SI Review: April 2012

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Benefit of Counsel

Crucial Clause

What you don’t see can hurt you

By George Reardon

These days, staffing firms often use their customers’ contract forms when sealing a deal. Often, those contracts lack some clauses that staffing firms shouldn’t do business without. Staffing firms’ own contract forms often omit important and useful terms. Regardless whose contract you start with, there are six terms that I believe no staffing contract should be without.

A good “Services” definition. A definition of “Services” should cover what you do to supply personnel to clients, not the work that your personnel do for them on assignment. Fixing this one term cures many other serious contract issues.

Burden increase pass-through. You need the right to charge the client for newly introduced or increased payroll taxes and other government-mandated burdens until guaranteed rates are renegotiated. The recent spike in unemployment insurance rates dramatically demonstrates this need.

Comprehensive workforce transfer restrictions and fees. Workforce transfers occur when clients hire a staffing firm’s assigned employees or arrange for them to continue their assignments as employees of a competing staffing firm. The practice is completely legal and free under normal circumstances, unless contracts say otherwise. But timecard language and staffing firm contracts usually ignore the risk, deal only with direct client hires, or use language too vague or delicate to enforce.

Staffing firms should consider imposing delays or fees on workforce transfers. The terms can be more generous for client hires than for competitor hires. If used, such provisions should delay or charge for the client’s “use” of the assigned employees’ services during a period following any service through the staffing fi rm. They should not rely on feckless concepts like “direct or indirect hiring,” “placing temps on another firm’s payroll” or “calling to discuss our fees.”

Further, clients can be told truthfully that the fees and restrictions reduce co-employment, because the client clearly doesn’t “own” a workforce that it has to pay for or wait to hire.

Back-loaded indemnity. When third-party claims involving assigned employees arise, clients often demand at the outset that the staffing firm issue a written promise to indemnify the client and to pay all of the legal defense bills. However, until the facts are fully investigated or the case is decided, it is usually too early to determine fault and whether indemnity applies. To prevent confrontations and cross-claims between clients and staffing firms at times when cooperation between them is critical, indemnity clauses (See “Benefit of Counsel” in our March 2012 issue.) should have each party pay its own way until the underlying matter is resolved.

http://www.staffingindustry.com/site/Research-Publications/Publications/Staffing-Industry-Review/March-2012/Benefit-of-Counsel

Healthcare penalty management. If the “employer mandate” penalties of the healthcare reform law (PPACA) are not judicially or legislatively repealed before 2014, most staffing firms will have to pay annual penalties of $2,000 or $3,000 for all or some of their fulltime assigned employees. Unlike other burdens, these penalties are after-tax costs (requiring a gross-up to reflect the real cost) and won’t be paid on the same schedule as wages or payroll taxes. Even well-drafted existing burden increase pass-through clauses won’t address these penalties. Ensure contracts that are effective on Jan. 1, 2014, will specifically address the PPACA penalty allocation and administration, whether or not the staffing firm intends to bill any penalty cost to clients.

Interest on receivables. Companies tend to pay first the bills that charge interest for late payment. Even if you never actually charge the interest on overdue receivables, your collections may improve if your client contract provides for interest calculated daily (to prevent ambiguity about what a “month” is) and starts accruing on a well-documented date (for example, invoice date instead of date of receipt).

George Reardon is special counsel and a member of the Contingent Workforce Practice Group at Littler Mendelson, P.C., the largest employment law firm representing management in the U.S. He was formerly general counsel of Kelly Services Inc. and Adecco Group NA. He can be reached at greardon@littler.com.

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