The reality of day-to-day life in a company may require employees to execute corporate documents on behalf of their employers. This is especially true for employees in an administrative, managerial or financial capacity. While employees are integral to a company’s success, they do not fall within the recognised category of ‘company officeholders,’ meaning they are not company directors or secretaries. Company officeholders might have the legal right and capacity to bind the company to any transaction or dealing. So, the question arises – what is the status of transactions entered into by an employee on behalf of the company? More importantly, can a company escape liability under a dealing that a corporate officer did not expressly enter into?
This article explains whether an employee’s actions will bind your company. It also explores the various types of authority that a company can give to employees.
Authority of Company Officeholders
Under the Corporation Act 2001 (Corporations Act), a company may execute a document if the document is signed by:
- 2 directors of the company;
- a director and a company secretary of the company; or
- for a company that has a sole director, that director, if:
- the director is also the sole company secretary; or
- the company does not have a company secretary.
The law protects outside persons or entities dealing with your company. A person may assume your company has properly executed a document if the correct people have signed it (as above). That person may also assume that anyone who signs the document stating they are the sole director and sole company secretary occupies both offices.
A person dealing with your company may also make certain assumptions that anyone who appears, from public information from ASIC, to be a company officeholder has been duly appointed and has the authority to exercise the powers and perform the duties customarily exercised or performed by a director or company secretary of a similar company.
Agent of the Company
Your company’s power to make, vary, ratify or discharge a contract or execute a document (including a deed) may be exercised by an individual acting with the company’s express or implied authority and on behalf of the company. In other words, where an individual has received authority to act as an agent of the company, they may bind the company by entering into documents.
Additionally, a company officeholder does not need to execute a document for it to be binding on the company. For example, where an employee of your company has express, implied, apparent, or ostensible authority, they may sign a document and bind your company to that document.
Express Authority
An employee will have the express authority to bind a company where the company has, via its company officeholders, undertaken steps to ensure that the employee has the express authority to, for example, enter into a contract to engage a software developer on the company’s behalf. A company can express this authority by:
- expressly stating (in their employment contract) that an employee can enter into certain contracts and transactions on behalf of the company;
- including the employee’s name on a list of signatories;
- issuing a letter of authority; or
- granting the employee a power of attorney (though it is worth noting this rarely happens).
Express authority is the clearest authority a company can provide to an employee. It is a confirmation in writing of their authority to take certain actions. When an agent acts with express authority, the company should thoroughly outline the scope of their liability.
Implied or Apparent Authority
An employee’s role may sometimes require them to have implied authority to undertake certain activities. This is particularly the case for those employees who occupy administrative, managerial or financial positions.
In such circumstances, the employee can be assumed to have the right and power to undertake activities that are reasonably necessary for the effective performance and discharge of their employment function. What actions are reasonably necessary is a question of fact answered on a case-by-case basis.
Ostensible Authority
Ostensible authority refers to situations where a reasonable third party would understand that the employee has the authority to act in the circumstances. For example, the employee may have the right to sign a contract on the company’s behalf. This may look like the situation where an employee of your company receives the title and status that give rise to a misrepresentation about the scope of that employee’s actual authority.
This can, at first instance, seem like a broad legal principle that has the potential to open up the floodgates and rectify any rogue employee’s behaviour. However, this is not the case. A third party would be unable to rely on ostensible authority in circumstances where they had no basis to reasonably assume that the employee was acting for the company.
This Board Reporting Toolkit can help you meet your compliance needs, by explaining your obligations as a director and providing you with a series of tools and templates to ensure you can correctly undertake your key obligations.
Key Takeaways
Generally, there are some steps that a company can implement to ensure that its employees are acting within their authority and that it avoids liability for dealings and transactions employees enter into in breach of their authority.
These include, but are not limited to:
- clearly defining corporate roles, job descriptions and role specifications which outline the rights, powers and limitations of employees;
- quickly acting upon and remedying any breaches of authority;
- clearly conveying to third parties with whom the company contracts who has authority to bind the company; and
- reprimanding employees who continue to act outside of their scope of authority.
If you have any questions about the types of authority that an employee can hold, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
In short, yes. These types of authority give the employee the power to make decisions, such as entering into certain contracts on behalf of the company.
An employee will have the express authority to bind a company where the company has, via its company officeholders, undertaken steps to ensure that the employee has the express authority to act on the company’s behalf.
An employee’s role may sometimes require them to have implied authority to undertake certain activities. In such circumstances, the employee can be assumed to have the right and power to undertake activities that are reasonably necessary for the effective performance of their role.
Ostensible authority is situations where a reasonable third party would understand the employee has the authority to act in the circumstances.
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