Wednesday - 19 November 2008
HowTo
Scores of agencies across the country have signed up to general consultancy terms offered by clients and their managed service providers. What many haven't realised is this could put their business in serious jeopardy. Buried within the detail are provisions which could bring an employment business down — warranties and indemnities that cannot be managed or underwritten.
The problem is that a consultancy agreement will often contain provisions agreeing to warrant the actions of the contractor. Fair enough, if you are a consultancy, charging consultancy margins and actively managing the worker. But in the case of an employment business, there is no actual control over the contractor's activities. You don't manage them onsite: you are not their boss. So if a contractor infringes intellectual property, reveals commercially sensitive information or causes damage to a client, you're liable under consultancy terms, even though there is nothing you can do to prevent this. And unlike a consultancy, an employment business can have hundreds or even thousands of contractors on site, which multiplies the likelihood of a claim.
Some agencies may believe that their Professional Indemnity (PI) insurance will cover them in such an event. Sadly, this is not the case. PI insurance only covers the acts of the recruitment consultant — not the acts of the contractor. The chance of obtaining appropriate additional cover is slim as no insurer wants to take on a risk that is so far outside the control of the company it is insuring.
The result is that employment businesses large and small are exposing themselves to significant risk. In fact, Recruiter has learnt of at least one FTSE-registered business that has been prepared to shoulder this risk with major accounts, and this has to be a considerable concern to shareholders.
Clear and present danger
Perhaps many recruiters believe that these terms will not stand up in court, that the liability is simply a theoretical concern rather than a practical one.
However, according to Justin Godbolt, a partner at Oxford Employment Law Solicitors, this is not the case. In his view the problem with consultancy terms is that the employment business is signing up to responsibility for services that it will not be providing. And the fact that it is not providing the services will not invalidate the liability. "The employment business often agrees to indemnify the client for the actions of the contractor and, in all likelihood, it will have to stand by that agreement," he believes.
"So why don't clients change their terms? The common response we get is that every other agency has signed up to them."
The recruitment industry has only itself to blame. It takes us a long time and a lot of persuasion to bring clients around to our point of view. But eventually they realise it's not in their best interests either — they're passing on risk to parties who can't manage it and that leaves them horribly exposed.
When you consider that typical indemnities for blue chip clients start at £1m, and go much higher, it is clear that one incident of contractor misbehaviour will hit an employment business hard. As Godbolt says: "While disputes are rare, the potential liability is significant, and it could take just one claim to bring down a business."
It is indicative that the Recruitment and Employment Confederation (REC) standard agreement provides that the employment business cannot be held liable for the "negligence, dishonesty, misconduct or lack of skill of the temporary worker". Ultimately, agents may be in competition but consultancy terms represent a common threat to their business. In the end, no one will win, including the client, unless agencies are prepared to speak up together.
Jason Luckhurst, managing director, Practicus
What happens if i sign up?
Published: 02 April 2008 Author: Jason Luckhurst, managing director, Practicus
The problem is that a consultancy agreement will often contain provisions agreeing to warrant the actions of the contractor. Fair enough, if you are a consultancy, charging consultancy margins and actively managing the worker. But in the case of an employment business, there is no actual control over the contractor's activities. You don't manage them onsite: you are not their boss. So if a contractor infringes intellectual property, reveals commercially sensitive information or causes damage to a client, you're liable under consultancy terms, even though there is nothing you can do to prevent this. And unlike a consultancy, an employment business can have hundreds or even thousands of contractors on site, which multiplies the likelihood of a claim.
Some agencies may believe that their Professional Indemnity (PI) insurance will cover them in such an event. Sadly, this is not the case. PI insurance only covers the acts of the recruitment consultant — not the acts of the contractor. The chance of obtaining appropriate additional cover is slim as no insurer wants to take on a risk that is so far outside the control of the company it is insuring.
The result is that employment businesses large and small are exposing themselves to significant risk. In fact, Recruiter has learnt of at least one FTSE-registered business that has been prepared to shoulder this risk with major accounts, and this has to be a considerable concern to shareholders.
Clear and present danger
Perhaps many recruiters believe that these terms will not stand up in court, that the liability is simply a theoretical concern rather than a practical one.
However, according to Justin Godbolt, a partner at Oxford Employment Law Solicitors, this is not the case. In his view the problem with consultancy terms is that the employment business is signing up to responsibility for services that it will not be providing. And the fact that it is not providing the services will not invalidate the liability. "The employment business often agrees to indemnify the client for the actions of the contractor and, in all likelihood, it will have to stand by that agreement," he believes.
"So why don't clients change their terms? The common response we get is that every other agency has signed up to them."
The recruitment industry has only itself to blame. It takes us a long time and a lot of persuasion to bring clients around to our point of view. But eventually they realise it's not in their best interests either — they're passing on risk to parties who can't manage it and that leaves them horribly exposed.
When you consider that typical indemnities for blue chip clients start at £1m, and go much higher, it is clear that one incident of contractor misbehaviour will hit an employment business hard. As Godbolt says: "While disputes are rare, the potential liability is significant, and it could take just one claim to bring down a business."
It is indicative that the Recruitment and Employment Confederation (REC) standard agreement provides that the employment business cannot be held liable for the "negligence, dishonesty, misconduct or lack of skill of the temporary worker". Ultimately, agents may be in competition but consultancy terms represent a common threat to their business. In the end, no one will win, including the client, unless agencies are prepared to speak up together.
Jason Luckhurst, managing director, Practicus
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