Got a Fee Dispute? Here’s How A Judge Will Decide

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Jan 4, 2016
This article is part of a series called Jeff's On Call.

There are two purposes of every contract:

  1. To protect the “reasonable expectations” of the parties.
  2. To compensate one or more parties for “damages” caused by “reasonable reliance” on those expectations.

Your printed fee schedule (or letter) is a contract with the employer, whether it’s signed or not. If you want to learn more about why, I suggest you read Chapters 100 and 113 in Placement Management entitled “A Simplified Theory to Win Placement Fee Cases” and “How Your Fee Schedule Endears You to Employers.”

When you don’t agree with an employer, it’s up to the judge or jury to figure out the terms of your deal. Too often, the words on your fee schedule aren’t enough.

For example:

  1. Was the “annual starting compensation” used only to determine the fee, or was there also an implied condition that said, “The fee is only due if the candidate stays for a year?”
  2. Was the “30-day replacement guarantee” all you intended, or was it just an offer to replace before issuing a full refund?
  3. Were the “estimated annual gross earnings” only meant to be used if the actual earnings coplacementsuldn’t be determined (as where the candidate bails or fails)?

If I gave you what you’d like to say, only an empty-headed employer would agree. So certainty in the terms yields to practicality and marketability.

Courts have been facing this problem of “latent ambiguities” (unanticipated events) ever since people started arguing. As a result, legal scholars have developed various “rules of construction” to figure out what the parties intended.

Attorney Andrew Coppola stated why in The Law of Business Contracts (out of print):

In the making of a contract, two or more people use words or perform acts, and one of them may give his expressions a meaning that differs from the meaning attributed to them by the other. The court must first determine by the process of interpretation what that meaning is.

By the process of construction of a contract, the court determines its legal effect and the legal relations of the parties.

Rules of construction guide judges and are used as formalized jury instructions everywhere. Here are the seven you should know:

RULE 1: Consider the transaction in its entirety.

Let’s say your fee schedule reads, “In the event the candidate ceases to provide services for any reason within 30 calendar days, we will replace said candidate at no charge.”

However, the hiring authority wrote you a letter in response that stated he wanted a 90-day replacement guarantee. Neither of you signed the others document. Absent some evidence that you didn’t receive the hirer’s letter, by making the placement you’re locked into the 90-day guarantee.

The court is just applying common sense to the transaction. It’s looking at the “course of dealings” to decide on the terms of the agreement before the contract was executed (completed).

The “rule of entirety” is applied after placements too. A discounted invoice is the most common situation. If you get mad and later bill a full fee, you’ll be lucky to even get the discounted amount.

The way to protect yourself is to clearly state the full fee on the first invoice, noting:

  • The discounted amount (percentage and number).
  • The date when the full fee will apply if the discounted amount hasn’t been paid.

That way, the court will find there was consideration for your discount — prompt payment. That’s a lot different from finding that the discounted amount was an oral modification of your written fee schedule.

AgreementRULE 2: Consider the circumstances to interpret the written language.

The frequently litigated issue here is when the employer engages the candidate as a consultant or independent contractor. (There’s no legal difference between these; “consultant” is the role, “independent contractor” is the status.)

The uninitiated have words in their fee schedules like “employ,” “hire,” “position,” “salary,” “wage,” “pay,” “commission,” “bonus” or “terminates employment.” The average corporate lawyer can drive a Mercedes truck through the hole.

Circumstantial evidence your lawyer should introduce is:

  • The job order for an employee.
  • The candidate’s previous history as an employee.
  • The way the “consultant,” “independent contractor” or other arrangement developed.
  • Any events that show:
    • Reluctance to pay the fee.
    • Solicitation of the candidate to change his status.
    • Inducement (usually money) to get the candidate to agree.
    • Any written agreement between the employer and candidate.

If you do it right, there’s no reason you can’t be paid on the projected annual gross compensation. Don’t let the employer argue “If he had been an employee, we would have paid him less.” It didn’t pay him less — it paid him more.

And does it matter if the candidate “insisted” on the arrangement? Not to us. We love it no matter who got the idea.

Bill it. Full fee.

Then go back and change the wording of your fee schedule to include services by the candidate as an “employee, consultant, independent contractor or other arrangement.” Be sure the rest of it ties your fee to gross compensation, not all those other words mentioned relating to ordinary employment (“salary,” “wage,” “pay,” etc.).

RULE 3: Consider specific provisions over general ones.

This can be the most elusive rule of all. It’s easy to see how by looking at your fee schedule carefully.

It probably states something like, “Your acceptance of referrals from (name of your business) constitutes acceptance of this fee schedule.”

But it also states (until you follow my advice regarding Rule 2): “The fee is due to (name of your organization) only if a candidate we refer to you is hired directly or indirectly, as a result of our efforts.”

Can you see the inconsistency? If not, look again. The word “referral” (in the first paragraph) is general, but the word “refer” (in the second) is specifically limited by “only” and “efforts.”

You’d like the fee to apply any hire from a referral. But you set up the agreement to require linkage in the chain of causation. You’ll now have to show that your “efforts” were the cause (result) of the hire.

The same interpretation is often applied to a single paragraph. A common killer is: “The fee is due to (name of your organization) only if a candidate we refer to you is hired directly or indirectly within one year, as a result of our efforts.”

Here “efforts” is more general than “one year.” The result is that even if you can show “direct causation,” that chain self-destructs after one year. For this reason, we recommend omitting anything about the time a referral will be considered active. This will leave the court three options:

  1. One year based upon “custom and usage.”Around 65% of the recruiters make the same mistake you did. The employer will readily find one-year fee schedules to introduce into evidence. They’ll be introducing them because they hired after a year. You’ll need to find a way to “revive” the referral period like (from best to worst):

* A letter or agreement signed by the employer waiving its right to assert the expiration as a defense.

* A letter from you to the employer indicating you intend to demand payment even after a year (based upon continuing interviews, providing additional data, etc.).

* Changes in circumstances (job title, job duties, reporting relationship, department, compensation package, benefits, etc.).

  1. A reasonable time based upon common sense. We can live with this, because all those changes in circumstances can expand or contract the time. If the court finds the employer sandbagged, couldn’t make up its mind, or was looking for a place to park the candidate, you’ll get paid.
  1. The statute of limitations. The states vary on the period, and you should know yours. After this time, you can’t enforce your right to a fee. It’s usually longer for a written contract (four years in California) than an oral one (two years). Therefore a signed fee schedule really helps. Sometimes you can use your schedule with an acknowledgement of its receipt by the employer. Although it’s not likely you’ll get it, a letter from the employer waiving the defense works just like one regarding the one-year referral period mentioned in the first point.

You can see by this discussion that there’s no advantage at all in printing one year on your schedule. If you think leaving it on helps you get paid when the placement takes less than a year, fine. I’m not moved, and it won’t budge a judge.

The first time you discover a “placement in the basement,” you’ll be sorry.

RULE 4: Consider handwritten or typed items before inconsistent printed ones.

This is really an extension of Rule 3. If the parties modify the schedule, their intent should control.

It’s a good idea to require that the changes be signed or initialed and dated — if you’re an employer. It’s a bad idea if you’re a placer, because you never change a fee schedule to increase your rights. Don’t worry if the employer doesn’t sign it either — you’re the one who’s bound by the change.

Even a line across those percentages above 20 sent by fax will be enough to keep your standard of living below average. You won’t complain, though. People who cut fees are happy with whatever they can get.

RULE 5: Consider the terms less favorably against the party who wrote them.

This reflects a recognition that you’re in a better position to determine what’s on your fee schedule than an employer. The courts know it, but too many recruiters don’t.

If you sign a PSA (placement service agreement) prepared by the employer, the reverse is true.

The extreme case is where you try to enforce a fee where the PSA forecloses it. This happens in three ways:

  1. A resume race. This is standard PSA fare (along with lower fees and extended guarantees). If you’re the one who introduced the candidate, set up the interviews, checked the references, and extended the offer, you’ll be somewhat perturbed if the resume racer wins.
  1. A job title change. Many PSA’s limit the “acceptance” of the referral to the current job opening.There are often arguments about the similarity of the new opening to the old one, or the qualifications required for it. Your frustration level will vary in direct proportion to those similarities.
  1. An anti-raid covenant. We all know the rules. But how many times do you sign a PSA that promises not to recruit from a juicy source where you never place? You’re bound, though. Just by giving you JO’s (and you working them), there’s enough consideration to make the anti-raid covenant enforceable.

Will the court construe these terms against the employer to the point of ignoring them? Your lawyer will be arguing the PSA is a contract of adhesion; that it forces you to adhere to its terms or not placement play at all. He’ll say it’s unconscionable, since it shocks the conscience. Unfair, too.

But the court won’t be that impressed when your fee schedule surfaces.

Lawyers Gordon Schaber and Claude Rohwer wrote why in Contracts:

This rule has no application where the contract terms were the product of the joint efforts of the two parties . . .

[C]ourts have demonstrated a marked reluctance to deny enforcement to contracts simply because they are “unfair.” It is generally deemed appropriate to leave the determination of what is and is not an appropriate bargain to the parties themselves.

For more on this subject, read Chapter 46 in The Placement Strategy Handbook entitled “Placement Service Agreements: The Hiring Squeeze.”

RULE 6: Consider the sophistication of the recipient of the promise.

Our files are filled with employers who say:

  1. They didn’t know a 35% fee was customary. (Of course, they never received the fee schedule either.)
  1. They thought the 35% fee was based on the first months’ compensation. (The 30-day guarantee confused them.)
  1. They thought the “applicant” would be paying the fee.

If you think these arguments are ridiculous, remember that judges and juries aren’t employers. They’re usually employees. Most are less sophisticated than a first-time hirer. You’ll have to convince them that the employer knew what you were writing about. This sometimes called the “plain meaning rule.” You’ll call it the “plain pain rule” unless you keep the schedule simple.

RULE 7: Consider the written contract as a final, complete understanding of the parties.

This sounds logical enough — your fee schedule or the employer’s PSA states all the terms of the placement.

But what happens when there’s a disagreement? Things like:

  • You want to testify about discussions (oral statements) concerning an exclusive assignment in exchange for the lower fee.
  • The employer wants to testify about how you promised (orally) to check references.
  • The employer wants to introduce a letter from you dated before you signed the PSA stating you wouldn’t bill your search costs.

If that later written document (fee schedule, PSA, etc.) covers the issue, the extrinsic evidence can’t be introduced. This is known as the “parol evidence rule.” “Parol” means “oral,” but the rule includes earlier writings too.

The fee schedule or PSA is deemed “integrated,” meaning it is a “complete embodiment” of all the terms.

As Coppola noted:

A determination that it is the complete contract has the effect of nullifying and discharging any inconsistent oral or written agreements, understandings, or statements that previously took place, or oral agreements made at the same time.

If language in the integration is ambiguous, the court must interpret it, and the parol evidence rule does not prohibit any relevant evidence of understandings or statements for that purpose.

Such evidence does not vary or contradict the integration; it merely explains it.

As you can see, the parol evidence rule has undoubtedly improved the standard of living of the legal profession. Nobody knows where “contradiction” ends and “explanation” begins. Except a judge.

These are the seven rules of construction that will determine how your fee schedule is interpreted.

Now they can work for you!

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