Over the past couple of months, there have been some major legal developments, including employment law changes in April 2020, IR35 Private sector proposed changes as well as delays (please see our other articles for more information on these topics), preparations underway to accommodate the UK leaving the EU, impact of the COVID-19 pandemic on the labour market.

With these rising pressures, less end-clients will be willing to sign recruitment agencies' standard terms of business and they are now either trying to negotiate terms with recruitment agencies or asking agencies to sign the end-client's own terms of business.

Given all of these developments, now is the perfect time for recruitment agencies to review and update their commercial contracts as well as their processes of reviewing end clients contract terms. In this article we explain how to:

  • Approach your contracts,
  • What clauses you should look out for,
  • Why regular reviews matter, and
  • How we can help.

Approaching the Contract

The contract should be a reflection of your agreement with an end-client. However, when you are signing an end-client's standard terms the contract can contain many (nasty!) surprises.

However, before dissecting every clause, it is important to understand the contract generally. This means that you should:

  • Understand what you expect and want out of the contract,
  • Decide what liabilities and risks you are willing to accept, and what you would like to negotiate with the other party(s). For example, consider who has the liability for workers while they are on assignment.
  • Understand what your insurance coverage is.

Once you have a general idea of what you want and what to expect, you should:

  1. Read the contract (yes, all of it!) to make sure you understand the basics of what it is saying and to check that the contract is an accurate representation of your relationship and agreement with the other party(s),
  2. Consider whether anything is missing,
  3. Consider whether the contract matches your insurance cover,
  4. If anything does not match your expectations or understanding, then flag it – we list some of the terms to look out for below.

Key Clauses

The following is just an overview of some key clauses that you should look out for when reading the contract, and we explain what they may mean for your recruitment agency -

  1. Definitions: all capitalised words should have a corresponding definition and the definition should be clear.

It is important to read the definitions because they give meaning to key terms in the contract, and as language used in contracts can mean different things in different circumstances according to the context, it is important that you do not assume the meaning of words. In many cases, the Courts have emphasised that Courts should not “undervalue the importance of the language of the provision” (Arnold v Britton [2015]), so do not fall into the trap of misinterpreting the meaning of the contract by assuming you know the meaning of terminology.

  1. Limitations and Exclusions: limitation and exclusion clauses help parties to a contract manage risk. Some exclusion clauses can completely exclude liability for certain actions, although these clauses are of course subject to certain rules. For example, you cannot normally exclude liability for personal injury caused by your negligence, though you may be able to use an indemnity clause which would make the other party liable to pay for the claim – we will discuss indemnities in the next point.

Often limitation and exclusion clauses will mean that a recruitment agency accepts all liability for the actions, errors and negligence of workers or contractors it supplies while they are working on assignment; and they can also limit the agencies legal rights if something goes wrong.

It is also worth bearing in mind that these clauses may impact your insurance. As they may affect the level of cover you need, you may be left without the right level of cover, or alternatively, the cost of your insurance may be higher due to increased risks.

Clearly such clauses can be quite onerous, so it is important to read them and understand what you are and are not liable for.

  1. Indemnity and Hold-Harmless: an indemnity is essentially a promise to reimburse the end-client's specified costs on the occurrence of a specified event. A hold-harmless is usually understood to mean that you promise not to sue the end-client regardless of their contribution to the specified event. Normally these clauses work together with limitations and exclusions and you should check that they correspond with one another.

Going back to the personal injury example above, it is completely possible that an end-client was negligent and caused a personal injury to a worker you supplied. Normally liability for personal injury caused by a party's negligence cannot be excluded. But the end-client could insert a well-drafted indemnity into the contract to make you pay back any costs associated with an event like this (as was the case in Thompson v T Lohan (Plant Hire) Ltd [1987]) – essentially passing liability to you.

Indemnities can also impact your insurance cover, as they may make you take on more liability and increase the likelihood of you making a claim, and a claim of course can impact future renewal costs.

  1. Insurance: consider whether your insurance cover matches the cover that the contract requires you to have. For example, the contract may require you to have insurance that covers the workers and contractors you supply, and not just your Agency and your staff.

You should also take into account all of the clauses you have reviewed, and check whether the policy covers all of your liabilities or whether you may need to consider taking out additional cover.

And finally, check that your insurer's right of subrogation is not excluded or waived. Insurer's use the right of subrogation to recover losses back from the end-client. Normally maintaining the right of subrogation is a condition of the insurance policy so if you sign a contract which excludes the right of subrogation there is a risk that you may be in breach of your insurance terms.

Why Reviews Matter

It is important to review your contracts for several reasons:

  • You need to make sure your contracts are legally up to date and that you are complying with your obligations. For example, from April 2020 Swedish Derogation has been abolished, and all contracts containing this provision must be revised for any new workers so that they no longer contain clauses referring to Swedish Derogation.
  • Failure to comply with certain legislation will leave you open to reputational damage, fines, legal action and potentially business closure.
  • With more obligations on recruitment agencies than ever before, with the new requirements like producing a Key Information Document and Statements of Particulars of Employment, it is important that these documents match your Agencies contracts. If documents do not match each other there is more room for ambiguity and therefore more risk of dispute and legal claims against you.
  • Lastly, in order to stay competitive, business relationships and terms change quickly. Therefore, contracts are often out of date and do not reflect the nature of the relationship and agreement of the parties. This can lead to uncertainty, conflict and disputes, which not only ruins business relationships but can also be very expensive to resolve. By reviewing your contracts, you are protecting your business.

How We Can Help

We have discussed the importance and benefits of reviewing your existing commercial contracts and provided a brief overview of some of the clauses that you should look out for. You cannot contract on your standard terms all of the time, and that is fine, but it is important to understand what risks you are accepting and whether your insurance will cover you if a dispute arises.

However, we appreciate that contracts can be very long, complex, difficult to understand and very boring. At Lockton we specialise in the recruitment industry, and can help you with the process in several ways:

  • We check the contracts for you,
  • Help you understand the contract, the risks and the impact on your insurance cover,
  • We can help tailor the insurance policy to non-standard terms, and
  • We can help you fit insurance products around the advice.

If you are looking for more information on contract reviews or insurance policies, then please get in touch with us.