There are some tort exceptions to limited liability that would negate carefully constructed asset protection plans and expose an owner to unlimited personal liability.
Usually, the owner of a limited liability company (LLC) or corporation will not have unlimited personal liability for the commission of a tort (personal injury) within the business--unless the owner personally committed the tort. Of course, the LLC or corporation will be liable under the respondeat superior doctrine.
But it is possible for a business owner to be personally liable when an agent of the business commits a tort, if the owner committed a separate tort, such as a separate act of negligence. Here, three parties are liable:
- the agent or employee who commits the tort--because he or she committed it
- the entity--under respondeat superior
- the owner--for his or her own independent tort
Really, two separate torts are committed: one by the employee and the second by the owner. Most likely, this independent tort will be in the form of negligent hiring or supervision of an employee of the entity.
This exception is really just a specific example of the first exception--namely, personal commission of a tort. Here, personal liability is predicated on the fact that the owner has personally committed a tort (i.e., the improper hiring or supervision of the employee) that is separate from, and in addition to, the tort committed by employee.
In addition, while this exception, too, is usually incorporated in state statutes governing professional corporations, LLCs and limited liability partnerships (LLPs) operated by professionals, it will apply in all states as a matter of common law and will apply to all businesses, not simply to those businesses providing professional services.
The small business owner will want to avoid application of this exception by taking measures to ensure that he acts reasonably in hiring and supervising employees. Many strategies here involve time, costs and philosophical questions related to employee's privacy. The business owner must weigh these factors against the likelihood that the employee will commit a tort causing personal injury or property damage. This, in turn, will depend on the nature of the business and the employee's particular job.
For example, a criminal background check would be especially important in hiring employees at a day care center or in a business where the employees will handle large sums of cash. Drug testing would be appropriate in hiring bus drivers or where employees will operate machinery, such as construction equipment.
In terms of hiring new employees, the small business owner may want to consider:
- Background checks - including verification of prior employment, academic transcripts, licenses, professional affiliations, credit history, and arrest history
- Drug testing - generally, state laws allow mandatory testing for all applicants, and then periodic random testing of employees, where the business involves safety risks
In terms of supervising employees, the small business owner may want to consider:
- a mentoring process, whereby a new employee is instructed and supervised by a senior-level employee for a prescribed period
- a system of checks and approvals before work is sent to clients, patients or customers
- case/job tracking systems
- regularly scheduled meetings where case/job status is discussed
- training sessions (in-house or outside seminars) for employees
Smith & Jones, LLC, a law office, hires a new attorney, Stevens, as an employee. Smith does all of the hiring for the firm. He interviews Stevens twice before hiring him. Smith makes sure that the LLC hires Stevens, so that the LLC, rather than Smith or Jones personally, will be the principal in any transactions initiated by Stevens.
Let's say that, ten months later, Stevens commits an act of malpractice, costing a client $400,000 in losses. Then, as it turns out, Stevens actually had dropped out of law school in his first year. This fact was never discovered by the firm, as Smith found him knowledgeable concerning the law during the two interviews and never conducted a background check.
It is likely that Smith will be sued personally for this loss due to negligent hiring.
Jones should have no personal liability for negligent hiring, because he did not personally participate in the hiring of Stevens. However, both Smith and Jones may face personal liability because it is likely that they each will have committed yet another personal tort--negligent supervision of Stevens.
In addition, of course, Stevens will be personally liable for his act of malpractice, and the LLC itself will be liable under the doctrine of respondeat superior. Nevertheless, the greatest concern to Smith and Jones will be the fact that all of their personal assets outside the business will now be exposed to liability for this tort.
Had Smith conducted a proper background check, he would have avoided this liability. Let's say he did and finds that Stevens' background passes muster. In addition, assume the firm had instituted reasonable measures to train and supervise Stevens. Here, Smith and Jones should face no personal liability for malpractice committed by Stevens, because they will not have personally committed a separate act of negligence and because the LLC is Stevens' principal.
Of course, with a proper background check and proper supervision, the likelihood that Stevens will commit a tort is significantly reduced in any event.