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12 Pitfalls In Staffing Vendor Contracts To Watch Out For

PLEASE NOTE: This blog post does not constitute legal advice. Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.  No reader, user, or browser of this site should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel in the relevant jurisdiction.

It’s widely understood that the process of finding and vetting capable staffing vendors is not fun. When this (often long) process is finally over, it can be tempting to rush to sign on the dotted line and just get to hiring already. But doing so can be expensive for your business.

It’s important to be careful about what you’re agreeing to in a staffing vendor contract. Often, vendor contracts have clauses that can potentially create big problems, resulting in a poor service experience, high costs, and even expensive legal and compliance issues.

Problematic clauses in staffing vendor contracts can be hard to spot if you don’t already know what to look for. To help you out, we’ve flagged the major pitfalls to watch out for in staffing vendor contracts:

1. Having One-Sided Conversion Terms

Often, temporary workers in your contingent workforce eventually prove to be great additions to your full-time workforce. That’s why it’s important to confirm that you’re getting a fair deal on the conversion terms in any staffing vendor contract.

Conversion terms differ based on the industry, qualifications, and category of the candidate. But there are still standard practices that staffing vendors should be following. 

For their hard work in finding and placing great candidates, staffing vendors are entitled to fair compensation. Usually, this is an agreed-upon percentage of the new employee’s starting salary. But if the worker works for you for an extended period (ranging from six months to one year or more), most agencies will allow you to hire the employee without paying a fee. 

And if you choose to convert the contractor to a permanent employee before six months (or one year, depending on the industry), the staffing vendor should offer a graduated fee schedule. Typically, the longer the contingent worker has worked for you, the less the conversion fee should be. All conversion terms, including the entire process and fee structures, should be outlined in writing in your staffing vendor contract. 

2. Not Including Guarantee Language

Every time a hire is made, it’s expected that things will go well. But what happens if this candidate doesn’t work out, or doesn’t turn out to have the requisite qualifications? In this case, you’ll have wasted time and money on hiring the candidate and paying the staffing bill rate to your vendor. On top of that, you’ll need to spend time and money – again – on urgently hiring a replacement. 

To avoid this, oftentimes there is a guarantee clause in staffing vendor contracts. Guarantee language ensures that you are compensated for a bad hire with either a replacement candidate or a prorated refund during the guarantee period, typically of 90 days. It also incentivizes staffing vendors to place high-quality and dedicated candidates in your jobs. 

A strong contract acknowledges that the staffing vendor ascertains that the worker has all requisite qualifications. More importantly, it would outline the conditions and time period within which you can receive a replacement candidate or be refunded for a bad hire. 

However, there are a lot of variables that are not under the control of agencies, and a hiring business needs to acknowledge that sometimes a poor outcome is the fault of the hiring business and not due to any action on the part of an agency. 

3. Vague Payment Terms

Payment terms are an essential part of any vendor contract, and need to be clearly drafted to avoid any unnecessary costs or unpleasant surprises. 

The payment terms in a contract should state the staffing billing rates that the vendor will charge, including for overtime and premium pay. Before signing a contract, it’s important to confirm that you’re not paying above-market rates by benchmarking staffing billing rates to industry standards.

Along with the bill rate, a staffing vendor contract should outline payment timelines and any applicable fees, including the details of penalties for payment delays. And finally, negotiate net payment terms that aren’t too restrictive. 

4. Watch Out For Staffing Companies Treating Employees As Owned Assets

Employees are a company’s most valuable asset. But some staffing vendors can take that too literally. Sometimes, staffing vendors include clauses that bar a contingent worker who has previously worked for you from working with you again, unless you pay a hefty fee. This is an unfair limitation on both you and the temp worker you want to rehire. Read any contract carefully to confirm that you are not unwittingly agreeing to such restrictions. 

5. Unclear Delineation of Responsibilities Between Your Business and the Staffing Vendor

This one can become a serious issue, involving tax penalties, heavy legal fees, and bad press. A vendor contract should explicitly delineate the distribution of employer roles and responsibilities between the staffing vendor and your business. These include managing payroll, paying and withholding taxes, offering benefits, day-to-day supervision of the candidate, and more.

6. Inadequate or Absent Clauses on Indemnification and Limitation of Liability

The last clause we talked about was about avoiding a nightmare situation in the first place. This one is about minimizing damages in case you end up in one. A fair indemnification clause protects both you and the staffing vendor against any risks arising from errors made by the other party in carrying out its responsibilities. 

This means that in case of a lawsuit, the staffing vendor agrees to defend you in court, indemnify, and hold you harmless from all claims, losses, and liabilities to the extent that they arise from the staffing vendor’s breach of the terms outlined in the agreement, and vice versa. 

A strong contract would also have clauses limiting your liability by outlining the circumstances under which you (or the staffing vendor) are not liable for damages or required to indemnify the other party.

7. Not Including Language Related to Arbitration and Legal Jurisdiction

With a great staffing vendor and well-defined contract, you’ll ideally enjoy a great partnership free of any major conflict. But in the event that conflicts do arise, fighting it out in court is not the best option for anyone. 

To avoid the expensive and time-consuming legal battle, make sure that your staffing vendor contract includes adequate arbitration language. Designate the state and court(s) that will have jurisdiction over your agreement so that potential conflicts can be resolved effectively and amicably. 

8. Lacking Clear Clauses On Term Of Agreement and Termination

The term of your contract and how it will be terminated can be a delicate issue between your business and the staffing vendor. The best way to avoid unpleasant situations and potential legal confrontations is to have a definite and agreed-upon term of engagement. 

Ensure that your contract defines the conditions for termination as well as an exit clause, so that you can get out of a contract or fire the vendor if things don’t work out. Formalizing this process safeguards both you and the staffing vendor from unexpectedly being left in the lurch. 

9. Not Mandating Insurance Provisions

While you may not be the direct employer of a contingent worker, you still have a lot of influence over how talent is managed by the staffing vendor. You can hold staffing vendors accountable (and reduce your compliance risks) by mandating that the vendor provide all applicable insurances. These include worker’s compensation, employer liability insurances, commercial general liability insurance, and other applicable insurances depending on the industry and state of employment. Additionally, verify that the staffing vendor’s insurance certificates are up-to-date and make sure that there is a process in place to audit and verify that certificates are updated by the vendor annually before you sign the contract.

10. Not Defining Your Expectations of Staffing Vendors

Verbally communicating your expectations of staffing vendors isn’t enough, because they may or may not be followed. Instead, they should be requirements in contracts. Not only will this ensure important requirements are carried out, but it’s also easier for the staffing vendor to know upfront what your expectations are. The most important terms are:

A) Background Checks and Drug Screens

This specifies the types of background and qualification checks, including drug screens, that  the staffing vendor is required to carry out before assigning a contingent worker to a hiring business. In doing so, it should ensure that the required checks are relevant to the worker’s job responsibilities so that you remain compliant with Equal Employment Opportunity Commission (EEOC) norms and the Fair Credit Reporting Act (FCRA). Finally, a contract should also outline who will be responsible for the expense of carrying out the requested checks.

B) Confidentiality agreements

Sensitive information can be protected by requiring all employees assigned by the staffing vendor to sign a comprehensive confidentiality agreement. It can also be a good idea to sign a confidentiality agreement with the staffing vendor as well to protect any proprietary and confidential information communicated to the vendor. 

11. Absence of Amendment Clauses

The biggest lesson and reminder from 2020 is this: things change, and we must adapt. This is why a contract shouldn’t be set in stone. While this seems obvious, it can be easy to forget about including amendment provisions in your staffing vendor contract. A good contract outlines the process for adding, modifying, or removing any clauses. As standard practice, this requires written consent from both you and the staffing vendor.

12. Audit Clauses

As with anything put in place contractually, a strong contract will have a mechanism to track and verify things like I9s, drug screens, etc. This all needs to be done in compliance with the hiring businesses’ procedures and preferences, so it’s important to have clear expectations about what the processes are. Additionally, most contracts have audit provisions that stipulate how long a staffing agency needs to keep certain records available. It is important that all the elements are understood and outlined in any contract.

Avoid Pitfalls Altogether with Prosperix

While it’s not easy to review every staffing vendor contract for each of these pitfalls, it’s crucial to having a great, risk-free working relationship with your staffing vendor. It’s imperative to standardize staffing vendor contracts in consultation with your lawyer. 

However, it’s possible to sidestep the aforementioned problems by working with a provider like Prosperix. When you hire through our Crowdstaffing Hiring Marketplace, you sign one contract, one invoice, and have one Employer of Record while being able to hire from a connected crowd of hundreds of already-vetted talent suppliers. No more endless hassle around standardization and contracts. We take care of it all.

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