Most companies engage professional recruiters or “headhunters” out of sheer necessity, particularly in highly competitive markets where talented candidates are scarce. Recruiters are able to approach prospects freely, and often, their networks are more robust than those of an internal hiring manager. Notwithstanding such advantages, working with a headhunter can be expensive. To protect this investment, companies should carefully review and negotiate the provisions of their recruitment agreement, which, in most cases, should include the following nine “must-have” clauses:
1. Payment only for “qualified” candidates
A company should only pay for prospects who are actually hired as a result of the recruiter’s efforts. More specifically, the obligation to pay should clearly state that payment is due only if and when the company hires, as a full time employee, a “qualified” prospect as a result of the recruiter’s referral, within a reasonable time (typically 6-12 months) from the date of the initial referral.
It is important to distinguish who sourced the candidate. If the company already has the candidate’s resume (e.g., they applied directly, they were referred by someone else, they used to work for you in the past, etc.), then the headhunter should not get “credit” for sourcing that potential employee. To “qualify” a candidate for a headhunter fee, the recruiter should be required to clear each potential referral with the company by asking “do you already know this candidate?” and allowing the company a set period of time to respond. Only those candidates who are confirmed as “qualified” prospects, and ultimately hired by the company within a reasonable time from the referral, should generate a placement fee for the recruiter. To recap: a candidate might be disqualified for such valid reasons as (a) in the past 6-12 months, the company has talked to the candidate or the candidate has applied for a job directly, or (b) the candidate has worked for the company previously.
2. Calculation of fees
The fee should be based only on a percentage of the guaranteed annual cash base salary; and it should expressly exclude from the calculation any bonuses, options, equity, or the value of any benefits. In most cases, a typical fee is roughly 15% of the base salary, and sometimes, a fee cap is included (e.g., not to exceed $20k).
3. Money-back guarantee
It is standard practice to require a full, money-back guarantee from the recruiter in situations where the new hire leaves the job for any reason within the first 90 (or possibly even 180) days. A headhunter may try to water down this obligation by offering a partial money-back guarantee, or by offering to try to find a replacement candidate in lieu of a refund; however, it is entirely reasonable, and industry standard, to expect a full refund initially. In addition, after the first 90 or 180 days, the refund is typically reduced gradually on a “sliding scale” in the event the new hire leaves (or gets fired) any time within the first full year. It is reasonable to allow limited exceptions to this guarantee, such as in situations where the employee leaves because the employer gets acquired and/or moves the job to another city.
4. No poaching (non-solicitation)
Headhunters are often given access to key company personnel, as well as to confidential information about the company and its hiring practices. To keep this information from being used against the company (e.g., to recruit employees away to help fill other positions for other clients of the headhunting firm), the company should require a no poaching or non-solicitation provision tied to certain remedies in the event of a breach.
A confidentiality provision prevents recruiters from sharing what they learn about your business plans, budgets, and salary ranges, as well as any HR issues you might discuss with them.
6. Compliance with Laws
While recruiting on the company’s behalf, the headhunter is essentially acting as a company representative. If the recruiter does something illegal during this process, it is likely that the company will be pulled into any potential lawsuit as it is the party with the deepest pockets. Therefore, the company should require the recruiter to comply with all applicable laws (e.g., non-discrimination, no spam, obey do not call requests, etc.) and seek indemnification from the recruiter in the event the company has any liability resulting from the misdeeds of the headhunter.
As mentioned above, a company should not be responsible for any laws broken by a recruiter. An indemnification clause also protects a company by requiring headhunters to be truthful and accurate in how they represent the company and the position being filled. If the recruiter should lie, materially mislead, or embellish such information, making promises to new hires that they expect the company to keep, this can be detrimental to the company. The indemnification clause will insulate the company from liability in the event a lawsuit is filed against the recruiter and the company, or if the new hire expects additional compensation.
8. Hiring discretion
Put simply, the company makes the hiring decisions, regardless of any recommendations or opinions from the recruiter.
Typically, most relationships with headhunters are non-exclusive, and the company will use other sources to find talent. A non-exclusivity provision can help to clarify the intent and expectations of the parties.
The bottom line is that headhunter or placement contracts are fairly standard and easy to negotiate once you know what to look for. You don’t want to be stuck paying for new hires you sourced yourself or for new hires who don’t work out and leave (or need to be fired) as soon as they start. Nor do you want to pay for the headhunter’s own mistakes. Avoid getting locked into exclusive placement deals without good reason; and finally, don’t listen to any headhunter who tries to tell you that some of these provisions are not industry standard. If you would like assistance with a corporate recruitment contract, Outside GC can help. Please reach out to Brian Heller at (202) 365-3940 or [email protected].
This publication should not be construed as legal advice or a legal opinion on any specific facts or circumstances not an offer to represent you. It is not intended to create, and receipt does not constitute, an attorney-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal questions you may have. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.