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When Does HR Owe Contingency Search Firms a Fee?

If you are like me as a HR person, you're always concerned about recruiting fees.  The organization that pays no attention to the level of contingency search fees being paid is destined to look up and find their cost of hires to be 2X, 5X, even 10X what it should be.   That's a call to fully outsource your HR team.

The solution?  Step one - everyone on your HR team is a recruiter, so have them working openings.  StepThe_candidate_wr two - get a formal referral program in place and put a meaningful bounty on talent coming in.  Step three - centralize or have some form of coordination regarding when search firms get involved with searches.  If you don't have centralized coordination, you'll look up and have three hiring managers telling you they are ready to hire a candidate referred from a search firm.  That's not bad if the talent is rare and you needed the help, but it's bad business to pay 30-40K in fees if you could have sourced the talent on your own.

With that being said, there's a lot of good recruiters out there, especially the ones that can help you fill specific niches you have no shot at filling on your own.   Still, you have many recruiters that will flood you with resumes, hoping one sticks and you'll be on the hook for a fee.  Not exactly value-added. 

How about this scenario?  A recruiter sends paper on a candidate to a company, the company doesn’t consider candidate; but eight months later the candidate is hired through the efforts of the internal recruiting team.  Do you owe the recruiter a fee?

Karen Mattonen recently broke this down from the recruiter's perspective at Jim Stroud 2.0:

"Most importantly the courts have also decided that there are four criteria to determine if a recruiter is going to get a fee…

The Recruiter must have a discussion regarding the applicant with the employer (written, or verbal, and based upon the written terms of the contract)

The Employer and Recruiter agrees to interviewing the candidate

The Candidate agrees to the interview

The Recruiter must help facilitate the interview process with the candidate and company"

That seems reasonable, but there are plenty of volume-oriented recruiters out there that will still demand a fee if they emailed a resume to you and the candidate ends up being hired.  With this in mind, I'm a big fan of having your own agreement ready for contingency search firms to sign and then have the following components included:

--Candidates Referred From Multiple Sources – Search Firm agrees no recruitment fee is due regarding referred candidates, who have applied or were sourced, via other sources by company (examples include but are not limited to:  Careers website, Internet recruiting websites, employee referrals, professional networking, professional associations, etc.).   Company agrees to evaluate circumstances and timing regarding candidate submittal from multiple sources and make equitable determinations on a case-by-case basis.

--Lifespan of Referrals - All referrals are valid for a period of six months from the date of the referral.   All referrals are subject to the multiple sources provision outlined above for subsequent openings within company during this time frame.

Most of the search firms that approach your department won't have an agreement ready for you to sign - they don't want to spend the time haggling.  While they may be taken aback that you have one ready for them to sign, add these bullets to your agreement and you'll eliminate much of the fuzzy areas, and still give your team the ability to fully source the position in question.



That's a really interesting post there because you're hitting on what is a really important issue. I work in the UK, so the legislation and codes of conduct are slightly different (slightly less advanced in some areas) to the US. Plus new cases are cropping up fairly regularly, so things can change rapidly in this field.

I work for an outsource provider and we therefore act on behalf of clients to manage the relationships they have with both recruitment agencies and search companies. We're pretty good at negotiating fees down and getting them to sign up to fair Ts&Cs that benefit the client because we can promise the suppliers business elsewhere (i.e. with other clients). When we first come on board with a new client though it's always amazing how many ad hoc agreements organisations have in place and the ridiculously high fees they're often paying for what is often substandard service.

Aside from looking into outsourcing this process (which obviously I would say!) the best advice I give to HR professionals is to make sure that one person or small team takes responsibility for the management of any suppliers. It can be a hassle but it's worth doing right. There should definitely be standard terms that you get suppliers to sign up to, as you suggest. In fact I'd go as far as to say never sign up to standard agency or search terms, you always get a bad deal. On top of that you should look into putting together Service Level Agreements that everyone is required to work to, particularly for those suppliers you use regularly. So you get a certain number of CVs (pre-qualified etc) by a certain date and then guarantee to give feedback, arrange interviews etc in a certain timeframe on your side.

This is just a small part of it really but it's a great place to start. Bit of hardwork up front but it really pays dividends over time, and great to see it brought up on a blog like this.

Chris Young

You are hitting on something that is really interesting. Something I have seen locally... We have a banking recruiter who shops the same talent pool to all the banks. This obviously happens everywhere... The problem I have is that not all the banks realize this is happening. So from an ethics perspective, I have to wonder... Which bank gets "first shot" at a high quality candidate?

If someone doesn't work out at a particular location - are they shopped elsewhere?

Not sure this is common practice - but it is scary. Knowledge is power, I guess.

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