Paper Example on Agency and Employment Law

Published: 2021-07-19
1179 words
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10 min to read
George Washington University
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The owner of a business is the principal and the mangers of a business are the agents. The relationship between the two develops the principal agent problem where the principal is concerned about optimizing returns from the business while the managers focus on earning as much as possible from the business without necessarily maximizing the returns for the owners of a business or the shareholders. An agent is any other person who has been given authority to act on behalf of others.

In pursuance of the principals interest, employees are considerably advantaged. This is because as far as the business is operating profitably, they will continue with their employment. Other benefits such as salaries, allowances, and their welfare are enhanced unlike when the organization is performing poorly. However, if an agents interests are pursued without control, a business may not thrive in the long run due to limited revenues.

Agents are usually concerned with the short-term performance of a business and not its long run. This is because; the success of an agent or a manager in a company is based on his or her short-term success. This is a major weakness of the principal agent relationship. The threats to the relationship include lack of trust between the principal and the agent. This is because the principal would like to ensure that the agent do relax on his or her job.

On the other hand, the agent would like to ensure that the employees deliver on their job at the lowest cost possible. This may involve minimizing payment and wages to ensure that the cost of production is reduced. The move may trigger labor dispute due to the fact the employees are protected by employment laws and regulations (Laffont & Martimort, 2009).

The authority created by the agent and the principal has both positive and negative effects on the employees. The authority creates expectation over its subjects. If the subjects in this case employees fail to perform according to the expectation required, then a conflict arises.

The authority of the principal and the agent is created by the use of certain mechanism such as the use of auditors who evaluates the performance of the workers. This incurs the business an agency cost.

The other mechanism used by the management and the principal is the use of moral incentives to ensure that they feel appreciated and motivated to perform even better. The agency costs incurred by the principal and the agent equals an opportunity to the employees. This is because the employees receive some incentives either in form of monetary or moral support.

The agent can also employ a contract design to protect him or herself from the problem of incentives and information asymmetry. A contract ensures that the agent acts selflessly and optimizes on the returns for the business or the principal. High returns for the business indirectly benefits the employees through bonus and related continued employment opportunity. Contracts are tied to the compensation of the employees if the employee attains a given target of performance. This is a great opportunity for the employee to make earnings while it also ensures that the interests of the principal are protected.

Tipping in the service industry is highly encouraged in some places; the client gives an employee a tip on condition that the employee serves the client in a proper way. The principal having encouraged the clients to tip the employees is a mechanism of dealing with the principal agent problem which translates in an earning opportunity for the employee. Therefore, the authority created by the principal and the agent translates to an opportunity for the employees (Laffont & Martimort, 2009).

There are various laws that protect employees from discriminatory practices and policies in employment. Some of the laws include discrimination of a worker based on their sex, color, age, sexual orientation, race, and religion. For example the 1964s Civil Rights of, the Age Discrimination in Employment Act of 1967 (ADEA), the 1973s Rehabilitation Act sections 501 and 505, the 1991s Civil Rights Act, and the 1963s Equal Pay Act (The U.S. Equal Employment Opportunity Commission, 2009; Deakin & Morris, 2012).

The employers are prohibited from failing to employ somebody who has previously complained to the authority about employment discrimination. The laws also prohibit employers from enforcing policies that are neutral in employment and could affect job seekers in a disproportionate way.

The employers policies and job practices should only be related to the job. While making a job advertisement, an employer is prohibited from making an advertisement that rules out certain applicants on the basis of their sex, beliefs, disability, race and so forth. The same applies during a recruitment process, it is illegal for an employer to discriminate a person applying for a job based on their gender, age, sexual orientation, color, national origin, race, and disability.

While disciplining workers, employers are prohibited from enforcing different disciplinary measures based on their gender, age, sexual orientation, color, national origin, race, and disability on employees who have committed similar offense (Perelshteyn, 2009).

An independent contractor has the mandate to carry out a given task without the physical control by the person who contracted him or her while executing the task given. This is because the law acknowledges an independent contractor as autonomous. Therefore, an independent contractor is not an employee of the person who has given him or her the contract. This is a different case from the situation where a principal gives an employed manager salary. The manager in this case is an employee of the principal and the principal has the mandate to ensure that the employee acts according to his or her wishes as a principal.

An example of an independent contractor is a lawyer who is hired by a client to assist in settling a given dispute. The legal protection in job differs between an independent contractor and an employee.

Some of the key areas that differ are in regards to taxation, liability insurance, and employees compensation. An employer or the principal has a legal obligation to withhold his or her employees tax for remission to the authority however; the same does not apply to the independent contractor.

The law also does not require that the employer pay an independent contractor a workmens compensation premium unlike the case with employees. In case an employee is injured in the course of his or her duties, the principals insurance is obligated to pay the employee. The law under the workers compensation status covers an employee (Cheeseman, 2015).



Bernhardt, A., Milkman, R., Theodore, N., Heckathorn, D. D., Auer, M., DeFilippis, J., ... &

Cheeseman, H. R. (2015). Legal Environment of Business: Online Commerce, Ethics, and Global Issues. Los Angeles: Pearson.

Deakin, S. F., & Morris, G. S. (2012). Labour law. Hart publishing.Laffont, J. J., & Martimort, D. (2009). The theory of incentives: the principal-agent model. Princeton university press.

Perelshteyn, J. (2009). Broken laws, unprotected workers: Violations of employment and labor laws in America's cities.The U.S. Equal Employment Opportunity Commission. (2009). Federal Laws Prohibiting Job Discrimination: Questions and Answers. Retrieved from



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