Compliance Glossary

Corporate Liability

Corporate liability is the legal responsibility a corporation assumes for acts committed by the organization’s employees or agents acting on its behalf. 

What is Corporate Liability?

In the eyes of the law, corporations are seen as “persons” or individuals who can be prosecuted and liable for actions. Distinctly separating corporations this way gives them the ability to own assets and take on liability separate from the owners or leaders of the company. Corporate liability determines the extent to which the organization is liable for the actions of its employees. 

How Does Corporate Liability Work?

To hold a corporation liable, the offense must be committed by an employee (or third party agent) of the organization while they are working within the scope of their role and the intent of the action was to benefit the corporation. If these two criteria are met, the organization could be held liable instead of the individual who committed the crime. In cases where the acts were committed in negligence or due to a lack of management oversight, the corporation can still be held liable. 

However, if the employee strays from their duties and commits a crime in the process, the law will examine the extent of the deviation to determine liability. If the employee was not acting within the scope of their role it is considered a “frolic” but if the infraction is minor then it will be considered a “detour”. The courts take many factors into consideration to determine which category the actions fall under, but if the actions are found to be a “frolic” then the corporation will not be held liable. 

Importance of Corporate Liability?

Corporate liability is important because it helps define what party will be legally responsible in a wide range of cases. These liabilities can range from debt-related obligations to contractual obligations to liabilities related to personnel. Corporate liability also helps corporations better prepare to mitigate the risks associated with doing business. Compliance programs can assess corporate liability risks and implement policies or training that educate employees and third parties on how to ethically and legally succeed in their roles. 

Examples of Corporate Liability

Corporate liabilities can be finance-related, accounting-related, or legal in nature. Some examples of corporate liabilities include (but are not limited to) bribery, false claims, embezzlement, insider trading, and violations of environmental laws.

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