What Is Implied Authority in Business?

Implied Authority Defined and Described
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By giving your employee a name tag your business has given that person implied authority. Are you ready for that?

Implied authority is created in a situation where the authority to act on behalf of someone else is implied by the actions of the person. Implied authority is different from actual authority and both are part of the principle of agency. 

Here's an example of implied authority: A car salesperson is negotiating with a buyer and she says, "I'll give you a free rustproofing treatment." The implication to the buyer is that the salesperson has the authority to make this offer. But what if she doesn't? The manager has a difficult situation in this case, of whether to allow the offer or to take it back. 

Three Types of Authority

Express authority is given in writing in a contract with an insurance agent or a power of attorney.

Implied authority is given in cases where someone (usually an employee) is wearing a company uniform or interacting with the public on behalf of a company or organization.

Assumed authority is similar to implied authority because a third party would assume that the person has the right to act.

Implied authority and assumed authority relate to the principle of agency.

What Is the Principle of Agency?  

Agency is a legal situation in which one party acts on behalf of another. One party is the agent and the other party is the principal. Two examples of agency are in real estate and insurance, where named "agents" act on behalf of their clients. 

The agent has duties and responsibilities, sometimes expressed by the acronym "OLD CAR." These responsibilities are:

  • Obedience: Acting on the direct instructions of the principal
  • Loyalty: No conflict of interest
  • Disclosure: Telling the principal important facts and issues
  • ConfidentialityNot telling information the principal party wants kept private
  • Accounting: Keeping track of expenses and important documents
  • Reasonable Care: Not being negligent in acting on behalf of the principal

How Does Implied Authority Relate to Agency? 

Implied authority is one type of authority under this principle of agency. The wearing of a name tag by an employee, as in the example above, gives someone implied authority to act as an agent of an employer or another business. 

The other type of authority is express authority (sometimes called actual authority), which is given expressly in a contract (oral or written). In the case of a real estate agent, for example, there is usually a written contract between the real estate person and the client, in which the client gives written authority for the agent to act on behalf of the client. Very often express authority is limited by the terms of the contract. 

How someone can be assumed or implied to have authority depends on the specific situation.  

The principle of agency and authority relates to the basics of contract law. The agent is entering into a contract with someone on behalf of the principal (person hiring the agent).

Liability and Implied Authority

When an agent or employee acts with implied authority, it creates a liability for the business and for the person. In the case of the car dealer, the liability might be just a lower profit on the car, but in other cases, the liability might be more serious. For example, if an employee of a ski resort lets someone who is disabled onto a ski lift (in violation of company policy), and the skier has an injury, the employee has created a liability which can cost the company a large amount. 

While it might look like the company suffers the liability, the company might claim that the employee acted outside their scope of responsibility, leaving the employee with the liability. In the case above, for example, with company policy against allowing certain types of disabled people on the ski lifts, the employee has acted outside the bounds of the employment agreement and can be personally liable.

This example is a good reason for having a comprehensive company policy manual that spells out what employees can and can't do. Make sure that every employee signs a statement saying they have read and understood the terms of the policy manual.

How Does a Business Deal With Implied Authority Abuses? 

Let's say you have an employee who tends to want to "give away the store." This is a case I'm familiar with, of an employee in a hardware store who had an excess of enthusiasm. He would make special deals for his friends, discount items, take back refunds without following the refund policy, or add extra items (like nails and screws) to a bag. What do you do in these situations?

Some suggestions: 

  • You can attempt to prevent misuse of implied authority by making clear to employees that they can't deviate from prices or policies without your express consent. 
  • You can discipline employees who continue to abuse implied authority. 
  • You can put the employee in a different position, where they are not in a position to misuse their implied authority
  • In the case above, nothing worked, so the employer fired the employee

Implied Authority in Partnerships

Partnerships are a special situation because all the partners of one type (general partners, for example) all have the same amount of authority in making deals on behalf of the partnership. This authority is implied by the nature of the partnership

Partners in a partnership have implied authority to carry out day to day activities on behalf of the partnership, including: 

  • Buying and selling products and services
  • Billing customers and accepting payments
  • Contracting for advertising and other services
  • In some cases, a lease may be signed by a partner 

On the other hand, some actions by partners on behalf of the partnership must only be taken by express authority (written contract and approval by the partnership), including:

  •  Buying property (buildings and land) on behalf of the partnership
  • initiating a lawsuit or submitting a dispute to arbitration
  • Enter the partnership into a new joint venture, partnership, or connection to another legal entity
  • Give up a claim made by the partnership or admit fault in legal action.