CWS 3.0: November 7, 2012

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Contract Sample Clauses Part 2

Contingent workforce managers often leave such issues as liability, indemnification and insurance to attorneys, but the CW managers often craft commercial terms of the contracts themselves.

Here’s part 2 of a compilation of sample clauses that should not be overlooked in drafting your contracts. (For part 1, click here.)

In part 2, we discuss benchmarking, right to hire and permanent placement fees. As always, you should seek advice of counsel before entering into any legal agreement.

Benchmarking

The benchmarking clause basically says the same thing as the "most favored customer" clause but is a little less onerous to vendors. It says your company has the right to benchmark your current pricing and service terms against the general market once a year. This is helpful for services or contracts that are poorly scoped or implemented outside of a formal competitive bid process. You might call it a "buyer’s remorse" clause because it provides the peace of mind during any contract term that can take advantage of a formal process to validate the current contract deal.

"Benchmarking: After the first anniversary of the effective date, company shall have the right, at its own cost and expense, and no more frequently than once during any twelve (12) month period, to obtain the services of an independent third party reasonably acceptable to vendor and subject to vendor's standard confidentiality agreement, to benchmark the services (including performance, service levels, and charges) against other vendors performing similar services under similar terms and conditions to ensure that company is obtaining competitive pricing and levels of service. Should such benchmarking result in an indication that the company is paying more than market competitive pricing and/or receiving less than competitive service levels, vendor has 30 days to provide alternate benchmarking that substantiates vendor's competitive pricing and levels of service or to adjust pricing and levels of service to company’s benchmark. If after such 30-day period vendor has neither provided such alternative benchmarking nor adjusted pricing and/or levels of service in accordance with the benchmark, company may either terminate the agreement with vendor or continue to require vendor to perform under the existing agreement. Should company terminate this agreement under this provision, the termination will be handled as a termination for [convenience or cause] under this agreement." 

Right to Hire

The right-to-hire clause is often a stealth clause because most procurement folks focus on the markup only. Meanwhile, they may be converting a large percentage of their temporary labor to permanent. It is not uncommon to see conversion fees in the range of 40 percent of annual salary or more. If you have a low markup, but give it all back in conversion fees, you really aren't saving as much as you think.

"Company may hire agency’s temporary employees recruited by agency as a company employee at any time subject to the right to hire schedule below. If company elects to hire a temporary employee prior to 90 (ninety) days or 520 billable hours, whichever is less, company will pay according to the following pay scale, which shall be based on the direct starting pay of temporary employee. 

"Hours of service are accumulated from the start date at company of the applicable right to hire associate to the current date and will include ALL days and hours of service at company with agency. This will allow for breaks in service (non-contiguous time) providing all service is with the agency. 

"Company reserves the right to convert contractors to a direct hire subject to the conversion fee schedule or move to an indirect payrolled status with a vendor of company's choice after 90 days or 520 hours with no fee."

Click on chart to enlarge.

The most effective application of this clause is based on total hours billed in addition to days worked. This often clarifies the situation when it comes time to convert and the question inevitably comes down to business days or calendar days in the conversion calculation. Remember also that this clause gives you the right to convert the temporary worker from a full markup to either a payroll rate or a separate payroll company. These payroll companies sometime offer more favorable markups, contract and payment terms.

Permanent Placement Fees

 Perm placement fees often come with an almost 100 percent profit margin for the staffing provider. Where there are margins like these, there are always opportunities to improve the contract from a sourcing standpoint. While there are different flavors of external recruitment — recruitment process outsourcing and retained search, for example — the type of perm placement most often included in temporary labor contracts is based on a contingency fee. As the name suggests, the agency only gets paid upon making a successful placement with the company. If the external recruiter fails to make a placement, the agency gets nothing.

This fee is often expressed as a percentage of year-one salary and can range from 10 percent to 40 percent depending on the position and market. Given that starting salaries for "fee approved" positions (those positions for which the placement fee has been approved and budgeted) are most often well into six figures, you are considering some serious money. Obviously, many contingent contracts also include provisions for less expensive hourly, non-exempt positions, but these placements are often addressed in fixed fee arrangements and vary depending on volume, types of placement and so on.

When drafting perm-placement in your contracts, it is critical to make sure to address quality and secondary search.

From a quality standpoint, if you are paying a hefty percentage of the candidate's salary, it is often a good idea to make sure you are getting your money's worth in the vetting done by your contingency firm. One way to address this is by including what essentially is a money-back guarantee for placements made with the agency, such as:

"The agency agrees to refund the fee according to the following schedule for any new employee placed by the agency who leaves company's employment for any reason, with or without cause, voluntarily or otherwise.

Click on chart to enlarge.

Such a provision gives the agency extra incentive to make sure the placements made are for the long term.

Another common issue in contingency searches centers around secondary placements. Specifically this occurs when an agency submits such highly qualified candidates for an open position that multiple candidates are placed from the search for different positions. If the company found these candidates through a search, the agency is due compensation. Because the extra placements were from a different search, though, and the agency has ostensibly been compensated for that search, one could argue that any additional fees should be reduced. This is difficult to articulate effectively in contracts, but here is an attempt:

"Company agrees that if any candidate initially identified and presented to company by the agency for any authorized position is subsequently hired by company for any other authorized position, or a substantially similar position, within one year after presentation by the agency of the candidate to company, the agency will be entitled to a fee. This fee will be discounted by XX percent in the event that agency had successfully placed another candidate with the company as a result of the same search. For example:

"Agency submits candidates ‘A’ & "B’ for position ‘X’
 Company hires candidate ‘A’ for Position ‘X’ and pays agency fee according to the agreement
 Company also hires candidate ‘B’ for a new position ‘Y’

“Because agency has already been compensated for the initial search, agency shall discount fee percentage by XX percent."

When looking at your vendor’s service level, it is important to take a complete look at the whole program and contract process. Recognizing the contractual issues in contingent contracts is what really separates good programs from bad ones.

These are just a few of the contract wordings that should be considered as a part of any well-sourced services or product agreement. They are good starting points, but your attorney should be able to work with you to apply these to your own contract situation and process.

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