Types of Legal Relationships

An agency relationship is a special type of legal relationship between persons or corporations. The law recognizes three types of business relationships: the employee/employer relationship, the agency relationship, and the independent contractor relationship. The closest of these is the employee/employer relationship. As noted earlier, the employer is legally liable for almost all actions of the employee. The existence of the relationship is characterized by the payment of set wages, the withholding of taxes, and the ability of the employer to direct the details of the employee's work (within the constraints previously discussed). Normally, nurses, orderlies, maintenance personnel, and administrators are employees of the hospital.

Agents are persons (or, more rarely, corporations) who have a business relationship with the hospital or clinic but who have more freedom of action than an employee. Agents are usually paid on a commission or piecework basis. Taxes are not withheld, and there is no contract of employment between the hospital and the agent. Instead, there is an agency agreement (either explicit of implied) that describes the work to be performed, the authority of the agent, and the rate of pay. In this relationship, the hospital would be the principal. The legal liability of a principal is much more limited than the liability of an employer.

The principal is held liable for the actions of the agent that are directly related to the duties that the agent performs for the principal. For example, the hospital could hire an employment agency to find physicians who would be interested in moving to the community and becoming members of the medical staff. The agreement would be for the agency to contact prospects and refer them to the hospital. The hospital could then process their application and decide which of the applicants were qualified for medical staff membership. The agency would not be given the right to admit prospects to the medical staff. A problem would arise if the agency promised medical staff privileges to a physician who then moved to the community because of the promise. If the physician were then denied medical staff privileges, that physician would be damaged to the amount lost in moving to the community.

In this case, who could the physician sue? The hospital did not empower the employment agency to promise staff privileges to physicians interested in moving to the community. The agency thus exceeded its authority in making the offer of staff privileges. Since the agency exceeded its authority, only it, not the hospital would be liable for the physician's damages. In contrast, if a hospital administrator (employee) made the promise without proper authority, the hospital would be liable for the damages.

The weakest type of relationship is that with an independent contractor. Independent contractors are persons or corporations that are paid to do whatever is necessary to perform a specific task. The institution that hires an independent contractor has no right to oversee the details of the contractor's work. The institution merely specifies the job to be performed, and the contractor hires the necessary personnel and directs their work. In an independent contractor relationship, the institution is liable for the actions of the contractor only if it was negligent in selecting the contractor. For example, a hospital might hire a builder to renovate a wing of the outpatient department. If a patient is injured through the acts of the builder, the hospital would be liable for the patient's injuries only if it was negligent in selecting the builder or in ensuring that the patient was properly warned of the danger.

While the three types of business relationship are legally distinct, the assignment of personnel to the appropriate class is difficult. Employees are the easiest to sort out because of their tax status. Someone who is treated as an employee for tax purposes will usually be considered an employee for liability purposes. It is possible, however, not to be an employee for tax purposes and still be an employee for liability purposes. The legal test of employment, irrespective of a person's tax status, is the degree of control that the employer can exercise over the person's work. If the employer is responsible for supervising and directing the details of the person's work, that person will be considered an employee for liability purposes.

Outside of classic business transactions (such as that with an employment agent), the distinction between the agency relationship and the employment relationship is usually very uncertain. A person who is considered an agent for the delivery of medical care will have such broad authority that the principal (the hospital) will seldom be able to escape liability by asserting that the agency acted beyond a delegated authority.