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Liability for the negligence of others: a new standard?

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in Compensation and Benefits,Human Resources

Employers often ask: “Will I be liable if one of my independent contractors injures someone?” The short answer is, “It depends.” A recent case from the North Carolina Court of Appeals adds new considerations to the long answer.

First, the basics

Employers have relatively high potential liability for the acts of their employees, particularly negligent conduct. Employers may be liable when the employee’s conduct (1) has been expressly authorized, (2) is subsequently ratified by the employer or (3) is committed within the scope of the employment and in furtherance of the employer’s business.

Generally, a person or organization employing an independent contractor isn’t liable for the contractor’s negligence unless the employer seeks to control how the contractor performs its work. Limiting liability is one of the most compelling reasons for some organizations to use truly independent contractors instead of employees to perform some work.

But dealing with independent contractors historically has required a balance of prudent oversight with impermissible directing or controlling of the contractor’s work. Prudent companies monitor their independent contractors—from a distance, so it does not appear the companies are trying to control how the contractors perform their work.

Now, the change: apparent agency

This balance may no longer be sufficient. Recently, the North Carolina Court of Appeals addressed a case involving an anesthesiology group a hospital had hired as an independent contractor. One of the anesthesiologists injured a patient during intubation, and the patient sued both the anesthesiology group and the hospital. Among other claims, the patient argued that the hospital was liable on a theory of “apparent agency.” The case is Diggs v. Novant Health, Inc., 177 N.C. App. 290 (2006).

Don’t stop reading just because you don’t work for a hospital! The court’s rationale in deciding Diggs could easily apply to other kinds of employers.

“Apparent agency” is a term from the realm of contracts, answering whether an employee can bind an employer to a third-party agreement the employee entered without the employer’s authority. In certain circumstances, for example, an employee who has not been granted the authority to do so might bind her employer to a sales contract with a vendor. This would occur when the employee was permitted to represent she had authority, and the third-party reasonably believed that authority existed.

The Court of Appeals in Diggs used the apparent agency concept to determine whether the hospital was liable for the anesthesiology group’s negligence. According to the court, “[W]here a person, by words or conduct, represents or permits it to be represented that another is his agent, he will be estopped to deny the agency as against third persons, who have dealt, on the faith of such representation, with the person so held out as agent....”

Three-part test

The Court of Appeals then came up with a three-part test for determining apparent agency in the context of negligence:

  1. Whether the hospital held itself out as providing medical services
  2. Whether the patient looked to the hospital rather than the individual medical provider to perform those services
  3. Whether the patient accepted the services on the reasonable belief that the hospital or its employees were rendering the services.

The court then determined that a jury could reasonably find the hospital liable for its independent contractor’s negligence even though the hospital did not direct the contractor’s work.

Among other things, the hospital advertised that it had a department of anesthesiology. The patient was unaware of the contractual relationship between the hospital and the anesthesiology group. According to the court, to avoid a finding of apparent agency, the hospital would have had to provide “meaningful notice” to the patient that an independent anesthesiology contractor was providing the care.

What to take from this

This should concern every business that regularly uses independent contractors. Although the decision was very hospital-specific, the rationale could easily be applied to a variety of service providers. If a customer looks to your company for a service and you contract part of that service to others, you might be held liable simply if the customer reasonably believed (and had not been clearly informed otherwise) that your company would provide the complete service.

No longer is the balance of oversight over an independent contractor always enough to distance a company from liability. The company also must ensure that third parties understand an independent contractor is involved, particularly when the independent contractor relationship is not obvious.

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