When should we pay commission to employment agencies?

The Conduct of Employment Agencies & Business Regulations are still causing headaches, 15 years after they were introduced. Ally Tow from Boyes Turner looks at occasions where employers may unintentionally become liable to pay commission to agencies, and how to avoid them.

It has been 15 years since legislation was passed to restrict when businesses could charge transfer fees when an employer offers a temporary worker a permanent role.

The Conduct of Employment Agencies & Business Regulations 2003 came into force in April 2004, but they have not been without controversy.

Many businesses have tripped up, blaming difficulties encountered in understanding and correctly implementing the regulations. One consequence has been the evolution of a new area of case law around what constitutes the "effective cause of introduction". This means there may be times when hirers unintentionally become liable to pay commission.

So when might this happen and how can employers avoid this trap?

When someone is introduced for direct employment

Disputed commission to employment businesses that introduce work-seekers to a hirer for direct employment will typically occur in one of two ways.

Where a work seeker who has previously been introduced to a potential hirer by an employment business but not at the time engaged, but is later hired following either direct contact with the hirer; or introduction by a different employment business.

The employment businesses' terms will usually provide for payment of commission upon engagement following an introduction. To rely on the terms, they need to 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 candidate's CV (even if sent on a speculative basis). With this in mind, HR professionals should consider the following:

• 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;
• 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;
• 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;
• Does the hirer have multiple sites? If so, check whether your business has received and/or accepted terms from one of these sister sites. 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, commission may still be claimed on a quantum merit basis, i.e. payment of a reasonable sum where no contractual sum has been agreed.

Workers on temporary assignments

If there's a dispute over commission to employment agencies supplying workers under the hirers' supervision/control for temporary assignments, this typically only occurs in one way.

Here the issue is transfer fees payable where a hirer has engaged someone introduced by an employment agency on a temporary basis, and then seeks to engage them upon conclusion of the assignment, either on a permanent basis (temp to perm) or through a second agency. 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.

The regulations aim to restrict the basis upon which transfer fees can be charged.

For example, 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 the agency has supplied labour, 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. A time lapse of more than 42 days between assignments will break continuity for the purposes of calculation of the relevant period.

If 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.

Take care to notify the employment agency whenever you are considering engaging a temporary worker at the end of an assignment. The increased use of social media is likely to mean the employment agency will learn of the engagement (the new hire may highlight their new role on LinkedIn, for example), resulting in an obligation to pay a transfer fee.

Are the agents the effective cause of introduction?

Another area becoming increasingly common within the recruitment industry is the question of whether the agency was the effective cause of introduction.

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. This clause will claim they were not responsible for carrying out the work leading to the eventual engagement of that person.

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) and an analysis of the historical facts leading up to the hiring of that person will need to be undertaken.

In this case, detailed recruitment notes will be invaluable. These should include all emails 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 (did they arrange any interview(s) and/or assist on decisions around their remuneration package, for example?).

Opt-out provisions

Under the regulations, work-seekers include any person who is a company. Any temporary work-seeker 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 to the employment agency before any introduction/supply takes place, in turn notifying the hirer before any introduction/supply commences. An effective notice will dis-apply the regulations in their entirety.

They may have been around for some years, but these are complex regulations, and they have created many headaches for many businesses.

However, by understanding these key points, 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.