This week’s inquiry comes from Norman Cohn:
I enjoy reading your column in The Fordyce Letter, and I appreciate the help you’ve given me over the years. I hope you can answer a question in your Jeff’s on Call! column. I signed a recruiting agreement with a company. I have gotten as far as setting up phone screens, but no farther; in particular, no placements or exchange of money. I set up a phone screen, and the hiring manager interviewed my candidate by phone. For three weeks I called the manager and sent emails asking how the phone screen went, with no response. I finally decided to call him at home. He reported me to HR, and HR said no more working together. The agreement has technically expired, but it states that I cannot solicit from the company until two years after contract expiration. Can I now start to recruit employees from the company? Thanks for your help.
. . . and thank you for following my advice all these years! Your success is the ultimate compliment to someone like me. May this reply contribute to it.
Your question would qualify to be on a placement law bar exam, but I’ll try to keep it simple:
That two-year off-limits provision is called a post-termination restrictive covenant. (I told you I’d try to keep it simple!) Its enforceability depends on the validity of the underlying agreement – ABC company’s PSA (placement service agreement).
What we have here is an executory (unperformed) contract. I know the PSA was executed (signed), but the execution (performance by you placing a candidate) never occurred. Therefore, the contract was never completed.
The issue then becomes whether an executed (signed), executory (unperformed) written agreement can stand up as an enforceable contract by a non-performing party against another non-performing party.
Under the usual analysis, this hinges on whether there was consideration (value by giving up some right in exchange for the return promise or act). ABC would have a tough time arguing that it gave up any right or agreed to do some act in exchange for your act of recruiting for it. In fact, ABC undoubtedly gave itself all kinds of additional rights in that PSA (submit resumes first, only deal with HR, extended guarantee, lower fee, etc.).
So far, it sounds pretty good for being able to recruit away. Too good. There’s a nasty presumption (legal common-sense assumption) that executed (signed) written agreements qualify as contracts even though they’re executory (unperformed). This presumption is based on the common-sense idea that parties serious enough to sign written agreements intend them to be enforceable. Business-to-business transactions are considered serious by their nature. The presumption automatically shifts the burden of proof to the recruiter to prove there was no contract.
It’s messy when you have the burden of proving the non-existence of something. That’s why I always analyze contingency-fee placement deals as unilateral (one-party performance) contracts. This drives employer lawyers crazy, because there are only a few cases in the first-year Contracts casebook on them. Freshman law students don’t understand the concept very well. Then it’s forgotten entirely until they read a few lines about it three years later in their bar exam study outlines. (I was doing contingency-fee search in my freshman year. Understanding unilateral contracts was more than an academic exercise. It helped me survive by using the law to collect my fees.)
All of the other contracts analyzed during that first semester of law school are bilateral (one party promises something in exchange for another party’s promise). Moreover, employer lawyers don’t deal with unilateral contracts in their promise-for-a-promise, deal-making, transactional world.
Why is the distinction so important? Because the unilateral contract theory completely bypasses that pesky consideration argument. Instead, we’re just dealing with a mere “agreement to agree.” Why? Because even though written and signed, the PSA never ripens (develops) into a contract at all until there’s a placement. ABC’s not promising to do anything, and neither are you. No promise, no offer or acceptance, and no presumption of a contract. Ergo, no contract formation.
Here’s how to analyze the PSA unilaterally so it never sees the legal light of day — while you recruit away!
Graphically, the PSA-governed contingency-fee placement process usually looks like this:
Sign PSA/Call Client Contact/Take Job Order/Verbally Confirm PSA/Begin Search/Present Candidate/Arrange First Interview/Debrief Client Contact and Candidate/Arrange Second Interview/Debrief Client Contact and Candidate/Assist with Negotiations/Receive Offer Letter/Obtain Candidate References/Receive Notification of Acceptance/Candidate Starts
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At what point does a contractual (legally enforceable) obligation arise on the part of the client? Nowhere, because no placement occurs unless there’s a start!
That’s how you get out from under that two-year “post-placement” provision in the PSA!
No placement, no contract.
Since you need to educate your lawyer about unilateral contracts, ask him to read the cases reported by appellate (appeals) courts in your state. Since you’re in California, the case names and citations (official identification numbers) of the two I recommend are Davis v. Jacoby, 1 C2d 370, 378, 34 P2d 1026 and Chicago Bridge & Iron Co. v. Industrial Accident Commission, 226 CA2d 309, 318, 38 CR 57.
The annotations (citations to other cases, reference information, commentary, etc.) will help your lawyer understand the law that governs the contingency-fee search business. (Readers outside California can just have their lawyer access these two cases and do a search for similar ones in their state.)
I know this is complicated, and even lawyers don’t always get it. So any of our readers who are confused can send me an e-mail at firstname.lastname@example.org. I’ll do my best to clarify how the law works, and we’ll post the best Q&A’s for all to read.
Yours for continued success. I’m delighted we were able to share this with recruiters everywhere!
If you have a legal question you’d like to have Jeff answer here on The Fordyce Letter, check out Jeff’s On Call! and submit your question.