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 are 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."

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 the master-servant rule.

Since the master-servant rule places the onus on the employer to be responsible for any civil wrong 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.

An accountant working for a large accounting firm intentionally overlooks erroneous sales claims by a manufacturer he is balancing the books for. 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 Anderson of its licenses to practice as certified public accountants (CPA) 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.

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.

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, 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.