Avoid Replacement Game-Playing With a “Tire-Tread” Guarantee

Jul 27, 2015
This article is part of a series called Jeff's On Call.

ask-jeff4Hi Jeff,

I am a sole proprietor who runs both a contingency and retained search recruiting firm. Your writing has guided me ever since I started in business in 1997. Your understanding of our business, legal knowledge and humor are priceless. We thank you for helping make us all successful!

A client of mine, who we’re working with for the first time, is asking for a refund based on our inability to refill a high-level position.  

They received 19 replacement candidates from us and interviewed four. Can we state that if they interviewed the candidates then they must have been “qualified” or can they say that the candidates weren’t? 

They are a huge insurance company in a different state. The fee was 25% of the projected salary of $250,000 with a bonus of 25%, so there is a lot at stake. They want $62,500 back, we don’t want to do that, and my recruiter is even more upset than I am.

We really would appreciate your thoughts on this dilemma.

Thank you for not retiring! 

Anthony Florinda

Jeff Responds

Hi Anthony,

Oh great. Now I can’t even retire?

Okay, I won’t. Just promise you’ll keep getting into trouble.

But enuf about me.

I’ll get to your question about the condition subsequent of a replacement guarantee in a minute.

So you Fordycers can’t retire either.

Kindly stand up, do one jumping jack, catch your breath, sit back down, then:

  1. Click to
  2. Click the Placement Fee Collection Quiz button at the beginning of the bottom row.
  3. Take the PFCQ.
  4. Click the Placement Law Language Quiz button in the middle of the bottom row.
  5. Take the PLLQ.
  6. Click the Answers to Placement Law Quizzes button at the end of the bottom row.
  7. Grade yourself on the PFCQ and PLLQ.
  8. Get back to this screen.

The whole concept of guaranteeing one stranger working for another (often even stranger) stranger defies all logic. That’s because it has a recruiter assuming liability over something over which he has no knowledge or control. The best evidence of a recruiter’s inability to control other people is contained in your last placement. Does your placed candidate’s background resemble the spec’s? Thank you. And knowledge? How could you possibly know what’s going on in that legal laugh factory?

Replacement Guarantees As Warranties

When a replacement guarantee is stated — either in the recruiter’s fee schedule or the client’s PSA (placement service agreement) — it’s often interpreted by a court as a warranty as to the candidate’s fitness for the intended position.

Our JOC readers who follow consumer protection laws may recognize that this sounds like the products liability implied warranty theory of fitness for intended use. That is the analogy used by employer lawyers when they want to nail you for the candidate’s mistakes or misdeeds. So legally, a replacement guarantee can have you indemnifying the client against virtually anything imaginable. In insurance parlance, you’re shifting the risk of loss to yourself in an unlimited, unascertained amount.

Replacement guarantees started in the mid-sixties when the APF (applicant-pay-fee) pro-rata refund guarantees seemed too high for the emerging EPF (employer-pay-fee) recruiters. This became a problem for the executive search franchisors, since prospects tended to dash out of the room when they were being “closed” to buy a franchise. It was much easier to sell the franchise if you told the prospect that no fee would ever have to be returned.

Replacement Game-Playing

Of course, those folks had yet to honor a replacement guarantee. Doing so is an experience most recruiters only have once. It is then that they discover the wonders of a non-responsive, cranky, game-playing “client” that eventually demands a full refund because the “replacement” candidates aren’t replacements. You failed to find an identical candidate in spite of its good-faith efforts to hire one. No two humans are exactly alike, they have different backgrounds, and non-repetitive jobs change.

That’s your sitch, Anthony. You can try limiting the number of “replacement candidates,” try limiting a change in job specs, and try limiting the time period for the client to hire a replacement.

But you can’t force the client to hire someone who isn’t the original candidate. You don’t have another identical item to replace him. Ultimately, that backs you into a cash refund corner.

Why don’t your good-faith efforts to replace count? Because the client says you can’t perform and the court will not order a replacement. No judge wants to supervise a subjective process like that, even with a deadline. It would just have you back in court again on the refund issue.

The “Tire-Tread” Guarantee

That’s why our savvy JOC readers use an objective “tire-tread” pro-rata refund guarantee. Anything beyond 30 days is giving away the store, though. Thirty days to find the right rest room – we can handle that. With a short term there’s no need to get into the termination for just cause legal and factual hassle. “Just be-cause” is fine. Pro-rata if you can, full refund if you must.

Before we leave this guarantee business, let’s cover another issue that often arises.

Listen up, Fordycers. I’m ’bout to learn you some Jeffstuff:

Let’s say you have no guarantee, the client didn’t notify you according to the terms, or the guarantee expired. Do you have some sort of fiduciary duty to refund or replace?


Start-Stop Second

That’s because of the start-stop second. It’s that instant of time when a candidate starts work and liability attaches.

Soliciting a contingency-fee job order from an employer and working the search doesn’t create a fiduciary duty of trust and confidence. You have absolutely no duty to an employer before a candidate starts. There is not even a contractual obligation.

During that start-stop second when the candidate reports for work, a unilateral contract is formed (by one party fully performing before the other). Your performance is complete and all conditions have occurred because the placement happens. The duty of counter-performance (payment of a full fee) then arises.

You have absolutely no duty to an employer after a candidate starts as well. There is no contractual obligation then either — unless you express one by your guarantee (or the court implies one because it finds you forgot to include it).

Whoa! Absolutely no duty to an employer before a candidate starts and absolutely no duty to an employer after a candidate starts! The first time I figured this out, I was ready to go back to working a desk. I even checked to see if “Start-Stop Second Search” was taken.

Best wishes for continued success, Anthony! Keep reading the the JOC’s, and we’ll continue to cover what recruiters need to know.


This article is part of a series called Jeff's On Call.
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