Three common mistakes in recruitment agreements

Disputes in the recruitment sector are common. Whether it’s a client not paying a transfer fee, a supplier poaching your staff or ex-employees taking a key client; if your business is in a dispute, the first question you need to ask is whether the terms of your contracts are enforceable.

Unfortunately, the regulatory framework in the recruitment sector is complex and businesses frequently get it wrong.

A hastily adopted or untailored agreement often means the loss of an otherwise legitimate case. The cost of not being in a position to bring or defend a claim can be in the tens of thousands of pounds, undoing the good work your recruiters have previously done.

It is therefore important to get your contracts right and make sure that they are suitable for each arrangement you enter into.

Protecting your staff

Due to the nature of the work, your clients and suppliers will often work closely with your staff during an assignment. Those relationships form a vital part of any successful recruitment business, but they also carry the risk of your staff being offered a position with those same clients and suppliers.

To help limit your exposure, and to provide a claim if staff are poached, each of your contracts should have an express restriction preventing your staff from being employed by your business partners. You may also include a provision, called a ‘liquidated damages’ clause, specifying how much will be owed to your business if an employee is poached (in the same way as an introduction fee for placing candidates).

The benefit of having a ‘liquidated damages’ clause is that you have a readily ascertainable sum pre-agreed which forms the basis of any claim you may make. However, any such clauses must be treated with caution and carefully tailored so as not to be considered excessive and arguably unenforceable as a ‘penalty’.

Protecting your key clients

Your employment contracts should also include protections to help prevent employees who are leaving your business taking key clients with them. Such provisions are particularly relevant for recruitment businesses because of the day to day contact staff have with clients and the emphasis on the importance of those personal relationships.

Incorporating restrictions into your employment contracts which state that the employee cannot approach or accept work from clients of the business after their employment has ended are vital. However, if the limits are drafted too broadly, such clauses may be considered too restrictive and may be challenged as unenforceable. You must therefore strike a careful balance between protecting the interests of your business and ensuring the restrictions remain lawful.

Getting your approach to the Conduct Regulations right

One of the key aspects of the Conduct Regulations is that they limit the circumstances in which a recruitment business can charge a transfer fee for a temporary worker who is then employed permanently by a client. For that reason, some recruitment businesses seek to ‘opt out’ of the Conduct Regulations altogether. Whilst perfectly legitimate in the right circumstances, caution should be exercised when doing so.

It is not for example possible to ‘opt out’ where a temporary worker will be working with under 18s or vulnerable individuals during the course of their assignment with a client. That makes an ‘opt out’ unworkable in certain sectors, particularly in relation to healthcare.

An employment business is not permitted to make ‘opting out’ a condition of its employment seeking services. An ‘opt out’ is also only available to workers providing their services through an intermediary company and must be correctly notified to the employment business prior to an assignment with the client commencing. As an additional complication, a temporary worker may also withdraw their ‘opt out’ at any time (although such withdrawal will not take effect until the beginning of their next assignment). The Conduct Regulations are therefore far from straightforward and do catch out businesses.

One of the consequences of getting it wrong (aside from the potential criminal liability that may be incurred) is that the Conduct Regulations will simply be deemed to apply. That means that certain transfer fee clauses and ‘paid when paid’ provisions may no longer be relied upon. Trying to sue a non paying client in such circumstances may therefore end in an embarrassing and costly withdrawal.

It is vital that you, or your advisors, understand the regulations affecting the recruitment sector. When implementing your standards terms of business, you should ensure that they are correctly tailored to the manner in which you do business. The danger of not doing so is all too often an expensive legal bill followed by a re-working of your agreements in any event to ensure they can be relied upon.

Debenhams Ottaway is an REC legal business partner. They advise recruitment agencies of all shapes and sizes across the UK.