Things to watch out for in tech recruitment agency contracts
We at Toughbyte do tech recruitment for companies in Europe and the US. We are flexible when it comes to the details of the contract we sign with clients and are ready to accept reasonable changes to it. As a result, our contract template has over the years evolved to cover all the points needed to take the interests of both us as an agency as well as the agency’s client into consideration.
Carefully examining a contract before signing is very important because this document may include provisions that could significantly impact your rights and obligations as a client. You should check the clauses & wording and see if there is anything you’d like to negotiate or clarify before you sign.
It may be tempting to try and create your own contract template that you use with all agencies you work with, however, this could be problematic. Each agency may have different needs & preferences and thus be reluctant to sign your agreement instead of theirs. For example, they may have other policies about confidentiality or payment terms, and a one-size-fits-all contract template may not allow for these differences. It is usually easier and faster for you as a client to have an agency contract on the table and suggest specific edits if something needs to be updated. In this post, we’ll discuss what you should watch out for when reviewing such contracts.
Object of the contract
The agreement should outline the tech recruiter’s services - sourcing, contacting, vetting candidates, etc. It should cover the scope of the positions you agree to have them help with and how you can assign new positions to them if needed. Additionally, some contracts may have an appendix that specifies the positions the agency will work on, so it is worth checking out as well.
Some tech recruitment agencies have a frame contract and don’t require you to sign a new one or an addendum to the existing one each time you ask them to help with a new position. You can simply agree on new positions in writing, and put the details in a recruitment assignment. If the agency requires you to work with them exclusively, a clause to that effect may be included. However, working with an agency on an exclusivity basis has certain risks involved. For example, it can limit your ability to hire the right candidate in time if the agency is unable to deliver satisfactory results. There is also a risk of still having to pay a fee for the candidate that applied to you directly. Additionally, if exclusivity applies to only one position, but you end up working with multiple agencies on different positions, you may end up in a situation where you have to pay a fee to each agency in case a candidate that applied to one position ends up being hired for another.
Duration of the contract
The next key aspect of every contract is its duration which should be stated clearly. Check that you have the ability to terminate the agreement if the tech recruitment agency does not meet your expectations. In addition, if there are any conditions for termination, such as a notice period or some associated fees, those should be included in the clause. Some obligations related to payment, warranty, data protection and confidentiality may remain in place after the cancellation of the contract, so pay attention to those as well.
Fees and commission structures
Check that the commercial terms you agreed on with the agency are clearly described. Most tech recruitment agencies work on a success fee only basis, also referred to as contingency fee, or a retainer. Any discounts you agreed on should also be recorded in the contract. Those may include a lower fee for the first placement, a progressive discount for subsequent placements if they occur within a certain number of months after the previous placement, etc.
Pay attention to how the fee is calculated and what it is based on. For example, if you’re hiring a permanent employee, the fee structure can be explained as follows: X% of the candidate’s post-trial period, pre-tax yearly salary based on an 8-hour workday, 5-day work week, 20-day work month and 12 months a year. If you’re hiring a contractor, the yearly salary can be calculated based on their hourly or daily rate.
Another part you should check is when the agency will invoice - after the developer signs the employment contract, when they start working for you, etc. How much time you have for payment should also be stated. The most common periods are 7, 14 and 30 days. If you want to extend the payment period, you should agree on that with the agency in advance. Keep in mind that there is a penalty for late payments which can be anywhere between 5 and 20% per year. Most agencies don’t charge this fee unless the payment is more than a month overdue.
The contract should clearly explain which candidates the agency considers theirs. For example, the agency has ownership of the candidates it introduced to you or that were contacted by its recruiters in the context of your position and then reached out to you directly.
If the agency presents a developer you already know, it can lead to a potential conflict, so there should be a clause describing what to do in such cases. For example, you can record that you have ownership of the candidates you interviewed a certain number of months before their introduction by the agency if you can provide written evidence of that.
The contract should also state how long the agency retains ownership of the candidate before you can re-engage them without having to pay a fee in case they are hired. The ownership period is typically 18 months or more. If you want to change it, you may be able to renegotiate it before signing the contract.
The first thing that should be made clear about the warranty is in what cases the agency will provide it and to which positions it applies. After that, the contract should detail what precisely the recruiters will do. For example, if the candidate leaves the company during the first few months of work, the agency will resume the search for a replacement free of charge. Another option might be to split the fee into two or more installments with the first one paid when the candidate starts working for you. If the candidate leaves during the first few months of work, you won’t have to pay the remaining amount, which is equivalent to a partial refund. It is also better from a cash flow perspective.
If the agency offers a free replacement guarantee, check that the contract explains when it applies and when the conditions of the warranty have been fulfilled. For example, the free replacement guarantee will likely not apply to positions with significantly different requirements or salary ranges.
Confidentiality and data protection
Since you will need to share the details about your company, product or services with the tech recruiters in order to find and attract developers, you should check that the contract ensures the confidentiality of any sensitive information about your business. It should define what info is protected, who can access it and for what purposes.
Pay attention to a General Data Protection Regulation (GDPR) clause. It should describe how the candidate’s personal information can be used and oblige both you and the agency to inform the candidate of any transfers of their personal data, get their consent to do so or take action in case they request to delete it.
Watch out for a non-solicitation clause. It prohibits each party from engaging current or former employees of the other party through the duration of the agreement and a set period of time after its termination. If either party breaches this clause, it must pay a fine, which should also be indicated in the agreement.
The contract should cover potential disputes, claims & controversies between the parties and mention which country’s law it is subject to. It should also state where the arbitration will take place in such cases. If you want to change the court’s location or the law of the agreement, it is better to negotiate these points before signing, as some agencies may be OK with working under your local law, but reluctant to change the arbitration location.
The importance of carefully reviewing the recruitment agency contract before signing goes without saying. There are several key points you should watch out for when doing so:
- What services the agency performs and which positions it works on
- How long the contract remains valid and how you can terminate it
- Fee amount and structure, how it is calculated and when the agency will invoice for the placed candidate
- Which candidates the agency considers billable and for how long, what to do if they present a candidate you already know
- What the agency will do if the candidate they have placed leaves during the probation period - look for a replacement free of charge or do a refund
- How sensitive information about your business will be processed and protected, what falls under GDPR
- Other points, such as non-solicitation and legal dispute details
Keep these things in mind to have a clear picture of what is to your advantage & disadvantage in the contract and what protects you from potential pitfalls of the collaboration. Knowing this will enable you to negotiate the terms that will ultimately satisfy both parties resulting in you closing your position faster without incurring unnecessary risks.