Vicarious liability in Australia and when an employer pays for an employee's wrongs

What vicarious liability is

Vicarious liability is the legal principle that makes one person responsible for harm caused by someone else's wrongdoing, because of the relationship between them. For a business, it most often means this: if an employee commits a wrong in the course of their work, the employer can be ordered to pay compensation, even if the employer did nothing wrong and had no idea what was happening.

Australian courts justify the rule as a fair allocation of loss. In CCIG Investments Pty Ltd v Schokman [2023] HCA 21, the High Court described the underlying idea as making the employer, whose business the employee is carrying out, responsible for injury caused in the course of that work, rather than leaving an innocent third party to bear the loss. The rule also gives businesses a real incentive to prevent harm.

Two elements must both be present before vicarious liability applies. This article explains each element, shows how they work through a real High Court case, and then deals with the misconceptions that most often catch Australian businesses out:

• Element one: the person who caused the harm must be in the right kind of relationship with the business, most commonly as an employee.
• Element two: the wrongful act must be committed in the course, or scope, of that person's work.
• The consequences: where both elements are met, the business can be liable for damages, statutory penalties, or both, even for conduct it never authorised.
• The practical side: how workers are classified, and what policies, training and insurance a business has in place, all affect how exposed it really is.

Element one: the relationship must be one of employment

Vicarious liability attaches to the employment relationship. It does not, in general, attach to the work of a genuine independent contractor. The difficulty is working out which relationship a business actually has, because Australian courts decide on the substance of the arrangement, not on the label in the contract or the title on the invoice.

The High Court has developed a multifactor test. Relevant considerations include who directs how, when and where the work is done, whether the business supplies equipment, uniforms and training, whether the worker can delegate the work or take on other clients, how the worker is paid, and who bears the commercial risk, including the cost of tools, vehicle and insurance.

Hollis v Vabu Pty Ltd (2001) 207 CLR 21 is the classic illustration. The courier company described its bicycle couriers as independent contractors, and the couriers supplied their own bicycles. But the High Court held they were employees in substance: a fleet controller allocated jobs and the couriers could not bid for work, the company supplied radios and uniforms, and the couriers were integrated into the business as an identifiable part of it. When one courier negligently knocked over a pedestrian, the company was vicariously liable.

The other side of the line is Sweeney v Boylan Nominees Pty Ltd (2006) 226 CLR 161. A mechanic who serviced refrigerators for the company was held to be a genuine independent contractor. He supplied his own tools and van, invoiced for hours worked, received no wages or superannuation and carried his own insurance. The company was not vicariously liable for his negligence, even though he worked regularly at its request, used its invoice forms and had been described as "our mechanic".

There are two important qualifications. First, an agent who is authorised to act on the business's behalf can expose the business to liability for acts done within that authority, whether or not the person is an employee. Second, some duties are non-delegable. A school's duty to protect its pupils is an example the High Court discussed in New South Wales v Lepore (2003) 212 CLR 511. In those cases the business can be directly liable for a failure to take care even though the work was performed by someone else.

Element two: the wrong must be connected to the work

The second element is that the wrongful act must be committed in the course or scope of the employment. The High Court said in Schokman that the just limits of vicarious liability are marked out by this requirement.

For negligence, the test is easy to state and harder to apply. An employee who causes a road accident while driving between client sites is doing a careless version of an authorised task, and the employer will ordinarily be liable. The employee does not have to have been following instructions. A wrong way of doing the job is still within the course of employment. A personal venture outside the job is not, and the law's traditional word for that personal venture is a "frolic".

Intentional wrongdoing is treated differently, but it is not automatically outside the rule. In Lepore, the High Court considered whether a school authority could be vicariously liable for a teacher's sexual abuse of a pupil. The Court rejected the idea that the answer was always yes, but accepted that intentional criminal conduct can fall within the course of employment where it is sufficiently closely connected with the work the person was employed to do. The modern question is whether the wrongful act was so closely connected with the employment that it is fair and just to hold the employer liable.

This is a factual judgment made about each incident. Time and place matter, but they are not decisive. Conduct at a work function, in work-provided accommodation or while wearing the business's uniform can be connected to the employment. Conduct that is purely personal, however unfortunate, will not be.

A worked example: what happened in Schokman

Mr Schokman was a supervisor at a restaurant within a resort. His employment contract required him to live in shared staff accommodation, and a team leader, Mr Hewett, moved into the same unit. One night both men spent time at the staff bar, and at about 3 am, after returning to the unit, a heavily intoxicated Mr Hewett stood over the sleeping Mr Schokman and urinated on him. Mr Schokman, who had a history of narcolepsy, suffered a cataplectic attack as a result.

Mr Schokman sued the employer in negligence. He argued that the employer was vicariously liable for Mr Hewett's act. The trial judge found the act was a drunken misadventure with no connection to Mr Hewett's duties as a team leader, and dismissed both the vicarious liability claim and the separate claim based on the employer's duty of care. The Court of Appeal overturned that result, focusing on the fact that the shared accommodation was itself a term of the employment contracts. In 2023 the High Court restored the trial judge's decision. The employer was not vicariously liable. The accommodation may have created the opportunity for the harm, but the act itself was a personal frolic, not part of Mr Hewett's work.

The case is valuable precisely because it is a boundary case. The relationship element was satisfied, because Mr Hewett was an employee. The connection element failed. It shows that vicarious liability is not a catch-all for every misfortune that happens to involve people who work together.

Misconceptions that leave businesses exposed

A few misconceptions recur whenever a business first confronts a claim, and each one can leave it exposed:

• No-fault liability: "I did nothing wrong" is not a defence. Vicarious liability exists precisely to hold an innocent employer responsible for an employee's wrong, because the business created the risk and benefits from the work.
• Labels: the contract that says "independent contractor" does not decide the relationship. As Hollis v Vabu shows, a business can be vicariously liable for someone it paid and described as a contractor, if the substance of the arrangement is employment.
• Time and place: "it happened after hours, so it is not our problem" is wrong twice over. Time and location are factors, not answers, and work functions and work-provided accommodation regularly produce claims.
• Negligence only: intentional wrongs can be covered, as Lepore shows. Statute also extends the principle. Under s 106 of the Sex Discrimination Act 1984 (Cth), an employer is liable for discriminatory or harassing acts done by employees or agents in connection with their employment or duties, unless the employer took all reasonable steps to prevent the conduct.
• Common law only: there is more exposure than damages claims. Misleading statements made by sales staff can be attributed to the business under s 18 of the Australian Consumer Law, which is Schedule 2 of the Competition and Consumer Act 2010 (Cth). Work health and safety laws impose a direct duty to ensure, so far as is reasonably practicable, the health and safety of workers and others affected by the business, separate from vicarious liability. And under s 6D of the Privacy Act 1988 (Cth), a business is generally exempt from most of the Act only if its annual turnover is $3 million or less, and even then only subject to exceptions such as health service providers and businesses that disclose personal information for a benefit.

How a lawyer can help you manage the risk

A lawyer's main contribution is to stop you relying on labels. Before you engage someone, a lawyer can help you work out whether the real relationship is employment, and structure the engagement and its documentation so that the substance matches the intention. That includes checking who provides equipment, who bears the risk, how the person is paid and whether they can work for others.

A lawyer can also help with the documentation that supports a reasonable steps position: employment contracts, workplace policies on conduct and complaints, contractor agreements, training and induction records, and incident response procedures. If a complaint or incident occurs, acting quickly and keeping records is often the difference between a defence and a liability, particularly under anti-discrimination law.

When a claim is made, a lawyer can assess whether vicarious liability actually arises on the facts, defend the claim, and in some circumstances seek contribution from the employee whose wrongdoing caused the loss. Insurance is a related issue. Public liability, professional indemnity and other policies respond differently to acts by employees, contractors and agents, and a lawyer can help you check that the cover matches the risk.

The question to ask about each role

Many businesses discover vicarious liability the expensive way, when a claim arrives and an engagement that looked like contracting turns out to be employment in substance. That discovery usually happens because the paperwork said one thing and the working reality said another.

So instead of asking "are we protected?", ask two questions about every role in the business. First, if this person caused harm while doing this job, would a court see the act as closely connected with the work? Second, is the real relationship one of employment, whatever the contract says? If you cannot answer both comfortably, that is the point at which a lawyer's review of your engagements, policies and insurance is worth far more than the cost of the advice.