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Where recruiters get it wrong in contracts

This blog accompanies the The Recruitment Network video about where recruiters get it wrong in contracts

This blog accompanies the The Recruitment Network video about where recruiters get it wrong in contracts. The first area that I flagged up in the video is contracts containing unreasonable and unenforceable terms. Often called penalty clauses, unreasonable and unenforceable terms will not be upheld against the other party to the contract.

The sorts of clauses that I am referring to are total exclusion of liability clauses, and penalty interest clauses. It is not possible at law to totally exclude liability for anything that you might do wrong under or in relation to the contract. You cannot exclude liability for direct losses to the other party arising from your breach of contract.

What you can exclude are indirect, consequential, additional, and special losses. However if you try to exclude direct losses, the whole clause becomes unenforceable.

Because penalty clauses are not allowed by law, penalty interest on late payments will not be allowed. When you are trying to write a clause that protects you if the other side breaches the contract, for example in this case pays late, you can only try to claim a genuine pre-estimate of your loss. So 4% interest is acceptable, 20% interest is not.

Another area where recruiters sometimes get it wrong in in an agency contract where there is no extended period of hire option in transfer fee clauses. The Conduct Regulations stipulate that if a client is not offered the option to pay for the contractor on an extended period of hire before being taken on directly by the client, the agency cannot charge a transfer fee at all.

One area that I often see recruiters getting wrong is confusion between opting out of the Conduct Regulations, and reference to opting out of IR35 or the AWR. The former is possible, the latter are not. I would therefore strongly advise that all recruiters have a basic understanding of what the Conduct Regulations are – so they know what opting out of them means; and what IR35, and the AWR are. Otherwise there is a real risk of referring to the wrong provision which can lead to looking a little unprofessional.

Another of the major things I see going wrong is recruiters not checking who the correct legal entity of the client is when they’re entering into a contract. It is very easy for a consultant to sign up the client company John Smith, not checking whether it is John Smith Ltd, John Smith UK Limited etc. That may mean that when you come to invoice the client, or chase the invoice, you’re not actually chasing the right party. So although it sounds very fundamental, do make 100% sure that you know exactly with whom you are entering into a contract.

Finally, a poorly drafted contract from an IR35 perspective is a recipe for disaster. The impact of IR35 on a client contract and the candidate’s contract cannot be underestimated. Not knowing how to ensure that, as far as possible, a contract provides for a contractor to be outside of IR35, can cause a recruitment company to end up liable for the contractor’s PAYE and national insurance contributions. This will be particularly important in the private sector after April 2020, about which I will provide more detail in another blog.

If you would like any advise regarding your contracts please visit our legal advice for recruitment companies page and do not hesitate to contact me on lucy.tarrant@cognitivelaw.co.uk

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