Perm fees – does an employment agency need to be the effective cause of the introduction?

The question of whether an employment agency was the effective cause of an introduction of an applicant often finds its way into a defence to a claim for unpaid permanent introduction fees (‘perm fees’).  Depending on the terms of the contract it may very well be a question that does not need answering.  For there to be a requirement for the employment agency to be the effective cause of the introduction the court would need to imply a term into the contract to that effect.

The leading case on the subject, Crema v Cenkos Securities Plc [2010] EWXA Civ 1444, makes it clear that a court cannot improve upon the terms of the contract but it has to interpret them in a fair and reasonable way.  In doing so a court looks to what a ‘reasonable person’ who had all the background knowledge which would reasonably be available to the contracting parties would reasonably understand the relevant contractual terms to mean. The court will only imply a term if the contract does not expressly provide for what is to happen if some particular (often unforeseen) event were to occur. Lord Justice Aikens made it clear that the default position is that no term will be implied unless the reasonable person would consider the contract to contain such a term.  Even then the court does not add a term but merely fills in the gaps in the contract to spell out what the contract means.

So what does this mean in the context of whether or not an employment agency needs to be the effective cause of an introduction in order to claim a perm fee?  The first point of call is the employment agency’s terms. The REC model terms of business (the REC terms) define ‘introduction fee’ as “the fee payable by the client to the agency for an introduction resulting in an engagement”.

The definition of introduction is the “means (i) the passing to the client of a curriculum vitae or information which identifies the candidate or (ii) the client’s interview of a candidate (in person, by telephone or by any other means), following the client’s instruction to the agency to search for a candidate; and, in either case, which leads to an engagement of the candidate; and “introduces” and “introduced” shall be construed accordingly.”

The REC terms clearly spell out that a perm fee is payable if the applicant who the agency has introduced is engaged by the client. The definition of introduction leaves little room for doubt as to what the parties agreed introduction to mean and for a court to imply a term requiring the employment agency to be the effective cause of that introduction.

Our recruitment team worked with an employment agency in an unreported case in 2012 where the court was asked to consider the question of whether the employment agency (A) was required to be the effective cause of the introduction in order to claim a perm fee.  Another employment agency and employment business (B), had instructed A to recruit various administrative staff as well as a trainee recruitment consultant and ultimately engaged three of A’s staff. The REC terms include an employment agency’s own staff in the definition of ‘applicant’. The court found that there was no requirement to imply a term into the contract making it a requirement for A to be the effective cause of the introduction. All it had to show was that its staff had been engaged following an introduction and it was entitled to its perm fees.

In two other unreported cases, Wallace Hind Associates v Lastolite Limited (2000) and Law Staff Legal Recruitment Limited v Just Costs Limited (2009), the court came down on the side of the hirer.

Lastolite Ltd, a manufacturer of cinematographic products, instructed Wallace Hind Associates to fill a particular vacancy. Mr Hudson was offered the post but he rejected it. The vacancy was made less senior and Wallace Hind filled it with another applicant. Approximately six months later Mr Hudson was placed with Lastolite, via another employment agency, for a different position. The contract contained an express clause which read “unless we are successful, then there is no fee payable”.

Lord Justice Tuckey interpreted it that Wallace Hind had to be the effective cause of the introduction. He said “The employer’s obligation to pay the agreed fee is, however, limited by the requirement for Wallace Hind to show that its introduction of an applicant was the effective cause of the engagement. The longer the interval between the introduction and the engagement and/or the greater the difference between the job for which the applicant was introduced, and the job for which he or she was engaged, the more difficult it will be to show this”. On these facts Wallace Hind was not the effective cause of the introduction of Mr Hudson.

Law firm Just Costs instructed Law Staff to find a costs negotiator for its Chesterfield office. Miss Scarborough was introduced by Law Staff sending Just Costs her CV. Her CV was rejected because the vacancy at the office had been filled. A week later another agency sent Just Costs Miss Scarborough’s CV but for no particular position. Just Costs arranged an interview with the other agency and Miss Scarborough was engaged.

Deputy District Judge Stuart said “If I look at matters as a reasonable person might do looking at an introduction period of twelve months and the prospect of a fee being payable within those twelve months no matter how an individual might be employed and for whatever reason then I would have to say that I would look at such a provision critically. I do take the view, in this case and under the terms of the contract, that it is reasonable to imply a term and it can readily be implied in this case that there does need to be some effective cause between the provision of the information concerning the candidate and her actual engagement, and that is in line with the case of Wallace Hind.”

Law Staff was a borderline case. District Judge Stewart was persuaded that the lack of negotiation on the part of Law Staff following the rejection of the CV combined with the hirer’s inability to recollect seeing her CV from Law Staff when it was sent by the other agency, mean that Law Staff were not the effective cause of the introduction.

Key lessons for employment agencies to learn from these cases

• Ideally make it clear in your terms of business that you do not need to be ‘the’ or ‘an’ effective cause of the introduction
• If CVs are rejected follow up with an enquiry as to whether there are other suitable vacancies with the hirer for which the applicant may be considered
• If there is no response to a CV follow up with enquiries with a view to obtaining feedback.