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Clearing The Fog - Part Two

Part Two of Three

The principals, laws and ethics behind recruiting firm “non-solicitation” policies *Part Two of a Three Part Series

Frequently Asked Questions

  1. “I signed a contract with a search firm two years ago, aren’t we now ‘their client’ and should they not be staying away from recruiting our own employees. Don’t we now have a relationship?”

    Answer:

    No. If that were the case every company would sign a contingency contract with every recruiter that called to maintain the façade of a relationship and discourage internal recruiting. Believe it or not some companies actually play this game with recruiting firms that are gullible enough.

    For starters there is a big difference between retained versus contingencyrecruiting agreements.

    In the former there’s generally a more descriptive definition as to the relationship which is required in exchange for the consideration (upfront, non-refundable deposit) made to begin the engagement.

    While in the latter (contingency) there is little to no mutual “marriage” or “commitment” whatsoever except when a candidate is hired and a transaction takes place. This is what the company has bargained for in return for not having to pay until performance is consummated in the form of a hired candidate.

    While the company does not have to pay until hire under most contingency arrangements, the search firm is equally freed of having to continue working on a position it may not find to be profitable and move on to other projects that are profitable.

    A contingency contract with a search firm alone … collecting dust in a company file drawer … does not constitute any relationship with that search firm unless consideration is exchanged for a service. Even then, one transaction does not a client forever make. (1)

  2. “We used this firm to hire and now we’re finding out they are calling our employees … are they with us or against us here?”

    Answer:

    Again this depends on the “Non-Compete” time period you bargained for in your contract. Notice I use the phrase “ … you bargained for …”. If something is important to you then you must request it. Excluding a spelled-out non-compete clause inserted into your specific fee agreement or recruiting contract, most search firms abide by national association ethics (2) and guidelines set forth by the organizations they are a member of.

    Top Three Most Popular Recruiting Associations:

    AESC – Association of Executive Search Consultants

    • Does not specify non-compete periods – leaves it to individual contracts
  3. NAPS – National Association of Personnel Services

    • Ethics guidelines stipulate a twelve month non-compete period from the date of the last transaction (hire/placement, etc.)

    ASA – American Staffing Association

    • Originally this organization was mostly for temporary and contract employment providers. They have evolved to include permanent staffing in recent years and competing head to head with NAPS. Its Good Practices code does not cite non-compete issues and address mostly temporary staffing issues such as payroll, etc.

  4. “Sometimes we hire and then skip a year … then hire more. Is it fair to be open to internal recruiting just because one year has lapsed with no activity?”

    Answer:

    It is highly doubtful any recruiting firm is counting the days so they can immediately start contacting your employees on the 366th day of the expiration of their non-compete obligations.

    Nevertheless – If you wish to enhance the contract clause addressing this issue, most search firms are open to fair bargaining of a longer period of time or other revision providing:

    a. You make a request for such

    b. Compensation and fee rates justify the added service being provided

    c. You are prepared to reconsider any previous cut rate or discount fee you may have been granted

    If you negotiated intensely for the lowest rate possible when originally formulating your agreement … which many companies tend to do feeling they have accomplished a “Good Deal” … you may not get additional incentives under that bargain basement rate. You may succeed in obtaining added incentives such as an extended non-compete periods, or guarantee periods or other adjustments only if the fee is within more acceptable standards to justify such.

    To use an analogy, most insurance companies will not permit you to purchase umbrella insurance for your house unless first the insurance underwriters approve you have high enough basic coverage to begin with.

  5. “Are there any other issues we should know about recruiters calling our employees?”

    Answer:

    While this may not benefit all companies, you should know some companies choose to invest in their search firm partnerships by paying a small “yearly stipend” during years where there is no recruiting activity.

    This small fee, which can be around $5,000 or so and pales in comparison to the tens or hundreds of thousands in fees (and millions of salaries managed) many companies invest in recruiting services … is remitted by the company to the search firm for several beneficial reasons as follows:

    1. It provides continuance of activity and consideration between the organizations – thus re-establishing a working relationship even when no active recruiting took place

    2. Triggers the non-compete and extends its term period

    3. Provides considerable Goodwill to the search firm which will often in return notify such clients prior to all other companies when superstar and “hot” commodity candidates hit the marketplace
  6. “We found out the search firm was representing one of our employees for another job located at another company … while they were simultaneously helping us hire through them. That’s illegal isn’t it? Isn’t that a breach of fiduciary responsibility? I mean you can’t take and place at the same time can you?”

    Answer:

    According to American Lawyer and quoted case law, No, it is not illegal.(3) In fact this is the reason for the search firm’s very existence: To provide recruiting services to marketable candidates worthy of garnering a fee.

And no, there is no breach of fiduciary duty. (4)

In fact there is no fiduciary duty at all when it comes to contingency search although some search firms are so professional in their execution they mistakenly become considered “part of the company’s organization” by management due to the tight knit relationship that often evolves.

Can an insurance broker sell you auto insurance, then go sell similar auto insurance to the driver that totals your very own car the next day? Yes they can. That same insurance company can insure your auto and as well as sell the same auto insurance to the person who proceeds to wreck your car! In fact insurance companies get away with this every day – this is what they do: Sell Insurance.

Will Monster.com or Hotjobs allow someone to post a resume who happens to be employed by a company that is paying them tens of thousands for a national annual account with a bank of job slots? Yes they will permit that. In fact web-based job boards are in essence earning their fees from candidates (via their resume submission) which makes the value of their resume search functionality more sellable – quite often to the same companies those employees are contemplating leaving.

Whether “recruiting from within a client” makes sense from a long term business perspective however, is of an entirely different matter. This is evaluated on a case by case basis.

The legal requirement for “fiduciary duty” (5) requires that there is first, compensation; secondly the individual must have “decision making authority” which would require the recruiter actually choose who to hire and determine what salary to make the offer at.

No contingent search firm ever makes hiring decisions or chooses who should be hired or sets the salary. Since the search firm never makes such offers or decisions it has no fiduciary relationship. Period.

In our next issue we will supply tips you can provide to your hiring managers and hiring clients as well as additional resources on this subject.

  1. The American Lawyer – Law.com reprint by Jeffrey Boxer, Esa
  2. IRES, Inc. is a member of the National Association of Personnel Services (NAPS)
  3. The American Lawyer, Law.com October 9th, 2006
  4. The American Lawyer, Law.com October 9th, 2006
  5. Jeffrey Boxer, Esq. – October 9th, 2006

Read Part One at:

- Frank G. Risalvato, Certified Personnel Consultant

Member of the National Association of Personnel Services Author, Speaker, Recruiter and Search Industry Veteran

Copyright, March, 2007