Master-Servant Rule: Meaning, Overview, Examples

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.” It is not related to the United Kingdom laws of the 18th and 19th centuries regarding the master-servant relationship, known as the Master and Servant Acts or Masters and Servants Acts. 

Understanding the Master-Servant Rule

The master-servant rule holds that an employer is vicariously liable for the torts and misdeeds of its 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 if the employee was acting out of their own personal interests.

An important aspect of the rule is that the employer does not have to have knowledge of an employee's bad behavior or negligence to be held responsible for their actions. This is known as the “duty of supervision.”

In the brokerage business, for example, a supervising branch manager who fails to detect, address, or stop unethical or illegal activity can 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 could face penalties.

Because the rule places the onus on an employer to be responsible for any civil wrongdoing committed by an employee, it behooves an employer to set out the guidelines for appropriate employee behavior. These 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.

Special Considerations

The courts have found in some respondeat superior cases that employers may not 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, when an employee, through actions at work, harms another employee, the company might not be held liable if it has workers’ compensation insurance. These policies pay money to employees who have been injured on the job—and if the accident was not due to employer negligence, the employer may not be liable.

Workers’ compensation doesn’t cover all injury insurance claims, though, which is why many companies opt to add employer’s liability insurance. This kind of 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 numerous examples of the master-servant rule in which a company or employer has been held liable, it’s advisable to consult a lawyer when confronting a case, as each one has its own circumstances. Below are a few instances in which an employer might or might not be held liable for an employee’s actions.

Arthur Andersen and Enron

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 to this happened in 2002. That's when 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, but 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 vehicular 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.