Counsel’s Corner

Whose contract is it anyway?

Background

There is an ever increasing practice of company clients who insist on using their own contingency recruiting contracts when utilizing the services of a recruiter. Often the recruiter, anxious to obtain the job order, fails to carefully read the contents of those contracts before beginning the assignment. That failure can cause severe problems down the road after a candidate is introduced and hired by the client who then turns to a contract provision to claim that a fee is not owed to the recruiter

The time to review and negotiate the contract is before you begin the search. Too many recruiters are so anxious to get started they never stop to establish the contractual terms beforehand. Then they are confronted by the contract the client wants and it is too late, they have already started. And bear in mind that the client is trying by whatever means it can, to limit, even eliminate, its obligation to the recruiter after the placement has been made and the candidate has been hired.

Read a Company Contract Carefully

Not all company contracts are the same, but they do have many similar provisions, again because the objective is to control when and if a fee payment will be made when a hire occurs. An overall observation that needs to be made at the outset is that, whatever provisions are established by the client, you can be assured that they will be in violation of the legal principles that normally govern the relationship between recruiter and client and the customary recruiting practices that are generally followed by recruiters. This is because they are generally drafted by attorneys not familiar with the recruiting industry and who are trying to satisfy Human Resources and their petty annoyances or mistaken beliefs in how the recruiting process should be governed.
The provisions discussed in this article come from actual client contracts.

Following a System

No referral will be recognized, nor a fee paid therefore, unless it is processed through the human resources department.

To begin with, the contract may contain a provision that establishes a protocol that requires all referrals be processed through Human Resources, and that a violation of that procedure will abrogate the requirement to pay the fee if a hire results. In fact, we know that this procedure is not generally followed, even by the client itself and certainly not by recruiters. In fact, on the contrary, both the recruiter and the manager to whom the candidate will report want to deal directly, and not through a middle man.

In Person Interview

Some contracts will require that an in-person interview of the candidate by the recruiter precede any referral to the client. While this may be a general practice at some levels, it is most often not followed at even the highest level where candidate compensation may run into hundreds of thousands of dollars, even millions. This happens every day. Why have a provision that is not being followed, only to have the client use its violation (even with the client’s complicity) as an excuse to threaten not to pay the fee?

Resume Required

No fee shall be due where the candidate’s resume was not submitted by ABA Recruiters before interview

What about the non-acceptance of the referral of a candidate by telephone before having transmitted the candidate’s resume to Human Resources? Is that real? This flies in the face of the client’s usual need to move swiftly in certain situations and often the loss of a candidate that is being recruited, and not necessarily looking to change employment, in not having a resume. What is more important, the referral or the protocol? Again, we want to eliminate controversy when the fee is due so get rid of it.

Prior Resume

No fee shall be due where Widgett, Inc. has received the candidate’s resume for a position from another firm, referral or other source within six (6) months prior to ABA Recruiter’s submission for the same position.

How will you ever know if you are going to earn a fee when you refer a candidate who is interviewed and hired, but it subsequently turns out the company had the candidate’s resume on file but never acted on it? You could be sandbagged every time. After all, the name of the game is being the “efficient procuring cause” for having brought about the hire. And if it was you making the referral happen, you should be entitled to the fee, not some other recruiter that dropped a resume in the mail that the client conveniently had in its file.

Rejected Candidate

No fee shall be due if a candidate is referred for a specific position and is rejected and later hired for a different position

So long as you were the efficient procuring cause for having brought the candidate to the attention of the company and there was no intervening event, then you should not be precluded from earning the fee to which you are rightly entitled. Such a provision can lead to all kinds of abuses by a company seeking to avoid paying a fee.

Prior Ad Response, Prior Contact, Exact Position

No fee shall be due where a candidate referred by ABA Recruiters responded to an advertisement from Widgett, Inc. for the same position, prior to the candidate’s resume being submitted by ABA Recruiters, Inc.

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This again belies the basis on which a contingency recruiter earns a fee. It should be based on being responsible for having brought the attention of the candidate to the company and the company acting on that referral, ending in a hiring: to then not be paid a fee for doing what you were retained to do is to “unjustly enrich” (legal term) the client. Sometimes this is also combined with the provision:

No fee shall be due where the candidate had prior contact with the company within 365 days of referral by ABA Recruiters

Or this provision:

A fee shall be due, if and only if, a candidate, actively recruited and referred by ABA Recruiters, is hired for the exact position requested by Widgett, Inc.

This is reason enough to read, carefully, any contract provided by a client in lieu of yours.

Referral Time Limit

Then there is the time limit imposed by the client in which the referral or resume is valid after which there is no obligation to pay a fee. This provision is sinister and, in fact, eliminates the very predicate under which a recruiter makes a referral and expects to earn a fee, i.e., that if the recruiter is the “efficient procuring cause” for having brought about the hire, the recruiter is entitled to the fee. For this there need be no time limit, only a causal relationship between the making of the referral and the offer of employment. A provision with a time limit on the validity of a referral defeats that principle and loses you the fee. Some companies even use a three-month validity period. A high-level placement can take a year or even more. You have to watch out for that one.

Fee Limits, Calculation, and Caps

Companies are often prone to limit the fees paid to below what the market will pay; and at the same time insert incomplete or inappropriate language describing the manner in which the fee will be calculated. This is almost as important as the amount of the fee. How do you describe the calculation so that you get a fee based upon the “computed first year’s projected income?” This may then be coupled with a provision that “caps” the fee at a certain level of candidate compensation. If, for example, your fee is 25% and the assignment is for a candidate who may earn $500,000 and the fee is capped at $100,000, it effectively reduces your fee to 20%.

First Resume in Wins

Another provision that serves to eliminate payment of a fee is the “resume in the house” catchall that says in one of many ways: if the client has the resume from another recruiter, even though you caused the client to interview and hire the candidate, the client will pay the other recruiter. Or, similarly, if the client received the resume through a direct response to an advertisement or voluntary mail-in and it is in their files, they will not owe you a fee. Sometimes this provision is limited to receipt of the resume within some period of time prior to your referral, like 180 days.
And last but not least, where the candidate worked for the client in the past it will not pay a fee.

Conclusion

What is the best way to deal with this problem? Provide your contract to the client at the very outset of the relationship and tell the client this is the basis on which you work. If there is a particular proviso that the client would like to change or one that the client would like to add, then negotiate it, or turn it down if it will only end up frustrating your earning a fee after you have done all of the work. But under no circumstances sign the client’s contract without reading and carefully evaluating each provision and how it will affect you if any one of the described circumstances occurs. It will be too late then.

A. Bernard Frechtman, Esq. is the author of Staffing Industry Law: A Guide for the Personnel Professional and can be reached at (212) 580-7402 and via email at abflaw@att.net or his website www.frechtman.com.

A. Bernard Frechtman, Esq. is the author of Staffing Industry Law, A Guide for the Personnel Professional. He may be reached at (212) 580-7402 or via e-mail at abflaw@att.net or on his web page: www.frechtman.com.

This article, the many others that he has written and the contents of his book, are based on his 50 plus years as an active litigator and transactional lawyer, predominately practicing nationwide in the staffing industry. Bernie maintains an active office in New York City while residing in Indianapolis, Indiana, from where he commutes whenever court appearances require it. His representation has included public companies, nationally franchised staffing companies, both state and national staffing industry trade associations, and litigation from the basic fee controversy to the more sophisticated and complicated trade secret, restrictive covenant and contract litigation. He has also served as an expert witness.

Among his many accomplishments is being named by NAPS as its first Hall of Fame Honoree. A graduate of Brown University and St. John's University Law School, where he was a member of the Law Review, Bernie is admitted to practice in the States of New York and Indiana, various Federal District and Circuit Courts and the U.S. Supreme Court.

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