Participation as a theory of employment.

AuthorBodie, Matthew T.
PositionII. The Definition of Employment in Doctrine and Theory B. Defining "Scope of Employment" through Conclusion, with footnotes, p. 692-726
  1. Defining "Scope of Employment"

    Unlike the competing definitions for the term "employee," the term "scope of employment" has not been the subject of various theoretical approaches. The term is not generally used in labor and employment statutes, as in most cases the nature of the rights provided to employees guarantees that those rights concern activities within the scope of employment. (168) The one primary exception is workers' compensation, which only provides protections against injuries incurred within the scope of employment. (169) Outside of labor and employment law, employers are only liable for the torts and crimes of their employees in such actions as are taken within the scope of employment. (170) And intellectual property protections generally only apply to works made within the scope of employment. (171)

    Scope of employment is defined as that zone of conduct in which the employee is performing her job duties. (172) Efforts to define employees' duties as excluding all torts, statutory violations, or criminal activity have generally been unavailing. (173) Under the doctrine of respondeat superior, if the employee is on the job or within a zone of activity related to the employment duties, the employer will generally be liable for the employee's tort, regardless of the employer's efforts to define such conduct as outside of the employee's duties or authority. Instead, courts have adopted something along the lines of a foreseeability test, in which the employer is liable if the employee's actions are in some way foreseeable. In two famous cases involving drunken sailors, both Judge Hand and Judge Friendly found employers liable for acts of violence to person and property taken by intoxicated employees. (174) In both cases, however, the courts found that the actions were taken within the sailors' overall context of employment and that therefore the employer was liable. (175) Moreover, an employer may be liable for employee actions taken outside of the scope of employment if the master retains some level of responsibility (through intent, recklessness, or non-delegable duty) or if the employee was aided in some way by apparent authority or the agency relationship itself. (176) Given "the proclivity of seamen to find solace for solitude by copious resort to the bottle while ashore," their acts of violence--while regrettable and unauthorized--were sufficiently foreseeable to be part of the costs of doing such business. (177)

    As a result, "scope of employment" categorization questions have usually concerned not whether the particular employee is following the script of her particular contractual relationship with the employer, but rather whether the activity is part and parcel of the overall employment relationship. (178) The employer is expected to absorb the costs of doing business as a firm, which includes a certain level of employee activity that may not directly inure to the employer's benefit. As the Restatement (Second) of Agency put it, the "ultimate question" in determining the scope of employment is "whether or not it is just that the loss resulting from the servant's acts should be considered as one of the normal risks to be borne by the business in which the servant is employed." (179) Or, as then-Judge Cardozo put it,

    The risks of injury incurred in the crowded contacts of the factory through the acts of fellow workmen are not measured by the tendency of such acts to serve the master's business. Many things that have no such tendency are done by workmen every day.... The test of liability is the relation of the service to the injury, of the employment to the risk. (180) III. EMPLOYEES AND THE THEORY OF THE FIRM

    Although we think of employees as defined by their work or labor, the legal definitions of "employee" have much more to do with the relationship between the individual worker and the person or entity for whom she works. Employment is not simply labor; it is labor within a particular context. In the modern economy, employees always work within the context of an economic firm. In fact, it is my contention that the firm itself creates the employment relationship. This Part examines how the theory of the firm in economic and organizational literature has focused on the employment relationship, and how being an "employee" really means providing one's labor within the context of a firm.

    Employees have been central to our conception of the firm from the start. In early neoclassical economics, the theory of firm was quite rudimentary; it simply saw the firm as a black box which took in inputs and produced outputs. No further dissection was undertaken. However, this theory did differentiate between what was inside the firm and what was outside: employees and capital assets were inside, while customers and suppliers were outside. (181) Although this conception of the firm was useful in early economic modeling and retains that purpose even today, it was ripe for a reinvestigation that endeavored to give it substance.

    Ronald Coase kicked off the exploration of the internal workings and purpose of the firm in The Nature of the Firm. (182) In an oft-quoted passage, Coase framed the issue this way:

    Outside the firm, price movements direct production, which is coordinated through a series of exchange transactions on the market. Within a firm, these market transactions are eliminated and in place of the complicated market structure with exchange transactions is substituted the entrepreneur-co-ordinator, who directs production. It is clear that these are alternative methods of co-ordinating production. Yet, having regard to the fact that if production is regulated by price movements, production could be carried on without any organisation at all, well we might ask, why is there any organisation? (183) Coase's answer was that the price mechanism can be costly. (184) For certain transactions, it is cheaper to simply direct the production to occur rather than contracting separately for it. In order to avoid the transaction costs of contracting, such transactions will occur within a firm rather than on an open market. (185)

    Of course, the firm-based transactions described by Coase involve the purchase of labor for a particular endeavor. In explaining these transactions, Coase stated: "If a workman moves from department Y to department X, he does not go because of a change in relative prices, but because he is ordered to do so." (186) The relationship between the entrepreneur-coordinator and the employee is the primary distinction between the firm and the market. It is the reason for the firm's existence. Coase seemed to be arguing that firms would be unnecessary but for the need to remove the employment relationship from the vagaries of market transactions.

    This conclusion is cemented when Coase considered "whether the concept of a firm which has been developed fits in with that existing in the real world." (187) His answer? "We can best approach the question of what constitutes a firm in practice by considering the legal relationship normally called that of 'master and servant' or 'employer and employee.'" (188) He then quoted at length from a treatise concerning the common law "control" test, which provided that "'[t]he master must have the right to control the servant's work, either personally or by another servant or agent.'" (189) Coase concluded: "We thus see that it is the fact of direction which is the essence of the legal concept of 'employer and employee,' just as it was in the economic concept which was developed above." (190) For Coase, the firm was defined by the employer-employee relationship. (191)

    In an important response to Coase's work, Armen Alchian and Harold Demsetz also focused on the relationship of employees with other participants within the structure of the firm. (192) However, they argued that Coase's focus on control, authority, and direction was misleading. (193) Instead, they framed their argument in these terms:

    Telling an employee to type this letter rather than to file that document is like my telling a grocer to sell me this brand of tuna rather than that brand of bread. I have no contract to continue to purchase from the grocer and neither the employer nor the employee is bound by any contractual obligations to continue their relationship. Long-term contracts between employer and employee are not the essence of the organization we call a firm. (194) Alchian and Demsetz's critique of Coase's theory does not mean that employees are no longer central to the idea of the firm. Instead, they argue that the importance of the firm (as separate from the market) stems from the need to coordinate production in the midst of a variety of inputs. The need for a system of team production is what separates firms from markets. (195) Alchian and Demsetz defined team production as "production in which 1) several types of resources are used and 2) the product is not a sum of separable outputs of each cooperating resource." (196) As a result, team production is used when the coordinated effort increases productivity, after factoring out the costs associated with monitoring and disciplining the team. (197)

    Although Alchian and Demsetz did not endorse Coase's model of the firm, their model also revolves around the role of the employee within the firm. The primary concern of the team production model is making sure that the team members do not shirk their responsibilities to the team. The inability to measure individual contributions to productivity is what makes the firm an efficient alternative to markets, but it is also the firm's central governance problem. Alchian and Demsetz argued that a specialized, independent monitor may be the best way of insuring that the team members all contribute appropriately and are rewarded appropriately. (198) That central monitor--the recipient of the residual profits--would be the firm. Although Coase as well as Alchian and Demsetz...

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