April 23, 2020
Recruiting Contracts: Your Guide For Pricing, Terms, & Conditions
by Chris Winterboer
Like any contract, you want to understand the intent and be mindful of the fine print before signing on the dotted line. I’ve often heard from insurance organizations that have had bad experiences with recruiters due to a clause in the contract they didn’t discuss before signing the agreement.
As you approach a partnership with a search firm, make sure there is an open dialogue with a lot of situational Q&A. Examples include:
- What if this person doesn’t work out?
- What if I hire the candidate for another position?
- What if we already have their resume?
- How do payment & guarantee refunds work?
- Can we still recruit on the position ourselves?
This guide gives you an overview of the major components of a recruiting contract.
What is the Right of Referral clause?
The typical right of referral period is 12 months, meaning if you accept a resume from a recruiter you are obligated to pay a fee if you hire that candidate within the next year. Here is some sample language you may see:
The charge for our services is earned when an individual referred by us accepts an offer of employment by your company, or any of its affiliates, within one (1) year from date of last referral or discussion of the individual.
Items to Note:
- NEVER pass a resume on to another company. Say a buddy at another insurance agency is hiring a CSR and you have the perfect resume. Do not send the CV to him. Instead, put him in touch with the recruiter. You are on the hook for the fee if your friend hires the candidate unless he and the recruiter hammer out a contract.
- Date of last discussion is an important clause. It is not ‘date of referral’ which prevents you from dragging out the interview process to intentionally circumvent a fee.
- Tracking is super important. If your company has multiple entities operating within the same HRIS system, then you have an increased exposure to pay the fee even if your division doesn’t hire the candidate. Information like their resume & interview notes cannot be unseen. The recruiter will make the argument their efforts led to a sister company making the hire.
- If you already have the person’s resume you need to show engagement with that person AND for the specific opening. Banking resumes but doing nothing with them is not a way to lay claim against a future referral.
What if I hire the person for another position?
This is an extension of the Right of Referral clause. Here is sample language:
Irrespective of a specific position for which they were presented if you hire a candidate referred by Recruiter within the one year right of referral period a full-service charge is owed.
Items to Note:
- Here is where you insert the definition of “hire”. If the employee works for your company in any capacity (W2, 1099, consultant, etc.) you will need to compensate the recruiter for the referral.
- The position, particularly under a Contingency Agreement which is an overarching ‘umbrella’ contract, is irrelevant. It prevents you from intentionally circumventing a fee by changing a small detail on the role (title or location).
Does the fee apply to the base salary or total compensation?
Our service charge is X% of the new hire’s base salary at time of hire or X% of the new hire’s estimated total first year compensation.
This is the sample language you can expect to see in most contracts (contingency or retained). What follows next is a direct discussion you and the recruiter must have about application. Document what you agreed to in an email.
Items To Note:
- A general rule of thumb is if the employee’s compensation is going to be comprised of at least 90% salary in that first year then the recruiter’s fee applies only to their salary. This is typical in non-sales, non-management roles.
- For sales positions expect the fee to apply to the total estimated first year comp. This protects the integrity of the fee, so you don’t offer the person a $1 salary with 100% commission.
- Management positions (and any retained contract) will apply the fee to the estimated total first year comp. This is in consideration of the many ways you can structure packages for highly compensated individuals including bonuses, stocks, etc
When do I pay the fee?
Contingency agreements don’t require up front payments and retainers do (usually 30-50% of the estimated fee). Here is standard language you will see in most contracts:
The service charge is due and payable when earned. Full payment of the fee is due within 15 calendar days of the candidate’s start date.
What is the guarantee period?
The guarantee period is a good faith extension of the search process. Basically, the recruiter wants to protect you from being burned by a Jekyll & Hyde situation. Here is sample language:
Placements will be guaranteed for a X (X) calendar day period after employment commences, on a pro-rated basis, each calendar day equals 1/Xth of the original fee. Full refund for terminations within the first 30 days of employment.
Items to Note:
- Be cautious about ‘free replacements.” Those clauses were common in the 1990s and early 2000s but over time companies & recruiters found it difficult to always guarantee a Plan B candidate would show up quickly. If a new hire doesn’t work out, the fastest way to feel compensated for that pain is through a refund.
- Guarantees will be null and void if you do not honor the terms of the contract. The recruiter is offering a good faith protection and expects the same from you. The #1 way you will void a guarantee is by not paying the invoice by the due date.
- Guarantees are directly tied to candidate fault. This means the employee must do something to warrant the end of their relationship with you. The two most common instances are termination & resignation. Layoffs, downsizings or any version of you saying, “We just realized we didn’t really want the position,” isn’t the employee’s fault and won’t get you the recruiting fee back.
I hope this was a helpful guide to understanding the pricing, terms and conditions of a typical recruiting contract. Remember, within the framework you should find ways to customize terms to fit your hiring needs. You can find our recommendations on customization in Capstone’s article Recruiting Contracts: Customize Terms To Fit Your Staffing Needs.