due for that employee.
Employee Status and “Works for Hire” Ordinarily, a person who creates a copyrighted work is the owner
of it—unless it is a “work for hire.” Under the Copyright
Act, any copyrighted work created by an employee within
the scope of her or his employment at the request of the
employer is a “work for hire.” The employer owns the
copyright to the work.
In contrast, when an employer hires an independent
contractor—such as a freelance artist, writer, or computer programmer—the independent contractor normally owns the copyright. An exception is made if the
parties agree in writing that the work is a “work for hire”
and the work falls into one of nine specific categories.
The nine categories include audiovisual works, collective
works (such as magazines), motion pictures, textbooks,
tests, and translations.
■ CASE IN POINT 19.2 As a freelance contractor, Brian
Cooley created two sculptures of dinosaur eggs for the
National Geographic Society for use in connection with
an article in its magazine, National Geographic. Cooley
spent hundreds of hours researching, designing, and
constructing the sculptures. National Geographic hired
Louis Psihoyos to photograph Cooley’s sculptures for
the article. Cooley and Psihoyos had separate contracts
with National Geographic in which each transferred the
copyrights in their works to National Geographic for a
limited time.
The rights to the works were returned to the artists
at different times after publication. Psihoyos then began
licensing his photographs of Cooley’s sculptures to third
parties in return for royalties. He digitized the photographs and licensed them to various online stock photography companies, and they appeared in several books
published by Penguin Group. Cooley sued Psihoyos for
copyright infringement.
Psihoyos argued that he owned the photos and could
license them however he saw fit, but a federal district
court disagreed. The court found that Psihoyos did not
have an unrestricted right to use and license the photos.
Agency Relationships
419
When Psihoyos reproduced an image of a Cooley sculpture, he reproduced the sculpture, which infringed on
Cooley’s copyright. Therefore, the court granted a summary judgment to Cooley.3 ■
19–2 Formation of the
Agency Relationship
Agency relationships normally are consensual. They come
about by voluntary consent and agreement between the
parties. Normally, the agreement need not be in writing,
and consideration is not required.
A person must have contractual capacity to be a principal.4 The idea is that those who cannot legally enter
into contracts directly should not be allowed to do so
indirectly through an agent. Any person can be an agent,
however, regardless of whether he or she has the capacity
to contract (including minors).
An agency relationship can be created for any legal
purpose. An agency relationship created for a purpose
th