What is the difference between principal and agent

You could spend your time answering phones and taking customer questions. However, there are probably better things you could do with your time, and these tasks might not fit your skillset. By assigning these tasks to others, you're being efficient with your time. A principal-agent relationship usually starts with a contract that clearly outlines the duties and responsibilities of both parties.

Some common examples of an agency contract are a power of attorney form or a contract with a realtor to sell a building your business owns.

Anyone can be a principal or an agent, but sometimes it's tricky to determine whether a principal-agent relationship has been formed. In ambiguous situations that spark disagreement, a court may have to step in and decide if the principal-agent relationship exists. Such a ruling—in the absence of a clear contract—would be based on the behavior of the two parties.

Someone can assume you have made a person your agent, even if there is no contract. Businesses must avoid the appearance of agency in their dealings. For example, if your employee buys something for your business after the employee was fired, your business could still be on the hook for the purchase, depending on how clear you were with the employee about their termination.

An agent can take on a lot of responsibilities, both in terms of your business and yourself as an individual. However, the law doesn't allow agents to do everything for you. You can't hire an agent to vote for you. You have to sign your will—you can't have an agent do that. An agent can't make a statement for you under oath. Certain individuals can be considered essential to a personal service, and those individuals can't hire an agent to perform that service on their behalf.

For example, a famous singer can't hire someone else to go perform at a venue in their place if their contract with the venue specifically asks for the famous singer to perform. The two most common types of principal-agent relationships in business are internal and external. Many businesses use a mix of both internal and external agents. Employees are perhaps the best example of an internal agent.

The relationship between the principal and the agent is called the "agency," and the law of agency establishes guidelines for such a relationship. A principal-agent relationship is often defined in formal terms described in a contract. For example, when an investor buys shares of an index fund, he is the principal, and the fund manager becomes his agent. As an agent, the index fund manager must manage the fund, which consists of many principals' assets, in a way that will maximize returns for a given level of risk in accordance with the fund's prospectus.

Agents have an obligation to perform tasks with a certain level of skill and care and may not intentionally or negligently complete the task in an improper manner. The principal-agent relationship can be entered into by any willing and able parties for the purpose of any legal transaction.

In simple cases, the principal within the relationship is a sole individual who assigns an agent to carry out a task; however, other relationships under this guise have a principal that is a corporation, a nonprofit organization, a government agency or a partnership. The agent is most often an individual capable of understanding and ultimately carrying out the task assigned by the principal.

Common examples of the principal-agent relationship include hiring a contractor to complete a repair on a home, retaining an attorney to perform legal work, or asking an investment advisor to diversify a portfolio of stocks.

In each scenario, the principal is the individual seeking out the service or advice of a professional, while the agent is the professional performing the work. Whether the principal-agent relationship is expressed clearly through a written contract or is implied through actions, the principal-agent relationship creates a fiduciary relationship between the parties involved.

This means the agent acting on behalf of the principal must carry out the assigned tasks with the principal's best interest as a priority. The agent is responsible for completing tasks given by the principal so long as the principal provides reasonable instruction.

Additionally, the agent has an obligation to perform tasks that will not intentionally harm the principal. A duty of loyalty is also implied within the principal-agent relationship, which requires the agent to refrain from putting himself in a position that creates or encourages conflict between his interest and the interest of the principal, also known as the principal-agent problem.

Business Leaders. Business Essentials. Estate Planning. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. A familiar form of indemnity is the employee expense account. Andy, who works in a dynamite factory, negligently stores dynamite in the wrong shed. Andy warns his fellow employee Bill that he has done so. Bill lights up a cigarette near the shed anyway, a spark lands on the ground, the dynamite explodes, and Bill is injured.

May Bill sue his employer to recover damages? At common law, the answer would be no—three times no. Hence even if the dynamite had been negligently stored by the employer rather than by a fellow employee, the claim would have been dismissed.

The three common-law rules just mentioned ignited intense public fury by the turn of the twentieth century. In large numbers of cases, workers who were mutilated or killed on the job found themselves and their families without recompense.

The employee gives up the right to sue the employer and, in some states, other employees and receives in exchange predetermined compensation for a job-related injury, regardless of who caused it. This trade-off was felt to be equitable to employer and employee: the employee loses the right to seek damages for pain and suffering—which can be a sizable portion of any jury award—but in return he can avoid the time-consuming and uncertain judicial process and assure himself that his medical costs and a portion of his salary will be paid—and paid promptly.

The employer must pay for all injuries, even those for which he is blameless, but in return he avoids the risk of losing a big lawsuit, can calculate his costs actuarially, and can spread the risks through insurance.

They also provide for payment of lost wages and death benefits. Even an employee who is able to work may be eligible to receive compensation for specific injuries. Part of the table of benefits for specific injuries under the Kansas statute is shown in Note Compensation for certain permanent partial disabilities; schedule.

If there is an award of permanent disability as a result of the injury there shall be a presumption that disability existed immediately after the injury and compensation is to be paid for not to exceed the number of weeks allowed in the following schedule:. The loss of the first phalange and any part of the second phalange of a thumb which includes the loss of any part of the bone of such second phalange, shall be considered to be equal to the loss of the entire thumb.

The loss of the first and second phalanges and any part of the third proximal phalange of any finger, shall be considered as the loss of the entire finger. Amputation through the joint shall be considered a loss to the next higher schedule. The injured worker is typically entitled to two-thirds his or her average pay, not to exceed some specified maximum, for two hundred weeks.

If the loss is partial like partial loss of sight , the recovery is decreased by the percentage still usable. In those states the employer may decline to participate, in which event the employee must seek redress in court. Those frequently excluded are farm and domestic laborers and public employees; public employees, federal workers, and railroad and shipboard workers are covered under different but similar laws.

The trend has been to include more and more classes of workers. Approximately half the states now provide coverage for household workers, although the threshold of coverage varies widely from state to state. Some use an earnings test; other states impose an hours threshold.

People who fall within the domestic category include maids, baby-sitters, gardeners, and handymen but generally not plumbers, electricians, and other independent contractors. The answer is that there are certain exceptions to the ban: for instance, a worker may sue if the employer deliberately injures an employee.

The third method is to self-insure. The laws specify conditions under which companies may resort to self-insurance, and generally only the largest corporations qualify to do so. The amount the employer has to pay for the insurance depends on the number and seriousness of claims made—how dangerous the work is.

The employer therefore has reason to assert the injured employee is not eligible for compensation. Recurring legal issues include the following:. The agent owes the principal two categories of duties: fiduciary and general. The fiduciary duty is the duty to act always in the interest of the principal; the duty here includes that to avoid self-dealing and to preserve confidential information.

The general duty owed by the agent encompasses the sorts of obligations any employee might have: the duty of skill and care, of good conduct, to keep and render accounts, to not attempt the impossible or impracticable, to obey, and to give information.

The principal owes the agent duties too. These may be categorized as contract and tort duties. These require the employer to provide no-fault insurance coverage for any injury sustained by the employee on the job. A number of recurring legal issues arise: Is the injury work related?

Is the injured person an employee? Skip to main content.