It’s no secret that your actions can lead to a lawsuit. But did you know that you can also be held financially and legally responsible for other people’s actions? Vicarious liability, also known as imputed liability, allows employers to be found liable for damages caused by the acts of their employees, agents and independent contractors.

If you want to protect your small business from the possible risk created by others, it’s essential to understand what vicarious liability is and how it can impact you. Here’s what you need to know.

What is vicarious liability?

You’ve likely heard people talk about “living vicariously” through others. In short, it means living through someone else’s experiences rather than experiencing them firsthand. Similarly, being vicariously liable as an employer means you are liable for an employee’s or agent’s actions even though you were not directly involved.

As a business owner, you can be responsible for damages caused by your employees in the performance of their regular work duties (and in some other scenarios we’ll cover below). It’s also worth noting that you can be held liable for damage even if the employee acts against your directions.

What is vicarious liability law?

Vicarious liability laws are based on a legal doctrine known as respondeat superior.1 That’s Latin for “Let the master answer.”2 When invoked, an employer can be held legally responsible, fully or partially, for the harmful acts of an employee or agent.

With no national standard for respondeat superior, each state creates its own standards. In many cases, proving the employer is liable will depend on a benefits or characteristics test.

How does vicarious liability work for business owners?

Imagine owning a coffee shop and instructing employees to make drinks a certain way. Their paycheck depends on following your orders. If an employee makes a coffee and hands it to a customer who then drops the cup and burns their leg, should you be responsible?

You are in charge of what your employee does, so you would likely be found vicariously liable in this situation. Think of it this way: Instead of looking to whom is directly involved in the incident, vicarious liability looks to the power dynamics between employers and employees.

Employee-employer relationship

Because the issue isn’t always clear, the relationship between the employer and employee is important for vicarious liability to be determined. To establish it, you must ask three key questions:

  1. Did the action occur when the employee was on the clock?
  2. Was the action part of the employee’s job duties?
  3. Was the employee acting to benefit the employer?

So, let’s apply this to the case of the barista in the coffee shop:

  • The accident took place during their shift
  • Serving coffee is a regular duty
  • The employee is serving patrons on behalf of your business

Using this model, we can establish that the employee-employer relationship did exist. So, the employer is vicariously liable for the employee’s actions.

Respondeat superior tests for employers

There are different ways to test for respondeat superior, which holds an employer responsible for the actions of people who work for them (as we covered above).

The benefits test comes into play if an employee is on the employer’s premises with permission after work hours for social or recreational reasons. For example, say one of your hair salon’s employees hosts an after-hours open house for potential clients to try out a new styling technique. If the employee’s presence benefits the employer somehow, as it does in this case, then the employer could be liable for any harm the employee causes.

The characteristics test looks at whether employee-caused harm is due to an action that is common for the job an employee performs. If it is, the employer would be liable.3 For example, if a bakery employee often makes deliveries and runs a red light to make a delivery on time — potentially putting others at risk — their employer could be held liable.

Vicarious liability pertaining to employees vs. independent contractors

This is an important concept because the laws around respondeat superior apply to employees, but not independent contractors. The following are a few of the questions that can help determine whether a worker is an employee or independent contractor in the context of respondeat superior. A “yes” answer to these questions would most likely qualify the worker as an employee:4

  • Do you have control over the details of the worker’s work?
  • Does the worker do the work typically with supervision?
  • Do you supply tools or other instruments for the work and a place to perform the work?

If you hire independent contractors, carefully consider these questions in the context of your working relationship. Depending on your answers, you could be held vicariously liable for damage caused by independent contractors while working for you.

Examples of vicarious liability in business

Now, let’s look at a couple of examples of where vicarious liability may or may not apply in business situations.

Delivery driver

A well-known e-commerce giant hires drivers on a contracted basis — meaning the drivers are not employees. However, the company faces scrutiny on whether it should be classified as a vicariously liable employer because of the extensive policies that it has in place.

For example, the company’s policies require drivers to maintain personal hygiene in specific ways, undergo company-approved training programs, and be drug tested on demand. There are existing court cases in which victims of collisions with the company’s drivers charge the company as the responsible party, demonstrating the importance of understanding your vicarious liability when hiring independent contractors.5

Auto detailing company

Car wash companies have gotten in trouble for misclassifying employees as independent contractors.6 The circumstances are not always cut-and-dried (or should we say washed-and-waxed). While an employee who cleans cars after the vehicles run through an automated washer is most likely to be classified as such, you would likely need to apply the “employee vs. independent contractor” test to other workers.

For example, say you hire an independent contractor to spin a sign promoting the business on a busy sidewalk and that person gets a little too creative with their signature style, accidentally striking a passerby. You could be found liable in such a circumstance.

Why should you care about vicarious liability?

To put vicarious liability in perspective, there are three primary parties for whom you can be vicariously liable as a small business owner:

  1. Your employees – Liability can pass from an employee to your small business if they cause damage during the employee’s regular work duties. You can also be liable if an employee causes harm while on the business’s premises for non-work reasons, but their presence benefits you somehow.
  2. Independent contractors (sometimes) – You’re not exposed to vicarious liability when you hire an independent contractor in most cases. However, if your independent contractor is determined by a court of law to be an employee, you can become liable.
  3. Agents with whom you work – Agents are individuals with the authority to act on your behalf.7 This is what’s known as an agent-principal relationship, and in most cases, the two parties split liability.

While you carry risk through these avenues as a small business owner, the good news is you can take steps to protect yourself and your company. First, you can implement good business practices to prevent causing harm, known as performing a “duty of care.” Next, it’s a good idea to have vicarious liability insurance in place, just in case.

Insurance protection for your small business

The potential for vicarious liability is ever-present. By purchasing general liability insurance or professional liability insurance (also known as errors & omissions insurance), you can protect yourself from the financial consequences of costs of both direct and vicarious liability.

General liability insurance helps to shield your business from the financial costs of bodily injury and third-party damage caused by your employees or your business operations or products. On the other hand, professional liability insurance helps protect you against the costs from claims of negligence, bad advice or oversights that resulted in a client’s financial loss.

With Thimble, you can protect your business quickly and affordably. It’s the simpler, easier and more cost-effective way to get business insurance coverage. All you need to do is download the Thimble app or click “Get a quote,” input a few details about your business, and you can get coverage today.

Get a quote

Sources:

  1. Legal Information Institute. Vicarious Liability. 
  2. Britannica. Respondeat superior. 
  3. Legal Information Institute. Respondeat Superior. 
  4. Legal Information Institute. Respondeat Superior. 
  5. Digital Commerce 360. Amazon still governs its contract drivers. 
  6. Insurance Journal. California Labor Commissioner Sues Gig Car Wash for Misclassifying Workers. 
  7. Legal Information Institute. Agent.