What Is the Master-Servant Rule?

The master-servant rule is a legal guideline stating that employers are responsible for the actions of their employees. It applies to any actions an employee undertakes while in the service of an employer that is within the scope of their duties for that employer.

This concept may also go by "the principle of respondeat superior" or "let the master answer" and is not related to the United Kingdom laws of the 18th and 19th centuries, known as the Master and Servant Acts or Masters and Servants Acts. 

Key Takeaways

  • The master-servant rule is a regulation that makes employers responsible for certain actions made by their employees.
  • This rule may cover employee acts that fall within the scope of their regular duties carried out for that employer.
  • The master-servant rule also states that the employer need not be aware of the actions of their employee in order to be held liable for their misdeeds.

Understanding the Master-Servant Rule

The master (employer) is vicariously liable for the torts and misdeeds of their servant (employee). However, determining whether an employer is found liable for an employee's actions depends largely on whether the employee's wrongdoing was part of doing the job for the employer or whether the employee was acting out of their own personal interests.

A very important aspect of the master-servant rule is that the employer does not have to have knowledge of any bad behavior or negligence of their employees to be held responsible for their actions. This is known as the duty of supervision.

For example, in the brokerage business, a supervising branch manager who failed to detect, address, or stop unethical or illegal activity could be found by regulators to be guilty of a "failure to supervise." In such a case, the brokerage company would most likely be held liable for any damages and may face penalties.

Employers of independent contractors are not subject to the master-servant rule.

Since the master-servant rule places the onus on the employer to be responsible for any civil wrongdoing committed by an employee, it is important for an employer to set out the guidelines for appropriate employee behavior. Such guidelines may take the form of an employee handbook, manual or code of conduct, training on ethical behavior and standards, and well-designed and publicized procedures on how to detect and report potentially unethical behavior.

The master-servant rule originated from ancient Rome, where it was applied initially to the actions of slaves and later to servants, animals, and family members of the head of a family. 

Special Considerations

The courts have found in some respondeat superior cases that employers may not necessarily be liable if they were unaware of their employees committing fraud. Such findings make the argument that the liability of the employer is not applicable because there was no participation in the employee's fraud.

In other cases in which an employee, through actions at work, harms another employee, the company might not be held liable if it has worker's compensation insurance. These policies pay money to employees that have been injured on the job—and if the accident was not due to negligence by the employer, the employer may not be liable.

Worker's compensation doesn't cover all injury insurance claims, though, which is why many companies opt to add employer's liability insurance. Employer's liability insurance protects companies from financial damages due to an employee's lawsuit resulting from job-related injuries that are not covered by worker's compensation.

Examples of the Master-Servant Rule

Although there are various examples of the master-servant rule in which a company or employer has been held liable, it's important to consult a lawyer since each case has its unique circumstances. Below are a few examples of when an employer might or might not be held liable for an employee's actions.

Enron and Arthur Andersen

An accountant working for an accounting firm intentionally overlooks erroneous sales claims by a manufacturer. If the manufacturer is audited and the sales claims are disputed, the accounting firm could be held liable for the accountant's errors.

Something similar happened in 2002. In that year, Big Five accounting firm Arthur Andersen was forced to surrender its licenses to practice as certified public accountants (CPAs) over its auditing of Enron. A court found the firm guilty of the criminal charge of obstruction of justice, though, in 2005, the U.S. Supreme Court reversed the conviction.  However, by then, the company was all but shuttered.

Company Assets

If an employee gets into a car accident using a company truck during after-work hours, the employer would most likely not be held liable. However, if the employee got into an accident while on the road on company business or on behalf of the company, the employer could be responsible for any damages caused by the accident.