What Is Master-Servant Rule?

The master-servant rule is a legal guideline stating that employers are responsible for the actions of their employees. The rule 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. Another way of describing the master-servant rule is that the master (employer) is vicariously liable for the torts and misdeeds of their servant (employee). This concept may also be called "the principle of respondeat superior" or "let the master answer."

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.

Key Takeaways

  • The master-servant rule is a legal guideline stating that employers are responsible for the actions of their employees.
  • The rule applies to any actions an employee undertakes while working for an employer that is within the scope of their duties for that employer.
  • The master-servant rule also states that the employer need not be aware of negligence by their employee to be held liable for their misdeeds.

Understanding Master-Servant Rule

A very important aspect of the master-servant rule is that the employer need not be aware of any negligence by their employee to be held liable for their misdeeds. This is known as a duty of supervision. For example, in the brokerage business, a supervising branch manager who is responsible for overseeing brokers but 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 that the employer set 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 can trace its origins back to ancient Rome, where it was applied initially to the actions of slaves, and later, servants, animals, and family members of the head of a family. It 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. 

Special Considerations

In U.S. securities fraud cases, the courts have found in some respondeat superior cases that employers may not necessarily be liable if it was unaware of their employee's fraud. Such findings make the argument that 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 their actions at work, harm another employee, the company might not be held liable if the company has worker's compensation insurance. Worker's compensation pays money to employees that have been injured on the job. If the accident was not due to negligence by the employer, the employer might not be liable. However, worker's compensation doesn't cover all injury insurance claims, which is why many companies opt to add employer's liability insurance. Employer's liability insurance helps to protect 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.

A real-life example can be seen in the 2002 surrender by Big Five accounting firm Arthur Andersen of 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 the 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 for company business or on behalf of the company, the employer could be liable for any damages due to the accident.