Employee Payback Agreements: Legal, But Unwise

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Jeff,

I want to thank you for the insight you always share in the “Jeff’s On Call!” column! What you have shared with me has impacted my desk on so many levels and I am very grateful for your contribution to the industry.

ask-jeff4As you might recall, our firm specializes in a blend of retained and contingent search at the leadership level predominately in the chemical and consumer products industries.

I had a unique situation come up and I wanted to get your thoughts on the issue: I have a fairly new client in the final interview stage with my candidate, The client has signed our search agreement, which offers a replacement guarantee. Well, the candidate just received this email from my client:

In addition, I did want to let you know that when we work with employment agencies, and if we would bring you on board and hire you, should you voluntarily leave our employ within a 2-year period of time, we would ask that you repay the fee we paid to the employment agency on a prorated basis. I don’t recall if I made you aware of this or not during our initial conversation, but wanted you to be aware. If you have any questions about this or anything else, please don’t hesitate to let me know.

My question is can a client ask this of a candidate?

Thank you again for all of your help and I sincerely appreciate you sharing your insight.

Sincerely,

Phil

Hi Phil,

How nice to hear from you after a few years, and that your success is continuing!

Employee payback agreements (EPA’s) appear to be enforceable bilateral contracts. That means each party is promising to do something in exchange for the return promise from the other. Since the employer doesn’t have to pay the placement fee and the employee doesn’t have to stay on the job, giving up those “rights” meets the legal requirement of consideration.

It’s odd that the employer sent an email to the candidate rather than having him sign an EPA. As any contingency-fee recruiter knows, oral contracts are enforceable. However, your candidate shouldn’t reply to the email. That way, the burden of proof by a “preponderance of the evidence” (Wouldn’t that make a great rap?) will be on the employer to show it was received and accepted.

Now, let’s move on:

Employer lawyers often send threatening collection letters to ex-employees, then attempt to enforce the EPAs. Invariably, this is just perpetuating the foolishness of using the EPA in the first place.

Actually, “foolishness” is an understatement. EPAs generate more employee morale problems (by employees becoming locked in the “slavery syndrome”) than any other contracts they are required to sign. They also generate an inordinate number of preemptive wrongful termination claims to blame the employer for severing the relationship.

EPAs Are Enforceable

But, yes Phil. EPAs are prima facie (on their face) enforceable.

Now, let’s look at the further foolishness of a recruiter’s involvement in an EPA.

EPAs sound as simple as A-B-C:

A. A job offer is accepted.

B. The candidate signs the agreement to reimburse the client if he leaves within a specified period (usually one year).

C. The client pays the fee to the recruiter.

So simple that many recruiters think this is a way to market their services. They tell the client there’s no risk. If the employee falls off the placement truck, just recall the loan. It’s a great way to reduce employee turnover. It’s also equivalent to a one-year unconditional refund guarantee. A placement paid is a placement made, they think.

Then they boogie over to the candidate’s corner, and rap about how unlikely it is that he will leave. Not only that, but employers never enforce employment agreements(?) ’cause everyone knows they’re difficult to enforce. Besides, they’re really just designed as a deterrent to keep employees from considering other opportunities, so don’t worry.

They rap on, as they place square pegs in the not-so-square holes of most clients. So far, so good.

Now, the not-so-simple arithmetic:

  1. The candidate leaves within the EPA period.
  2. The client seeks to enforce the EPA.
  3. The recruiter has just made an applicant-pay-fee (APF) placement.

When a former candidate looks at the average payback of $21,000, the music stops. Emotionally, the recruiter is perceived as interfering with his right to work. Financial and legal assistance from the new employer, or even the new recruiter, is often given.

How can this be? Nobody charges candidates for placements any more. Who even has a license to do it today? Wasn’t the EPA only with the client? The 30-day placement guarantee expired. Why all the fuss?

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Here’s why:

Truth-in-Lending Laws

The feds look at it this way:

  • The client paid the fee to you.
  • The candidate owed the fee to the client.
  • The candidate owes the fee to you.

Under Regulation Z of the federal Consumer Credit Protection Act (15 USC 1601, et seq.), there are a few minor details. For openers, a written contract with the candidate executed prior to a referral, must contai:

  • The dates of the placement and invoice.
  • The amount of the fee and any discount, expressed as an annual percentage rate (APR), according to a prescribed formula.
  • The amount of the finance charge, in capital letters, since a discount for prompt payment is automatically a finance charge under the CCPA.

You see, under Reg Z, you’re an “arranger of the extension of credit.” (Congress doesn’t say anything simply, or it would have codified your status as a “loan arranger.”) Why? Because you have “provided or offered to provide consumer credit which is extended by another business pursuant to which the person arranging such credit will receive a fee, compensation or other consideration or has knowledge of the credit terms.

Legally, it’s exactly the same as if you sent the candidate to a consumer lender. In fact, you are considered to be a consumer lender. A Lone Arranger. As Tonto would say, “Heap big problem, Kemo Sabe!”

State Disclosure Laws

While these vary, all states have financing disclosure requirements that tighten the federal screws. Examples of items that must appear in the written contract are:

  • The full name and address of the recruiter, client and candidate.
  • The full name and address of the compliance authority, with complaint filing instructions.
  • The amount of the bond required, so the candidate can recover, and excerpts of the penalties (the recruiter pays) from the statutes.

State Licensing Laws

No problem, Kemo Sabe. As long as you have your

  • Applicant-
  • Pay-
  • Fee license.

Criminal and civil penalties for not complying.

“Hi ho Silver, a-w-a-y!”

Civil Laws

The client will most likely attempt to enforce the loan by filing a lawsuit against the candidate for breach of contract. Then the candidate will counterclaim against you, alleging:

  • Conversion (wrongful taking of the fee).
  • Fraud (intentional misrepresentation about the job or the fee).
  • Conspiracy (with the client, to require the candidate to pay the fee).

For these and other claims, punitive (to punish) and exemplary (to set an example) damages are available. That means there is no limit on your liability. Simply refunding the fee won’t do it. Then again, who’s entitled to the refund? The courts have ruled in favor of the client, the candidate, or both. Very few have ruled neither.

Goodbye silver, away!

Employers, candidates, and competitors are increasing the pressure for you to develop “creative financing” techniques for fee payment. While EPAs are an excellent device to close placements and are perfectly legal, you shouldn’t become involved in them.

This means that if your client uses EPAs, you can mention this to your candidate. However, if you discuss the terms in any way with either party, you run the risk that someone will allege that you participated in the negotiations. That you really are the Loan Arranger.

Chapter 47 of The Placement Strategy Handbook is entitled “The Employee Payback: Stay Back, Way Back!”. Now you know why. (The PSH is available for $32.50 at www.SearchResearchInstitute.com. It outsells all other recruiting aids combined.)

Thanks for asking, Phil.

Best wishes in placing this candidate – and many more!

Jeff

More than thirty-five years ago, Jeffrey G. Allen, J.D., C.P.C. turned a decade of recruiting and human resources management into the legal specialty of placement law. Since 1975, Jeff has collected more placement fees, litigated more trade secrets cases, and assisted more placement practitioners than anyone else. From individuals to multinational corporations in every phase of staffing, his name is synonymous with competent legal representation. Jeff holds four certifications in placement and is the author of 24 popular books in the career field, including bestsellers How to Turn an Interview into a Job, The Complete Q&A Job Interview Book and the revolutionary Instant Interviews. As the world?s leading placement lawyer, Jeff?s experience includes: Thirty-five years of law practice specializing in representation of staffing businesses and practitioners; Author of ?The Allen Law?--the only placement information trade secrets law in the United States; Expert witness on employment and placement matters; Recruiter and staffing service office manager; Human resources manager for major employers; Certified Personnel Consultant, Certified Placement Counselor, Certified Employment Specialist and Certified Search Specialist designations; Cofounder of the national Certified Search Specialist program; Special Advisor to the American Employment Association; General Counsel to the California Association of Personnel Consultants (honorary lifetime membership conferred); Founder and Director of the National Placement Law Center; Recipient of the Staffing Industry Lifetime Achievement Award; Advisor to national, regional and state trade associations on legal, ethics and legislative matters; Author of The Placement Strategy Handbook, Placement Management, The National Placement Law Center Fee Collection Guide and The Best of Jeff Allen, published by Search Research Institute exclusively for the staffing industry; and Producer of the EMPLAW Audio Series on employment law matters. Email him at jeff@placementlaw.com.

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