Chapter 11Recognize, define, and give examples of an agency relationship.-Agency:a legal relationship in which the parties agree, in some form, that one party will act as an agent for another party, called the principal, subject to the control of the principal. -Agent:One who agrees to act and is authorized to act on behalf of another, a principal, to legally bind the principal in particular business transactions with third parties pursuant to an agency relationship.-Principal: Owners of a business entity.-Agency relationships are common and essential in the business environment; A common form of agency arises in an employer-employee relationship.-In all agency relationships, the principal authorizes the agent to provide services or accomplish some task on behalf of the principal and under the principal’s charge.-Understanding agency law requires one to be aware of:-1. Legal requirements for creatingan agency-2. Liabilityof a principal for the agent’s conduct-3. Dutiesand obligations of the parties-The principal and agent may be either individuals or entities (such as corporations).-Agency law generally exists on the state statutory level and is based on the Restatement (Second) of Agency.-Restatement (Second) of Agency:A set of principles, issued by the American Law Institute, intended to clarify the prevailing opinion of how the law of agency stands. Classify agents as either employees or independent contractors by applying the direction and control tests.-Agents are classified into one of three broad categories:-1. Employee agents: Generally, anyone who performs services for a principal who can control what will be done and how it will be done.-In order to be classified as an employee agent, the employee must have some source of authority to represent the employer.