Employment Contracts, US Common Law and the Theory of the Firm

Harvey James

International Journal of the Economics of Business, 2003, vol. 10, issue 1, 49-65

Abstract: The purpose of this paper is to show that the common law governing the employment of labour in the United States makes the distinction not only between employees and independent contractors but also between employees characterized as 'servants' and employees as 'agents.' This paper also uses an online database of employment contracts to show how written contracts of employment support the granting of decision-making authority or agency to workers qua agents. In doing so, this paper articulates a paradox. The common law embodies 'defaults' that allow firm owners to employ workers as 'servants,' but the common law does not contain defaults for workers employed as 'agents,' hence the use of formal, written contracts. This is paradoxical because many contracts of employment contain similar characteristics and clauses, which could in theory be incorporated into the common law and thus used as 'defaults' in contracting, thereby creating a substantial transaction cost savings in the establishment of employment relationships with workers expected to possess agency authority.

Keywords: Employment Contracts; Managerial Control; Agency Relations; Common Law; Transaction Cost Economics (search for similar items in EconPapers)
Date: 2003
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DOI: 10.1080/1357151032000043320

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