A Primer on Staffing Agency Contracts
Staffing agency contracts are agreements that lay out the terms of the relationship between a staffing agency and its client. The basic concept is that the staffing agency would help a company in need of temporary employees with recruiting, screening and sometimes even payroll and other administrative tasks. In exchange for these services, the client agrees to pay a fee back to the staffing agency – which can sometimes be a percentage of the employee’s hourly wage or commission.
These contracts are extremely important for establishing clear boundaries and expectations between the staffing agency and its clients . If not properly drafted, many staffing agencies have received unpleasant surprises when the client believed their relationship was tied to one specific role or project, and that the staffing agency was expecting to continue providing employees to the client on a permanent basis.
Staffing agency clients are often very large or usually engage the staffing agency to help fill many roles, and therefore they have little incentive to offer any real concessions during negotiation. It is up to the staffing agency to make sure it has covered all important bases in its contract, to prevent any confused or unexpected fees later on.
What to Understand about Staffing Agency Contracts
The components of a staffing agency contract with a client typically include:
- Scope of Work – The contract should detail precisely the services the staffing agency will provide to the client. It may include a general description of the services or it may specifically outline the nature of the position being filled, the location of the position, the hours, and any other job-specific details.
- Compensation and Payment – This section of the contract is used to identify the rate of compensation for the services provided, any additional costs that may be incurred, and how and when the client will be billed for the staffing agency’s services.
- Duration of Service – Staffing agency contracts may include a set duration for services, such as the length of the temporary employment arrangement, or it may simply state that it will remain in effect until cancelled by either party. It may also provide a contract termination period.
- Contract Termination – A staffing agency contract will typically include terms under which the contract can be unilaterally terminated by either party, with or without cause. It may provide advance notice requirements for termination of the contract and allow termination in the event of a breach of contract.
- Liability – The staffing agency contract may address liability for the provision of services, including contractual and indemnity obligations. It may specify whether liability is limited, for example, to the value of the services provided by the staffing agency.
- Confidential Information – If any proprietary information is provided by either party, the staffing agency contract should include terms requiring the receiving party to undertake measures to prevent disclosure of that information to unauthorized third parties.
- Non-Solicitation – Any staffing agency contract should contain non-solicitation provisions, which are designed to prevent one party to the contract from soliciting the other party’s employees, customers, clients, or other business partners.
- Compliance with Laws – The staffing agency’s contract should require that both parties remain in compliance with all applicable federal and state laws in the course of business and performance of their agreement. Failure to comply with labor and employment laws, such as wage and hour laws, can create problems for both parties.
A staffing agency contract provides protection to both parties.
Core Elements of a Staffing Agency Contract
In staffing agency contracts with clients, significantly limiting the liability of the agency is particularly important, given the nature of the relationship between staffing firms and clients. For example, many staffing companies must train workers in the duties they will be performing for the client, which exposes them to a wide range of liability claims, most or all of which can attempt to trace back to a negligent training claim against the staffing agency. The fact that large-scale lawsuits against staffing agencies can be widespread is illustrated by Walmart’s $4.3 million settlement on September 4, 2015 of a class action lawsuit in California in which a group of temporary workers claimed the company failed to pay staff who worked through a staffing agency for what the plaintiffs alleged were "missed and shortened breaks, missed wages, unpaid overtime, and reporting time pay." There are also serious potential liabilities for misclassifying contractors – depending on the specific details of the situation – as well as wage-and-hour risks. The most commonly expressed theory is that licensing rules are not being followed when workers are placed despite their ineligibility, such as when Fig Staffing Inc. worker Abraham McKever filed a complaint in Alabama in May 2015 that "the company is running an illegal operation that does not run background checks before placing people at job sites like jails and schools."
Agencies must, for the sake of all parties concerned, make every effort to place workers with the appropriate licenses and credentials.
As there is significant risk for agencies and clients alike, careful strategies for complying with the law both on the agency’s and the client’s part require adequate understanding of the legal obligations associated with their contracts. The two parties will then be able to anticipate liability issues and build the contract accordingly, so that they are less likely to find themselves involved in costly claims, or when they do, at least in the position to do something about it once their interests in common may have just been fractured.
More qualifications must go into the agreement – as should likely be evident by now – than what might be necessary for many other business contracts. These should include full descriptions and expectations for parties’ duties and responsibilities, and who is liable and for what. This will help protect each party if something does go wrong.
Agency and Client Legal Responsibilities in a Staffing Contract
The ideal way for both the client and staffing firm to reach an agreed upon contract is to have an open and honest discussion that details the specific needs of the client, so the goals of the staffing firm and its client can be aligned. The discussion between the client and the staffing firm should keep in mind that the ultimate goal for these contracts is for both companies to mutually benefit from the agreement. This means being open to feedback and suggestions from both parties as to what can work for both employer and employee.
A contract serves as a source of protection for both the client and the staffing firm, so both sides should weigh the benefits of a particular contract very seriously, and make recommendations based on what you believe will be your biggest needs. For example, the contract should have suggestions as to how a staffing firm should balance the agency fee and the quality of the employees it provides. If a staffing agency is only interested in collecting the maximum fee value, then they may not deliver the best possible staffing solutions.
For this reason, staffing agencies should focus their recruitment efforts on finding the best possible employee for the client, rather than just the one who is the cheapest for the staffing agency. This will help the staffing agency keep in mind their goals by focusing on the needs of the client, rather than budget line items. Clarity as to what the needs of the staffing agency are can help when negotiating revisions to the contract.
Negotiating a Staffing Agency Contract
Staffing agencies and clients often find themselves in agreement about their basic contractual terms, but there are more nuanced provisions and considerations that can lead to pitfalls for the parties if they are not given attention. Seeking the guidance of an experienced attorney during negotiations can help avoid these issues from the outset, but employers should also be aware of some common mistakes so they can ask the right questions when negotiating a staffing agency supply contract.
One pitfall that can plague a staffing agency is preparing a contract that lacks sufficient clarity. For example, a supply contract may state that the agency will supply "administrative employees" who will all have similar responsibilities and skill levels. A client may assume that all employees in this category will have, for example, the same minimum level of education. This could create liability exposure for the agency if one of its temporary in-house employees has a lesser educational background than other administrative employees and is not able to perform the job as well as the client expected. However, if the contract clearly states that the agency’s obligation is only to use its best efforts to provide "administrative employees" and that it makes no guarantees about their performance, the agency should not be liable if a client is dissatisfied with one of its temporary employees.
Agreements between agencies and clients may also create confusion when they fail to specify that the agency is providing temporary employees. If an agency does not make it clear that employees are intended to be temporary and do not renew the supply contract when the engagement is about to expire, the agency may run into issues down the road. The legal presumption under most state laws is that wherever employees are working, they will be construed as permanent employees unless there is evidence to the contrary . By failing to clarify the employer-employee relationship in writing, staffing agencies find themselves exposed to claims from employees for wrongful termination against whom they have no liability. For example, if the employment relationship is deemed permanent by a court, the agency’s employee claims wrongful termination after being released from the assignment that may not be valid if he was in fact employed only temporarily.
Another common issue is that agencies may neglect to ensure that their contracts with clients contain enough indemnification language. The contract should clearly specify that the client’s obligation to indemnify the agency applies to any claims its employees or independent contractors may have against the agency. Without this language, an agency can be left holding the bag if one of its employees, for example, sues another client for discrimination or harassment. This is a problem even if the claims of the temporary employee are brought against the client-a staffing agency has no control over how its employees are treated on the client’s premises, and a client may be fully liable for any harm caused to a temporary employee.
Another common problem occurs when clients request that the agency employee sign an arbitration agreement at the start of the assignment. This can create problems for the agency if the client has a separate agreement with the staffing employee that contradicts the supply contract. For example, some clients include mandatory mediation wording in their separate agreements with staffing agency employees. However, the supply contract controls the terms of the client-employee relationship. If the agency has signed a supply contract that includes binding arbitration, then the client cannot later enforce a mandatory mediation provision against the employee.
There is a reason why supply contracts for staffing agency services run many pages long. Language in these contracts is very carefully drafted to avoid the types of issues described above.
Common Mistakes to Avoid in Staffing Agency Contracts
To give you tangible insights on staffing agency contracts, let’s explore some real-world scenarios where things have either gone very well or very wrong.
Contracts that Have Gone Very Well:
HR Management, a large human resources staffing agency, provided over a dozen temporary staff members to an event planning firm for a large, week-long local festival. The contract was clearly worded, defining all necessary details including roles and responsibilities, duration, services, fees, and termination. As a result, the project went smoothly and both organizations were extremely happy with the work done and therefore signed a contract for several subsequent projects.
Contracts that Have Gone Horribly Wrong:
XYZ Enterprises, a manufacturing staffing agency, signed a contract with Randall Manufacturing for multiple temporary team members across their three locations. However, the contract was a poorly written, legalese-filled document that did not correctly address the needs and expectations of the staffing agency as a partner. Over the following year, the contract got dragged into multiple lawsuits due to disputes over contract termination and specific performance details.
Lessons From Real Staffing Agency Contracts
As technology continues to advance at an exponential rate, staffing agencies must also keep pace. It is likely that in the next five years, many more staffing agencies will use automated systems to manage contracting processes, from initial terms and conditions through to invoicing. This could possibly take the form of cross-platform integrations for the recruitment industry. Companies that make these changes will be very significant forces in the recruitment market.
Emerging markets such as India and China offer huge potential, and agencies must learn how to deal with these markets. Future contract provisions are likely to address these markets more frequently. Market leaders will identify risks early and take steps to remedy them.
Growing evidence highlights the fact that agencies are taking an even more proactive approach to managing their business relationships with clients through carefully crafted contract terms . For example, the rise of privately maintained databases of contractors with particular skills has become a very powerful tool for market leaders. Setting out contract terms that address how such databases ought to be maintained and used by both parties (and what happens to data in the event that arrangements are terminated) is becoming increasingly important.
The future of contracts for all sorts of commercial relationships is very much ‘digital’. Contracting is changing, and agreements concluded over the internet are rarer than ever. In very simplistic terms, an email could form a contract in some cases, but will typically fail to include essential provisions which deal with issues such as jurisdiction, liability and exit strategies.
The key is to address the risks which flow from any relationship with contract provisions that set out agreed behaviours, rights and obligations. This is a critical aspect of risk minimisation, and the contracting process must be taken seriously by all parties, from initial discussions through to the finished document.