Paying Commission to Employment Businesses/Agencies

In April 2004, the Conduct of Employment Agencies & Business Regulations 2003 (“the Regulations”) were introduced. The Regulations were introduced, in the main, to restrict when businesses could charge so-called transfer fees in circumstances where a hirer offers a temporary worker a permanent role. Despite having now been in existence for nearly 20 years now, many businesses continue to fall foul of the Regulations, blaming difficulties encountered in understanding and correctly implementing the Regulations. One consequence of the Regulations has also been the evolution of a new area of case law around what constitutes the ‘effective cause of introduction’. This can often mean that businesses unintentionally become liable to pay commission.

Careful consideration should also be given to the employment agency or employment business’ terms and conditions as these will usually also include various terms which detail the circumstances when commission will become due and payable.

In this article, I set out some examples where hirers may unintentionally become liable to pay commission, along with helpful hints and tips to help avoid this trap.

Work-seekers introduced for direct employment

Hirers can become unintentionally liable for payment of commission to employment businesses where work-seekers previously introduced to a hirer are later engaged by the hirer following direct contact with the hirer or by way of introduction from an alternative employment business.

Work-seekers on temporary assignments

The main issue with unintentional liability for payment of work-seekers engaged on temporary assignments is the question of transfer fees. Transfer fees are payable where a hirer, having engaged a work-seeker introduced by an employment agency on a temporary basis, subsequently seeks to engage them upon conclusion of the assignment either:

• on a permanent basis (known as a “temp to perm” placement); or
• through an alternative employment agency (known as a “temp to temp” placement).

A transfer fee will also be payable if the hirer introduces any work-seeker engaged following an introduction by the employment agency to a new employer (known as a “temp to third party” placement). This is particularly common in larger businesses which comprise several companies which although under the control of the ultimate parent company are separate legal entities in their own right. Often therefore a hirer may introduce the work-seeker to another company within the same company structure at the conclusion of the assignment for a permanent role. Such introduction would amount to a temp to third party placement.

Restrictions on charging transfer fees

The Regulations do seek to restrict the basis upon which transfer fees can be charged. The Regulations are complicated, but can be summarised as follows:

• Where there has been an introduction with or without any supply, any term will be unenforceable unless the hirer is given the option, instead of paying the transfer fee, of extending the hire period, at the end of which the work-seeker may transfer without charge. There is no limit on the period of hire that the employment agency may seek by way of extension or the level of fee payable.

If there has been a supply, the transfer must take place either within 14 weeks of commencement of the first assignment or within 8 weeks of the end of any assignment, whichever period ends later (“the relevant period”). A time lapse of more than 42 days between assignments will break continuity for the purposes of calculation of the relevant period.

• Where, following an introduction and supply, the hirer introduces the work-seeker to a new employer, there is no obligation on the employment agency to offer an extended hire period. A transfer fee will be payable without restriction, provided the transfer takes place within the relevant period. A transfer fee is also payable without restriction if there has been no supply by the employment agency.

With the increased use of social media by work-seekers, it is often the case that an employment agency will learn of any subsequent engagement by the hirer of the work-seeker and care should therefore be taken to ensure the employment agency is notified whenever consideration is being given to engage a temporary work-seeker at the end of an assignment. Employment agencies will often be more inclined to agree a reduced fee if hirers are open about their intentions rather than discovering about the subsequent engagement at a later date.

Opt-Out Provisions

Under the Regulations, work-seekers also have the right to opt-out of the Regulations in certain circumstances. Any temporary work-seeker, which for the purposes of the opt-out provisions includes a company as well as an individual, who supplies services through a personal service company may opt out of the Regulations.

To be effective, a notice to opt out must be communicated both to the employment agency and hirer before any introduction/supply takes place. If served after the introduction/supply takes place then the notice will only become effective upon conclusion of the particular assignment in question. An effective notice will, however, disapply the Regulations in their entirety.

Terms and conditions

An employment business’ terms will usually provide for payment of commission upon engagement following an introduction. To rely on the terms, they must be incorporated into the contract and accepted by the hirer. Acceptance need not be in writing. Frequently, employment businesses include a term providing for deemed acceptance upon reading a work-seeker’s CV (even if sent on a speculative basis). With this in mind, all HR personnel need to consider:

1. If any terms have been received and if so, when? Usually, to be incorporated, receipt must be prior to the hirer becoming liable to pay commission. They do not need to be sent each time a CV is forwarded.
2. What do they say? Terms should be read and fully understood. The court is unlikely to assist if the employment business is seeking to rely upon a term that the hirer did not read and/or understand.
3. Has the hirer already received the CV direct, through internal resources and/or another employment business? If so, it is imperative this is placed on record with a clear indication that no employment business will be used or that only one employment business will be used. It is good practice to keep detailed recruitment notes for all placements.
4. Does the hirer have multiple sites? If so, check whether your business has received and/or accepted terms from another site. If so, it is likely they will apply to the hirer as a whole and not on a site by site basis. Record receipt of all employment businesses’ terms in a central location.

If terms are not incorporated, it is possible that commission may still be claimed on a quantum meruit basis, i.e. payment of a reasonable sum where no contractual sum has been agreed.

Are the agents the effective cause of introduction?

As indicated above, this is finding increasing favour with the courts with it being necessary for agents to demonstrate that they were responsible for carrying out all work leading to the eventual engagement of the work-seeker. Generally, this means that agents will have to demonstrate they have done more than just introduce a work-seeker. This may mean that in circumstances where agents have sent a CV to a hirer but not had any dealings with matters thereafter, such as, for example, arranging an interview or negotiations regarding a work-seeker’s terms of employment, they will be held not to have been the effective cause of introduction and no fee will be payable. However, each case will turn on its own facts and a detailed analysis of the circumstances leading up to the engagement will have to be undertaken to determine whether the agents were the effective cause of introduction.

To guard against such a finding, however, it is now more common for agencies to include a contractual term providing for payment of commission whether or not they were the effective cause of introduction. Where such a term exists, it may not be possible for the hirer to avoid paying the commission due (and possibly two commissions if a second employment agency was involved). The detailed recruitment notes will be invaluable. These should include all communications showing when and how the work-seeker’s CV was received, how and when hire decisions were reached and any additional input received from the agency (e.g. did they arrange any interview(s) and/or assist with the work-seeker’s remuneration package?).

Conclusion

These are complex regulations, and they have created many headaches for many businesses. However, by understanding the key points set out above, and by maintaining thorough and complete records of recruitment processes, you will be given the best chance possible at persuading the hirer that no fee is due.