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Contract Risks and Liabilities – Have you really got them Covered

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Where a hirer or RPO sends its own form of contract to an agency for signature, it is important to have the contract independently reviewed by experts to ensure that it does not include onerous clauses, exposing the agency to risk.

Ravi Murphy, director at the recruitment law and compliance specialists Lawspeed, explains the common problems that can arise, their potential commercial impact and how to minimise risks and liabilities.

“When undertaking reviews of hirer drafted contracts for recruiters, we also recommend that we check their insurance policies in tandem”, says Murphy.

Every recruitment agency will have insurance, so it may come as a surprise to discover that your business may not be covered for many common recruitment situations.  As Murphy explains,

“Employer’s liability and professional indemnity policies, for example, often insure the agency’s ‘vicarious liability’ for the negligent acts and omissions of its own employees, but exclude the acts and omissions of contractors or temps.

“Therefore, you may spend a fortune on insurance premiums each year in the belief that it will cover the actions of the thousands of contractors that you supply, when in fact it only covers the actions of the handful of internal staff you employ directly.”

Minimise your liabilities

Murphy, whose background was in blue chip insurance before she joined Lawspeed, advises

“It may seem obvious, but first and foremost an agency should assume as little risk as possible when entering into agreements. Where risks are unavoidable, make sure that you fully understand what you are taking on and what insurance cover is needed to offset the liability.

“Potential losses caused by a contractor’s negligence, particularly in sectors such as engineering, construction or aviation, could run to tens of millions of pounds. Not many recruitment businesses could survive having to pay out a sum that large, yet many leave themselves at risk of complete ruin. The recent IT crash incident at British Airways highlights this point, as I understand the investigation is focussing on whether the outage which caused the problem resulted from a contractor accidently switching off the power. A claim may follow.

“How much risk each party is willing to accept will depend upon the realities of the situation, the likelihood of the liability crystallising, the relative bargaining power of the parties, and how far the risks are within each party’s control.

“Where the assumption of a risk is unavoidable, that risk can (at least in theory), be insured. However, all too often one party to a contract is able to shift risk on to the other, for example in the case of an RPO  imposing risk on a 2nd tier agency, yet the agency does not take the time to understand the terms of the contract and their implications. Onerous indemnity clauses are a classic example, where the agency could adopt a protective strategy if it realised the impact.

Help is at hand

With the legal terminology and insurance jargon used in contractual terms and insurance policies often complex and confusing, with terms sometimes buried in strange places, it is important that you seek specialist professional advice.

“Here at Lawspeed, we offer advice and assistance at every stage”, says Murphy. “We review recruitment contracts on a daily basis, and with twenty years’ experience as the recruitment sector’s leading legal and compliance experts, we can spot unacceptable risks, potential liabilities and areas which might leave you commercially exposed.

“Our cost-effective contract review service helps agencies to identify the risk areas and provide the appropriate advice. This could involve amending clauses where possible, identifying when something important is missing from the terms, or providing strategy advice and insight into possible insurance cover. As a case in point, transfer fees are always important, yet the detail of what may appear to be generous terms are often overlooked, with the result that they may not be worth the paper they are written on, thus leaving the agency exposed. Maximising fee protection is essential.

“Critically, we believe that prevention is always better than cure. Having watertight contractual terms to protect businesses from the outset minimises the risk of disputes arising in the first place.”

Murphy concludes

“We also offer recruitment agencies a free consultation with a director to discuss how we can help you with your business needs, how you could improve your terms and to explain how our other associated services could be of commercial benefit to you.”

To find out more, contact us on 01273 236236, email [email protected] putting Contract Review in the subject line or visit www.lawspeed.com/Expertise/Recruiters/contractreview.aspx