Employment Law Update

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Rethinking Recruitment Agency Agreements

Many employers utilize recruitment agencies to fulfill some or all of their staffing needs.  Not surprisingly, recruitment agencies often present the employer with the agency’s standard agreement.  What is surprising, however, is that many employers sign the agency’s agreement without seeking any changes.  Many agencies will agree to modify their agreements and employers can often obtain substantially better terms.  

Each recruitment agreement must be assessed individually, but the following are issues that commonly arise and should be considered:     

Two Main Types of Agreements  - Recruitment agencies typically use two types of contracts: contingency and retainer agreements.

  • Contingency agreements require a payment only if the employer actually hires a candidate.  The contingency fee is usually a fixed amount or a percentage of the employee’s first year of salary.  The percentage sought by the agency can vary widely from 15% to as much as 40%. 
  • Retainer agreements require an up-front payment of some percentage (usually one-quarter to one-third ) of the anticipated placement fee.  Retainer fees are typically non-refundable.   The reminder of the fee is usually paid at one or two subsequent intervals during the recruitment process, depending upon the particular agreement. 

Ask for a Lower Fee -

  • Employers should not hesitate to seek a reduction in the agency’s stated fee, whether contingency or retainer.
  • It is also important to make sure the terms of the agreement pertaining to the fee are free from ambiguity.  In particular, where the fee will be based upon the employee’s compensation, the agreement should specify that only the employee’s “base salary” will be considered, so that it is clear that bonuses and other supplementary forms of compensation are not included – unless the parties specifically intend that the agreement encompass such compensation.   

Seek Better Payment Terms – Employers will usually benefit from modifying the standard payment terms in an agency’s agreement.  The following are some modifications to consider:

  • Some agency agreements require payment as soon as the recruited employee accepts the employer’s offer, even though that will occur before the employee actually begins work.  Such provisions should be rejected.  There are normally no circumstances where it would be appropriate to pay the agency before the employee begins work in a contingency arrangement. 
  • Most recruitment agencies seek payment of 100% of the fee within a specified number of days after the employee begins work.  Employers should ask to pay the fee in installments, with the first payment due no earlier than 30 days following receipt of the agency’s invoice, or the candidate’s start date, whichever is later.     

Insist on a Refund if the Employee Does Not Work Out– The typical recruitment agency agreement requires the employer to pay 100% of the fee long before the employer can fully assess whether the employee will meet its needs.  Recruitment agencies have a variety of approaches to handling the employee who resigns or who is terminated within a specified time after hiring.  In most agency agreements, however, the agency will end up keeping the full fee.  Typical agency-drafted provisions include:

  • No refund, but the agency will attempt to find a replacement without an additional fee. 
  • No refund, but the agency will give the employer a credit or a partial credit against future invoices.
  • No provision at all; the employer gets no refund and no credit.

Employers should seek a refund if the recruited employee either resigns or is terminated (other than for lack of work) within a specified period of time and taking into consideration these factors:

  • The Refund Window  - The time period within which an employee’s resignation or termination will trigger a refund can vary.  Most agency contracts provide only a 30 or 60 day window.  We recommend asking for six months to a year.  For many positions, it is often difficult to fully assess an employee’s suitability for a position in less time.
  • Negotiate Refund Terms – Optimally, the employer should receive a full refund if the employee resigns or is terminated within the refund window.  Many agencies, however, will not agree to a full unconditional refund.   A more acceptable alternative for the agency may be to refund a pro rata portion of the fee based on how long the employee was employed.  For instance, if the refund window is 180 days, the refund would be equal to 1/180th of the fee paid as of the date of the employee’s termination multiplied by the number of calendar days remaining in the 180-day period. 

Indemnification – In addition to long-standing laws prohibiting discrimination in hiring, many jurisdictions have imposed new restrictions on employment inquiries concerning salary history, creditworthiness and criminal history.  Many agency agreements contain one-sided indemnification provisions that require the employer to indemnify the agency for any damages arising out of the employer’s actions.  Because the agency makes the initial decision on which candidates to forward to the employer for consideration, it is more likely that an employer may be exposed to liability for an agency’s alleged wrongdoing.  Accordingly, employers should seek indemnification from the agency or make mutual any existing indemnification provision. 

Disputes – Agency agreements often include a variety of provisions that come into play in the event of a dispute:

  • Jurisdiction and Venue – Agencies often require that disputes be litigated in their home jurisdiction.  That can be an expensive proposition if the employer is located at a great distance.
  • Arbitration – Many recruitment agreements require arbitration instead of litigation in court if a dispute arises.  In some instances choosing arbitration can be beneficial, but that determination requires an individualized assessment and should not be blindly accepted. 
  • Attorney’s FeesStandard agreements often provide that the employer must pay the agency’s attorney’s fees if the agency prevails in a dispute.  Such provisions should be deleted or made mutual so that the agency is liable for the employer’s attorney’s fees if the employer prevails. 

Other Considerations

Carve-Outs –  Make it clear that the employer need not pay a fee in relation to specific candidates with whom the employer had prior contact independent of any work by the agency. 

Recruiter Duties –  The recruiter’s obligations are often poorly defined.  Ensure that the agreement specifies what the employer has to do to earn the fee.  For example, will the agency do background screening of candidates?

Define the Recruitment Period – The agreement should define how long the recruiter is protected (i.e., entitled to payment) after referring a candidate.  The employer should ensure that the obligation to pay is not open-ended or unreasonably long.   A one-year window is standard. 

Require Compliance With Applicable Law – It is important that the Agency agree to comply with all laws that apply to the tasks it agrees to undertake.  For example, the discrimination laws, immigration laws, and laws that restrict criminal and credit history checks. 

Most terms in standard agreements proposed by recruitment agencies are one-sided in favor of the agency.  The recruitment agency may not agree to every modification an employer seeks, but employers often can benefit from carefully reviewing the agreement’s terms and seeking reasonable modifications. 

If your company needs assistance reviewing a recruitment agency agreement, please contact:

Bob KellnerChuck Bacharach