The reality of day-to-day life in a company requires employees to execute corporate documents on behalf of their employers. The is especially true for employees in an administrative, managerial or financial capacity. While employees are integral to a company’s success, they don’t fall within the recognised category of ‘corporate officers’ – that is, they are not company directors or secretaries.
Corporate officers have the legal right and capacity to bind the company to any transaction or dealing. So, the question arises – what is the status of dealings and 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 explores the different authories that may bind companies to the actions of their employees.
An employee will have the express authority to bind a company where the company has via its corporate officers undertaken steps to ensure that the employee has the authority to, for example, contract on the company’s behalf. This authority can be expressed by:
- including the employee’s name on a list of signatories;
- a letter of authority; or
- granting the employee a power of attorney (this rarely happens).
The scope of the employee’s authority will then depend on the document which confers the same.
Implied or Apparent Authority
At times, the nature of an employee’s role can require that they have implied authority to undertake certain actions and/or activities. As mentioned, 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 which 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 is harder to define. In layman’s terms, it refers to situations where a reasonable third party would understand that the employee has the authority to act in the circumstances.
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 not be able to rely on the doctrine of ostensible authority in circumstances where they had no basis to reasonably assume that the employee was acting for the company.
As a general rule of thumb, 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, get in touch LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.
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