An unconscionable fee: a case study

This case illustrates some of the work we regularly do for usually small employers who find themselves in a difficult position regarding a recruitment agency’s fees.

It is a situation which is more common than you might think, and we have had three similar situations with other clients on the same point recently.

The challenge

Our client was a small specialist consultancy business in a niche area.  It decided to hire a new consultant in an employed role and engaged a recruitment agency to help.  The agency offered up a number of candidates, including Tom.  Its terms of business required a fee worth 20% of the role’s annual salary (which was £75,000 p.a.) upon engagement and the usual type of ‘anti-back-door hire’ clause which said that the client would still owe this fee if it engaged within 12 months any candidate put forward by the agency even if it was a direct hire without the agency’s involvement.

After interviews, our client decided that unfortunately none of the candidates were what they were looking for, although Tom came the closest.  So they decided not to appoint anyone.

A month later, Tom came directly back to our client with a request.  He was in a difficult financial position, having just lost his job and with a family to support.  He was in bad need of some income to tide him over until another job offer in the pipeline hopefully came to fruition.  He was a nice chap in a tough spot and our client felt sorry for him.  It found that it could offer him a week’s work as a self-employed contractor to help him out.  So it took him on for that one week of work, for which it paid him £1,800 (roughly the same rate of pay as that of the unfilled role).  Tom then moved on and that was the end of their relationship.

As you will have guessed, the recruitment agency found out about this engagement and demanded its fee, being £15,000 (20% of £75k).  Our client went up the wall.

What needed to happen?

This was when our client first contacted us, having found out about us and our expertise in this area via a Google search.  It was both angry at the agency’s fee and also very anxious to find a way out.

Our view was that if only our client had chosen proactively to contact the agency and explain the situation in the first place, they might have found the agency sympathetic.  From the agency’s point of view, these sorts of secret back-door hires are something they need to stand firm against to protect their business.

Unlike in consumer law, where a member of the public has some protection from certain unreasonable terms of business, this is not the case in B2B agreements, where more or less ‘anything goes’ if it’s written into the terms and they can be proved to have been accepted by the client.

Outcomes for our client

Having got involved, we advised our client that, technically, the agency was indeed due its £15,000 fee even though the hire only lasted a week and was merely a charitable act to help out someone in a fix.  The anti-back-door hire clause in the agency’s terms was clear, well-written and didn’t allow for any reduction due to these special circumstances.  With our client’s agreement we contacted the agency and explained that there was no way it was going to get paid what it was asking for and that it needed to be realistic and ‘human’ about the situation.  We insisted that pragmatism had to win out.

After some difficult back-and-forth with the agency, we were eventually able to negotiate with someone sufficiently senior at the agency who was able to take a sensible view and we were able to negotiate the fee down to just 20% of the £1,800 that Tom had actually been paid.

While this seems the right and obvious outcome, it was notable that the agency, which was a large and highly commercial one, was resistant to this solution for a surprising amount of time.  Admittedly they were technically ‘in the right’ in terms of what their terms of business required, but clearly it would have been pretty outrageous if they had been successful in extracting the full £15k from our client.

We felt the outcome was a fair one for all involved.  The agency had taken a 20% cut and made its point.  Its aims of protecting its business and indeed the recruitment industry as a whole had been achieved.  We saved our client £14,640 out of a £15,000 bill and it certainly learnt the lesson about reading suppliers’ terms of business carefully and the benefits of open and up-front business dealings.  A fair outcome all round.

Whatever your situation, we’d be pleased to help – .

Effective cause: a case study

This case study touches on a key theme of agency law and fees – whether the agency can prove that its work was the ‘effective cause’ of the client’s hire of the candidate.  It’s an issue that we regularly help our clients with, both agencies and clients of agencies.

The challenge

Under well-established agency law, an agency (whether estate agency, recruitment agency or other) that is demanding its fee from a client needs to prove that its work was the effective cause of the transaction taking place.  There are a couple of well-known cases involving estate agents but the principles are directly applicable to recruitment agencies too.

The law allows the parties to a B2B contract to agree terms of business that override this orthodox ‘effective cause’ rule, and many well-written, modern terms used by recruitment agencies do this nowadays.  Their clients need to take a business-like ‘buyer beware’ approach (or caveat emptor if we’re allowed just a little bit of legal Latin).

But there are still many agencies whose terms of business don’t override ‘effective cause’ and in such circumstances that fact can come to the aid of either agency or their client, depending on the circumstances.

In this particular case, a long-standing employer client of ours had hired a manager who was a good, long-term friend of a senior executive in the business.  The recruitment agency had this person on their books as a candidate and had sent his CV to the client as part of a speculative approach.  The agency did not do more than send across the CV and certainly was not proactive in bringing about the hire.  The hire was undisputedly due to the long-term relationship between the candidate and the senior executive.

Despite its speculative approach to the client and its lack of any activity towards bringing about the hire, when the agency found out about the hire it demanded its fee.  It engaged a particularly aggressive law firm to pursue this, whose boorish Partner lectured us on the phone that his firm “does these cases all the time and always wins” and so our client should just roll over and pay up.

What happened?

Having got involved, our first action was to look at the agency’s terms of business and whether they had actually been accepted by our client in the eyes of the law.  They had been sent as a PDF attachment to the same email from the agency that had attached the candidate’s CV, and the terms said that as soon as the CV was read, the terms were deemed to be binding.  We felt there was some scope to argue in court that this ‘deeming’ provision was not necessarily effective, but in the end a stronger legal argument became apparent.  The agency’s terms, which appeared to have been taken from an REC template from a decade or so before, did not have sufficient wording in them to override the ‘effective cause’ rule.  This was very helpful indeed.

Outcomes for our client

Consequently we were able to put up a robust response to the agency’s aggressive quest for the fee, proving unequivocally that the one and only cause of the hire was the long-standing personal friendship.  It was helpful that the CV was never in fact forwarded to the director who decided the appointment – it remained sitting in the HR Manager’s email in-box.

Following this, it all went very quiet at the agency’s solicitors.  We heard nothing more.  A successful outcome for our client.

We are fully aware of the hard work that agencies often do to secure a portfolio of good candidates and the value in those candidates that rightly deserves to be protected by taking action against any unscrupulous clients who carry out a back-door hire.  However, speculatively sending a CV and then threatening to sue for the fee when that person is hired without any work or involvement between the agency and the client is, we feel, bad practice and brings the recruitment industry into disrepute.

Even if an agency has well-written terms of business that appear to override the ‘effective cause’ rule, our view is that it is often worth challenging the agency’s demand for the fee anyway, if it feels unreasonable.  Often a negotiated reduction can be achieved, simply in order to avoid court proceedings.  Or we might be able to find an argument that the terms were never ‘accepted’ in the eyes of the law in the first place.

Whatever your situation, we’d be pleased to help – .

Back-door hire: a case study

This case study illustrates a situation that we are asked to help with often, namely a ‘back-door hire’ where a recruitment agency has introduced a candidate to a client; the client has not hired the candidate at that time; but a short time later the client hires the candidate directly, usually without telling the agency.

Occasionally the reason for what looks like a back-door hire can be explained and justifiable.  Examples include where the candidate is already well-known to the client (see our case study on ‘effective cause’) or where the candidate has already been introduced to the client via another agency.  But, for the most part, it just amounts to naughty behaviour on the part of the client.

Sometimes this naughty behaviour is because the client is too small and commercially inexperienced to appreciate that it is doing anything very wrong or legally risky.  It may sound somewhat unlikely, but our experience is that a lot of owners of really small businesses are too busy to read suppliers’ terms and conditions (at least that’s what they tell us when they ask for our help).   Others dispute that they accepted an agency’s terms of business or that they should be treated as having accepted them.  “If we didn’t open the attachment containing the terms, how can we be treated as having read and accepted them?” they ask.

The challenge

In this particular case, we advised a small, niche international recruitment agency and helped it pursue a very sizeable fee of £200,000 that it was due.

Our client the agency was asked to find candidates for a well-paid position in a financial institution.  A suitable candidate was identified after a round of interviews that our client helped run.  The financial institution offered the candidate the job and pay negotiations then took place over several days.  Eventually they were unable to reach agreement and the appointment did not take place.  That’s the last that our client heard until 6 months later, when it followed up with the candidate as a matter of routine (always very well worth doing, as this case study proves!) and was shocked to find that he had been in post for a month with the same financial institution, in a role that wasn’t identical to the post that the agency had worked on but very similar.  Another recruitment agency had apparently been involved in putting him forward for this new role but hadn’t done much more than that.

Our client had a good set of terms of business and these included the now common ‘anti-back-door hire’ clause, which requires its client to pay the full fee if any candidate is introduced and is then hired within 12 months of the introduction, whether or not for the original role.  You might think that, armed with these terms, the financial institution would have paid up.  However, although unofficially someone in HR agreed that it was “not very fair”, its senior management refused to budge.  We suspected that this must be because the organisation had paid the second agency a large fee and was not willing to pay a similar fee all over again.

What happened?

We advised our client the agency that the financial institution had either messed up and overlooked the fact that it would need to pay our client as well as the other agency or perhaps had deliberately decided to take a risk and hope our client wouldn’t find out.  Either way, it was a large organisation with deep pockets and it certainly was capable of paying; and our client’s terms of business were clear, were not unreasonable and were likely to be upheld in court if we took things that far.  Our client decided it was up for the fight.

We wrote to the financial institution and a series of robust letters went back and forth between us.  With the involvement of their lawyers, they tried to argue every angle.  They claimed that our client’s terms of business had not been provided to them in the first place – but we sent them the original email as proof.  They asserted that the terms had not been accepted by them – but we reminded them that the terms said they were deemed to have been accepted if the candidates’ CV’s were requested, which had of course happened, and also that we were sure their Recruitment Manager would know this approach is industry standard nowadays.  They argued that it was unreasonable to expect them to pay two lots of fees – but we responded that this was their problem for trying to pull a fast one, not our client’s problem.  They said that our client was not the effective cause of the hire – but we countered with the fact that our client had done a lot to try to bring about the original hire and if either agency could be said to have been more of the effective cause, it had to be our client.  Moreover, the wording of our client’s terms of business meant that they overrode the traditional ‘effective cause’ argument anyway.

Outcome for our client

The result of these rounds of tough legal letters was that we were able to make the financial institution realise that it faced an imminent and high-risk court claim unless it accepted the situation and paid up.  We sent a final demand and requested a response within 7 days, failing which legal proceedings would commence.  We were pleased to receive a settlement offer the same day and, after some negotiations, our client agreed to accept £175,000 in settlement.

For the financial institution, it was an expensive lesson in paying attention to legal terms and that being a bully doesn’t tend to work in business.  For our client, it was confirmation that sticking to your guns and pursuing a case that you strongly believe in can be worth doing (and of course their terribly wise choice of engaging Menzies Law to help them).

Whatever your situation, we’d be pleased to help – .

Case update (1): Employment status

What do we already know?

We updated you in our June Newsflash Employment status and the “self-employed” plumber on the Supreme Court’s decision that a ‘self-employed’ plumber could be categorised as a ‘worker’ for employment purposes.

What’s new?

As promised in our above June Newsflash we provide further details of the case below.

Summary:  Can a plumber, who is self employed for tax purposes, be categorised as a “worker”?

Yes, says the Supreme Court in Pimlico Plumbers and another v Smith available here.

Facts:  The worker, Mr Smith, worked as a plumber for Pimlico Plumbers Limited (Pimlico) for around six years. He was labelled as a “self-employed operative” and described in documentation as an independent contractor, in business on his own account. However, under the arrangements between Pimlico and Mr Smith, he:

  • was required to wear a uniform and to drive a van, both with Pimlico’s logo;
  • had his movements monitored by Pimlico via GPS installed in the van;
  • could only be contacted by customers through Pimlico;
  • had a contract which:
    • did not permit him to provide a substitute to do his work and largely pointed to personal performance. Instead, Pimlico did permit work to be transferred between operatives and where necessary allowed external specialists to be used; and
    • contained post-termination restrictive covenants.

Also, customer contracts and estimates were issued in the name of Pimlico.

However, Mr Smith:

  • was paid by Pimlico against receipt of an invoice;
  • was required to provide his own tools, equipment and materials;
  • took personal liability for work performed by him and provided his own professional indemnity insurance;
  • was taxed as self-employed and was VAT registered;
  • had no obligation to accept work from Pimlico (but he was required to notify the days on which he was unavailable); and
  • could in theory reject particular jobs and could decide his own working hours (but was required to do a minimum number of hours work each week).

Mr Smith brought a Tribunal claim against Pimlico on the basis that he was an employee and had been unfairly dismissed by Pimlico and discriminated against on grounds of disability by failure to make reasonable adjustments.  He also made allegations in respect of unpaid holiday pay and unauthorised deductions from wages.

The Tribunal considered the question of Mr Smith’s employment status as a preliminary issue.  The Tribunal held that Mr Smith was not an employee and so did not qualify for protection against unfair dismissal. However he was found to be a ‘worker’ and entitled to holiday pay and protection against discrimination.

Pimlico appealed to the EAT and then to the Court of Appeal.  Both courts rejected the appeal and upheld the Tribunal’s decision that Mr Smith was a worker.

Pimlico then appealed to the Supreme Court.  The Supreme Court unanimously dismissed Pimlico’s appeal. The key factors which led to the worker status finding were that:

  • the dominant feature of Mr Smith’s contract with Pimlico was an obligation on Mr Smith to perform work personally (any right to a substitute was significantly limited); and
  • the status of Pimlico was not that of a client or customer of Mr Smith.

In ruling that Pimlico was not a client or customer of Mr Smith the Supreme Court agreed with the Tribunal that there was an umbrella contract between the two parties i.e. one which cast obligations on Mr Smith even when he was between assignments for Pimlico.

The Court also took into account how much control Pimlico exercised over Mr Smith, referring to the fact that Mr Smith should “wear the branded Pimlico uniform; drive its branded van, to which Pimlico applied a tracker; carry its identity card; and closely follow the administrative instructions of its control room”.

Implications:  This decision is important as it is a Supreme Court decision on worker status and as such it gives strength to recent decisions by the lower courts on this issue.

Whilst cases in this area will always turn on their own facts, the decision does provide useful authority on the personal service requirement and in particular when a contractual right of substitution might be inconsistent with personal service.

The decision also shows the continued importance of contractual terms seen in the context of the reality of the parties’ working practices. In particular, for self-employed status to hold true, removing a requirement for personal service and allowing a right of substitution is important.  Also the use of standard contractual documentation should be approached with caution and it would be advisable for employers to undertake an audit of any such arrangements to assess whether any ‘self employed’ staff could in fact be deemed to be workers.

There is yet more to come on the issue of employment status as the Court of Appeal is due to consider the Uber case at the end of October 2018. Further, the Government is likely to take action following the Taylor Review of Modern Working Practices which made detailed recommendations for reform of UK employment law in respect of non-traditional employees, both in the “gig economy” and elsewhere. For further news on the Taylor review and the Uber case see our updates here.

Government reforms (2): Data protection – GDPR guidance

What do we already know?

We have been regularly updating you about the new General Data Protection Regulation (GDPR), which was introduced on 25 May 2018 and replaces the EU Data Protection Directive and the Data Protection Act 1998.

For further detail see our updates here.

What’s new?

Just when you thought it was all over(!) there’s some final guidance from the Information Commissioners Office (ICO), to update you on…

Guidance on Data Protection Impact Assessments (DPIA)

The ICO has published the final version of its guidance on DPIAs (available here).  The guidance is intended to sit alongside the ICO’s Guide to the GDPR (available here).  The guidance explains:

  • the principles and process that form the basis of a DPIA;
  • what a DPIA is for;
  • when you need to carry one out; and
  • how to go about it.

Government reforms (1): Tobacco, alcohol & drugs

The Government has published a toolkit (available here) designed to help employers tackle tobacco, alcohol and drug abuse.

The toolkit follows Government research which suggests that absenteeism and low productivity related to substance misuse costs employers £5.3 billion.

The toolkit identifies a number of steps employers can take to help their workforces and combat substance abuse. These include:

  • Leadership making a clear commitment and receiving training to tackle substance abuse;
  • Making reasonable adjustments for staff who are required to take time off to deal with substance abuse; and
  • Encouraging employees to consider whether their consumption is putting their health at risk.

Case update (3): Disability discrimination – cause of misconduct

Summary: Can a dismissal for misconduct be discriminatory even if the employer does not know that a disability has caused the misconduct?

Yes, says the Court of Appeal in City of York Council v Grosset available here.

Facts:  The employee, Mr Grosset was employed as a teacher. He had cystic fibrosis, which the parties agreed amounted to a disability. After a change of head teacher at the school, his workload greatly increased and he began suffering from stress and finding it difficult to cope. Mr Grosset showed an 18-rated film to classes of 15 and 16 years old pupils; he was suspended and dismissed for gross misconduct.

Mr Grosset brought Tribunal claims for unfair dismissal and disability discrimination. The Tribunal held, on the basis of the medical evidence that it had seen, that Mr Grosset had shown the film when he was suffering from an impaired mental state because of the stress arising from his disability. Therefore, the Tribunal found that his employer could not justify his dismissal and it had amounted to discrimination because of “something” arising in consequence of his disability. The Council appealed.

The EAT upheld the Tribunal’s decision that this amounted to discrimination arising from disability.  Although the employer had not had the benefit of medical evidence at the time it decided to dismiss, the test for causation is objective.  Therefore it did not matter that the employer had subjectively come to the conclusion that Mr Grosset’s conduct was not because of his disability.  Objectively the unfavourable treatment was because of something arising from Mr Grosset’s disability.

The Court of Appeal upheld the EAT’s decision.  It confirmed the relevant issues as:

    1. did the employer treat the employee less favourably because of an identified “something”; and
    2. did that something arise in consequence of the employee’s disability.

The Court of Appeal held that it is not possible to read into the legislation a requirement that the employer must be aware, when choosing to subject the employee to the unfavourable treatment that the relevant “something” arose in consequence of his disability.

The Court of Appeal also agreed that dismissing Mr Grosset was disproportionate in the circumstances. A particularly strong factor underlying this conclusion was the Tribunal’s assessment that if the Council had put in place reasonable adjustments to reduce the work pressure on Mr Grosset, it would have been “unlikely in the extreme” he would have shown the film.

Implications: This decision makes clear that employers can be liable for disability discrimination even if they make a seemingly reasonable decision that there is no link between the misconduct in question and the individual’s disability. It is therefore very important that employers obtain thorough medical advice when disciplining disabled employees on the connection between the misconduct and their disability.  This is the case even if there is seemingly no connection between the disability and the misconduct or poor performance.

Russia 2018: World Cup wellbeing

With the football fever of the Russia 2018 World Cup now in full swing, employers are hopefully managing to use the World Cup to score an employee engagement goal (whilst preventing fouling by employees!). In light of this we haven’t gone into great detail about how to deal with the big event, but instead provided you with a quick summary of the main points to look out for. Our top tips for employers are:

  • Manage employees’ expectations: Be clear on what you expect in terms of attendance and performance. If you suspect an employee has “pulled a sickie” deal with this in accordance with your policy on sickness absence. Keep records and note any patterns which emerge (absence on the day or day after key matches for example) to assist the investigation.
  • Agree to requests for annual leave/flexible working if possible: If business commitments prevent this, be upfront with employees as to the reasons. Most importantly, be consistent with how you treat competing requests for leave. English male colleagues should not be prioritised. Women and non-England supporters should also be allowed to finish work early, or take time off, to watch games – whatever the national team they support.
  • Consider allowing staff to listen to the radio or watch the match at work: Be clear that this is being done on a discretionary basis only. Importantly, remember that not all supporters will be England fans and requests to watch other matches should be dealt with in a fair and consistent manner to avoid potential claims of discrimination.
  • Better banter: Patriotism is likely to be running high throughout the World Cup and ‘banter’ between supporters of different teams can boost workplace morale. However, there is a danger that seemingly harmless banter can get out of hand. Employees should be reminded of the standards of conduct expected of them and that any bullying or harassment, particularly on the grounds of race, will not be tolerated.
  • Health and safety: If employers invite any clients or customers to watch a match on the employer’s premises, the employer should bear in mind its obligations under the Health and Safety at Work etc Act 1974 and under the Occupiers’ Liability legislation. This means ensuring that the venue does not present any health and safety risks and ensuring that employees and guests do not put themselves or others at risk either at or after the event; for example by drinking too much alcohol or entering any dangerous parts of the premises. Employers should also check that their insurance policies cover the event. You should also check that you have a TV licence.

Overall, the World Cup is likely to be a great morale booster with the potential to unite the workplace. Hopefully our above tips and ACAS’s guidance (see here) should help employers to keep their employees on-side and avoid having to use the red card!

 

 

Case update (2): Unfair dismissal – waiting for the “final straw”

Summary:  Can an employee claiming constructive dismissal rely on a series of acts by an employer including a previously affirmed repudiatory breach of contract?

Yes, held the Court of Appeal in Kaur v Leeds Teaching Hospitals NHS Trust, available here.

Background:  There is an implied term of trust and confidence between employer and employee. This means that employers must not, without reasonable and proper cause, conduct themselves in a manner likely to destroy or seriously damage that relationship. Any such breach will allow an employee with two years’ service to resign in response and bring a Tribunal claim of constructive unfair dismissal.  However, if an employee continues to work, the employee will have affirmed the contract. This means that the employee loses their right to resign in relation to that particular breach.

It is well established that a series of acts which may not individually amount to breaches of contract, can when taken together amount to a breach of the implied term of trust and confidence.  The final act in the series, known as the “final straw”, can allow the employee to resign in response and bring a Tribunal claim of constructive unfair dismissal.  However, the “final straw” does need to be more than trivial.

Facts:   The employee, Ms Kaur, was employed by Leeds Teaching Hospitals NHS Trust (the “Trust”) as a nurse.  Ms Kaur was put through a performance and capability process, to which she had objected.   Ms Kaur had then made bullying allegations in respect of which she had filed a grievance and, most recently, an allegation was made against her of a verbal and physical altercation with a colleague (who was one of those alleged to have been bullying her). Both Ms Kaur and her colleague were taken through a thorough disciplinary process (which was also used to deal with Ms Kaur’s grievance) and given final written warnings.  Ms Kaur appealed but this was dismissed.

Ms Kaur then informed the Trust that she had been left with no choice but to resign and she brought a Tribunal claim for constructive unfair dismissal. Ms Kaur argued that the rejection of her appeal was the “final straw” in a series of acts that when taken together amounted to a breach of the implied term of trust and confidence. The series of acts included the alleged unjustified complaints about her performance, the altercation with her colleague and the Trust’s conduct of the disciplinary and appeal proceedings.

The Trust applied to strike out her claim. The Tribunal struck out Ms Kaur’s claim on the basis that there was no reasonable prospect of establishing that the conduct of the disciplinary and appeal hearings amounted to a breach of contract, or that this was a relevant “last straw” which allowed a claim to be brought for previous breaches. Ms Kaur also had no reasonable prospect of establishing that the altercation with her colleague was the “last straw”, given that she had remained in employment for a number of months following the incident, thereby affirming any possible breach of contract.

The EAT upheld the decision and Ms Kaur appealed to the Court of Appeal.

The Court of Appeal upheld the Tribunal’s decision to strike out Ms Kaur’s claim on the grounds it had no reasonable prospect of showing that the conduct of the disciplinary and appeal process could form the “last straw” as that process was entirely proper.

Usefully, the Court of Appeal offered guidance on constructive dismissal claims, setting out the questions a Tribunal will have to answer when deciding if an employee has been constructively dismissed:

  • What was the most recent act or omission on the part of the employer which the employee says triggered the resignation?
  • Has the employee affirmed the contract since that act?
  • If not, was that act or omission, by itself, a repudiatory breach of contract?
  • If not, was it nevertheless a part of a course of conduct comprising several acts and omissions which, viewed cumulatively, amounted to a repudiatory breach of trust and confidence? If it was, there is no need for any separate consideration of a possible previous affirmation. i.e. even if a past breach has previously been affirmed by an employee, it can still form a part of a series of events culminating in a “final straw” constructive dismissal.
  • Did the employee resign in response, or partly in response, to that breach?

Implications:  This case is helpful because of the guidance provided by the Court of Appeal on constructive unfair dismissal claims which involve the “final straw” argument.

Unfortunately this level of clarity from the Court of Appeal does remove the argument for employers that once a breach has been affirmed, it cannot then be part of a series of events culminating in a last straw constructive dismissal.  Employers therefore need to be aware that even if an employee remains in employment for some time after an alleged repudiatory act, a more minor subsequent act may leave the door open for a successful constructive dismissal claim.