Publisher’s Corner

I am frequently asked how to go about developing a long-term strategic plan for firms in our business, usually because some banker wants some assurances before coughing up some loan money or because some practitioner thinks they can really predict what will happen in their future and can plan accordingly. Pro formas, 1, 3 & 5-year plans are generally worthless hyperbole but the requests continue anyway.

I have seen a lot of these documents over the years and, if I were on the banker side of the table, I’d expect the loan applicant to jump up and start singing a rendition of “Blue Skies.”

But bankers are in the business of making loans if at all possible so, if the loan request is packaged properly, your chances are moderately good. That’s because most civilians (including bankers) have zero knowledge of the business we’re really in. Many in our business are taking this improving economic picture to think about growing their firms and the need for investor money or bank loans is essential.

Fact is, in addition to this being a “What have you done for me lately” business, it is permeated with so many “what ifs” that these loan applications should be written on a slice of Swiss cheese. The banks are looking for stable revenue generation and the borrower is trying to cobble together a chronicle of the future to assure the bank that they will get paid. Creating a vision of stability is the toughest part, especially if you don’t have a long-term track record to back you up. I can’t think of a less stable business. Eyes frequently glaze over when you start talking about number of marketing calls per day; number of sendouts; ratios of offers to sendouts; and other placement ratios which mean very little to the uninformed.

The structure of the loan package is almost as important as the content. Bankers are bureaucrats at heart and if all the i’s are dotted and the t’s crossed, it increases their comfort level.

The first question I’m usually asked is “What is the size and/or dollar volume of the industry?” This depends upon which segment of the industry is being addressed. Since our primary constituency is the Permanent Placement (Direct Hire) sector, we are at the mercy of surveyors in segments other than this. Even though other counters tell us that there are from 10-16,000 firms in our particular sector, our database of firms in this business subdivision is 37,949 as of this writing. There are so many solo practitioners these days many of whom work from home and don’t get listed in the Yellow Pages (from which most of this info is gathered) it is difficult to assess. Yet, they make placements, collect fees, buy training materials, subscribe to TFL, etc. I’m not sure how this information is valuable to the inquirers because there are hundreds (and sometimes thousands) of firms that specialize in a particular niche. If you operate within the accounting/finance niche, for example, you will have a lot of competitors. If you specialize in pet food manufacturers, the number of competitors is going to be significantly smaller. Nevertheless, this is almost always the starting point for practitioners wanting to set the stage for loan requests as if they can really expect to capture XXX percentage of that market.

Structuring a borrowable scenario is the creative part requiring considerable imagination. “If I have 8 desks, and if each of them makes 2 placements a month and if the average fee is $xxxxx and if I collect them all and if I don’t lose my superstars and if the economy stays up and if I don’t get sued and if I stay healthy and if they don’t raise my rent — and if you can put all this information into a plausible format acceptable to someone who knows very little about the realities of our business, you might get the loan you want. Just hope and pray that your banker doesn’t ask too many what ifs.

Our experience tells us that your best bet to get the money you need is through family, friends and other private investors. They’re the ones most likely to believe that if you get to the moon, you’ll find a green cheese sandwich.

We asked attorney Jeff Allen how to package a loan request and he covered it in this month’s Placement & The Law column. If you’re constructing a business plan, there is a lot of software that covers that task. (www.bplans.com, www.businessplans.org, www.planware.org, www.sba.gov/starting_business/planning/basic.html).You’ll also want to read Gary Stauble’s article in this issue.

Activity vs. productivity. A reader who was in the throes of growing his business again asked about the possibilities of establishing a compensation program for his consulting staff based on “activity” rather than the more traditional basis of paying for productivity. He somehow felt that since the “activities” were supposed to ultimately generate placement fees, that perhaps an “assembly line” pay plan might just work.

The only time we ever saw an “activity” plan work was with a firm that specialized in insurance search/placement. The firm had a well-established reputation among both hirers and potential hirees. The owner decided to hire nothing but people from the insurance industry and pay them a straight salary that was at least 20% more than they had been earning.

He assigned “activities” to them commensurate with their aptitudes. Some got job orders, some recruited, some interviewed, some closed, etc. At the end of the year, depending upon profits and the owner’s tax situation, discretionary bonuses were given.

It worked for him because he was a stern taskmaster. But he passed away and his firm was taken over by a more traditional owner.

He tried to maintain the former format but soon opted for a draw against commission plan.

He immediately lost four of his people who couldn’t (or wouldn’t) switch from task orientation (activity) to goal orientation (positive results/cash-in). Rather than hiring insurance bureaucrats, he hired sales-oriented people and, within the first year, his business more than doubled.

Tracking activity is good; compensating consultants strictly on activity is not. It’s still a “pay for performance” business and no matter what the architecture of your firm, that’s the way it always should be.

Retention is strongly on the minds of companies these days as they realize that their top performers are either already secretly looking around or about to leave when they are presented with an opportunity. This has caused a number of recruiters to call about threats being made by companies from which they are trying to recruit. One such threat came as follows:

Scenario: Well-known practitioner has discussions with potential candidate for an assignment. Candidate’s current employer gets wind of the conversations and their lawyer sends recruiter the following:

“It has come to my attention that you are actively soliciting employment opportunities for Mr. ____, who is currently under contract with (our firm). It is also my understanding that you have placed him in direct communications with (client company) officials. These actions are intentional interference with a contractual relationship between (our firm) and (candidate) and must stop immediately.

You are hereby notified that we consider your action and any action of your clients to be intentional interference with a contractual relationship. You and your client(s) have already caused damage to our contractual relationship. I urge you to cease this damaging activity immediately and notify me in writing that you have done so and that you have also been assured that your clients will cease any such activity immediately. We have forwarded this matter to legal counsel and will initiate prompt and aggressive action to protect our interests.

If you or any of your clients wish to negotiate for (candidate’s) services, you are advised to contact (us) directly to negotiate release or buy-out of his contract prior to contacting (candidate). If you have any questions on this matter, please feel free to contact me at your earliest convenience.”

This particular recruiter showed the candidate’s employment contract to her lawyer and was told that it was somewhat ambiguous. Nevertheless, it would require rather costly and time-consuming court time so she backed off.

We covered the reasons why you should always ask potential candidates if they’re encumbered with an employment contract way back in 11/95.

Not only are companies more frequently making difficult-to-turn-down counteroffers to crucial employees wanting to leave, there are more pre-emptive strikes (such as above) earlier in the process as companies belatedly recognize the worth of those key employees who have survived their downsizings and cutbacks.

This protective approach is not new. We checked our archives and found (in 1991, after the last recession) a similar letter was written by a Sears, Roebuck lawyer to a reader. The ironic part was that, at the same time, Sears was having a nationwide layoff of thousands of employees.

Maybe the folks should assess their own corporate policies before they put up the barricades to corral their remaining employees.

Insecure employers are paranoid about search people and view us as everything from a minor annoyance to a major threat. But is it illegal? Depends. Here’s how the question was answered by attorney Jeff Allen in Chapter 27 of The Placement Strategy Handbook:

Of course the source can sue. Anyone can be sued. The question is whether it will win. And that will depend upon proving you are liable for inducing breach of contract. If this can be done, punitive and exemplary awards, as well as injunctive relief, can be awarded. Very painful.

Article Continues Below

Inducing breach of contract is a little-understood area of law. It is not the same as breach of contract. It is the act of persuading the candidate to break the employment contract with the source.

There are three primary issues constantly being considered by the courts:

1. Was there a legally enforceable contract?

It will not take you long to realize that since the abolition of slavery, the employment relationship is basically terminable at will by either party. The exceptions are written individual or collective bargaining agreements. Therefore, how can you induce employees to “breach” contracts they could terminate any time anyway?

Hundreds of federal and state appellate courts have considered this question, but our favorite is a feisty United States Supreme Court decision rendered in 1915 (Truax v. Raich, 239 US 33, 60 L Ed 131, 36 S Ct 7) that stated:

The fact that employment is at the will of the parties respectively does not make it at the will of others . . . and by the weight of authority the unjustified interference . . . is actionable although the employment is at will.

90 years later, the law is still the same.

2. Was the conduct malicious?

The courts still aren’t quite sure what this means, but they know malice when they see it. American Law Reports, one of the most highly-respected legal encyclopedias, states:

Any further discussion of the subject under consideration [malice] should, for purposes of clarity, here point out the lack of scientifically accurate terminology which has mitigated against clearness in decided cases, both in conception and discussion. . . The ‘malice’ which will make one liable for procuring a breach of contract is malice in its legal sense, and does not consist of spite or ill will. (84 ALR 50)

How’s that for a course in Beginning Legalese?

Malice can be presumed by a raid and placement with a competitor. This shifts the burden of proof to you to show an absence of malice. If you can show something didn’t occur that isn’t defined, you may qualify for honorable mention in the next edition of ALR.

3. What if you were doing the source a favor by removing its undesirables?

We call this the “outplacement fee” defense. Maybe the source should split the fee with your client.

Now that you’re an expert in the well-defined law of contractual interference, undoubtedly you understand that the amount of injury to the sources does not affect your liability. It is the wrongful interference itself that is being enjoined or punished. A Harvard Law Review comment states:

[It] includes not merely the procurement of a breach of contract, but all invasion of contract relations. . . Any act . . . which retards, makes more difficult, or prevents performance. (Harv L Rev 728)

We are seeing an increasing number of contractual interference cases that also allege unauthorized use of trade secrets and unfair competition. Since you are being paid to do the deed, and since your client has the deeper pockets, it is inevitable that conspiracy will also be alleged. This leads to much finger-pointing, and few exclusive searches in the future with the “un-client.”

As we move into a high-technology society, the recruiting of key employees from competitors will increase. Watch closely as the law surrounding corporate raids evolves

Paul Hawkinson is the editor of The Fordyce Letter, a publication for third-party recruiters that's part of ERE Media. He entered the personnel consulting industry in the late 1950's and began publishing for the industry in the 1970's. During his tenure as a practitioner, he personally billed over $5 million in both contingency and retainer assignments. He formed the Kimberly Organization and purchased The Fordyce Letter in 1980.

Topics

Leave a Comment

Your email address will not be published. Required fields are marked *