What To Include In A Recruitment Fee Agreement

When do you actually get paid if you introduce a candidate to a client?

The reassuring answer is: you can make this clear in your recruitment fee agreement. The less reassuring answer is that if your terms are vague, you may end up arguing about whether your fee was triggered, whether the client made a backdoor hire, or whether a replacement guarantee wipes out your invoice.

If you're preparing or reviewing a recruitment fee agreement or recruitment agency terms of business in Australia, your goal is simple: make it easy for a client to say yes, while protecting your agency from the disputes that tend to come up after the placement is made.

Let's go through the clauses that matter most for placement fees, guarantees, candidate ownership and commission disputes.

What Is A Recruitment Fee Agreement?

A recruitment fee agreement is the contract that sets out when your client must pay you for introducing, shortlisting or placing candidates.

You might call it:

• Recruitment agency terms of business
• Client terms and conditions
• A recruiter commission agreement
• A recruitment services agreement
• A permanent placement agreement
• A temp-to-perm conversion agreement

Whatever you call it, the document should do more than list your fee. It should explain the whole commercial deal between you and your client, including what services you're providing, what counts as a successful placement, what happens if the candidate leaves, and how long you own the candidate introduction.

For most recruitment agencies, the agreement is used before you start working on a role. Sometimes you'll have a signed agreement. Other times, you may send terms by email and ask the client to confirm before you begin. The safest approach is to get clear acceptance before you introduce any candidates.

Without agreed terms, you may still have arguments available if a client accepts your services and then hires your candidate. But it becomes much harder, slower and more expensive to recover unpaid invoices. A written agreement gives you a much clearer starting point.

When Is Your Recruitment Fee Triggered?

Your recruitment fee should be triggered when the event you choose in your agreement happens, and this needs to be stated very clearly.

This is one of the most important clauses in your recruitment placement fee clause. If your terms simply say you get paid for a "successful placement", you may still end up arguing about what that means.

Common fee triggers include:

• Offer accepted: your fee is payable when the candidate accepts an offer of employment or engagement.
• Candidate starts: your fee is payable when the candidate commences work with the client.
• Engagement occurs: your fee is payable when the client, a related entity or another business connected with the client engages the candidate in any capacity.
• Backdoor hire occurs: your fee is payable if the client hires or engages the candidate within a set period after your introduction, even if you're not involved in the final discussions.

There isn't one right answer for every agency. If you charge permanent placement fees under a contractor placement agreement or permanent placement model, you may prefer the fee to become payable on acceptance of an offer. If your clients push back, you might agree that it's payable on the candidate's start date.

The key is to remove doubt. Your agreement should say exactly when the invoice is issued and when payment is due.

What Counts As A Placement?

Your agreement should define a placement broadly enough to reflect how clients actually hire.

For example, a placement might include when the candidate is engaged as:

• A full-time employee
• A part-time employee
• A casual employee
• A fixed-term employee
• A contractor or consultant
• A director, adviser or secondee
• A worker engaged through a related company, franchisee, client group entity or third-party payroll provider

This matters because clients don't always hire in the exact way you expected. A client might ask to meet a candidate for a permanent role, then later engage them as a contractor. If your fee clause only refers to "employment", the client may argue no fee is payable.

Say Jess runs a specialist recruitment agency in Melbourne. She introduces a software engineer to a startup for a permanent role. The startup says the role is on hold, then two months later engages the same person through a contractor arrangement. If Jess's agreement says her fee applies to any employment, contract or consulting engagement within the candidate ownership period, her position is much stronger.

How Should Your Placement Fee Be Calculated?

Your placement fee should be calculated using a clear formula, usually a percentage of the candidate's first year remuneration or a fixed fee.

For permanent recruitment, many agencies use a percentage of the candidate's annual remuneration package. Your agreement should spell out what is included in that package.

You may want to include:

• Base salary
• Superannuation, if your commercial model includes it in the fee base
• Guaranteed bonuses or commissions
• Car allowance or other fixed allowances
• Sign-on payments
• The annualised value of a contractor's daily or hourly rate

You should also be clear about what is excluded, such as discretionary bonuses, reimbursements or tools of trade, if you don't want those counted.

If you use fixed fees, milestone fees or retained search fees, say when each amount is payable. For example, your fee could be split across shortlist delivery, interview stage and offer acceptance. If you're charging an upfront retainer, your terms should say whether it's refundable, creditable against the final fee, or non-refundable.

Do You Need To Mention GST?

Yes, your agreement should say whether your fees are inclusive or exclusive of GST.

If your business is registered for GST, unclear pricing can create awkward invoice disputes. A simple clause saying your fees are exclusive of GST, unless stated otherwise, can avoid confusion.

You should also include payment timing, late payment consequences and whether you can pause services if invoices are overdue. For example, you might require payment within 7, 14 or 30 days of the invoice date, depending on your business model and client type.

What Should Your Replacement Guarantee Cover?

A replacement guarantee should explain when you'll replace a candidate or provide a credit, and when the guarantee won't apply.

Recruitment clients often expect some form of guarantee, especially for permanent placements. That's fine, but the guarantee needs boundaries. If it's too open-ended, you can end up doing extra work for free even where the problem wasn't caused by the candidate or your recruitment process.

A typical replacement guarantee recruitment clause covers a set period after the candidate starts. Common commercial periods include 30, 60 or 90 days, but the right period depends on the seniority of the role, your fee, your market and your appetite for risk.

Your clause should address:

• Length of the guarantee period: for example, 60 days from the candidate's start date.
• What triggers the guarantee: for example, the candidate resigns or is terminated for performance reasons.
• What you'll provide: for example, one replacement search for the same role.
• Whether a refund is available: many agencies offer replacement only, not a cash refund.
• Time limits for notifying you: for example, the client must notify you in writing within a set number of days after the candidate leaves.
• Payment condition: the guarantee only applies if your original invoice has been paid on time.

When Should The Guarantee Not Apply?

Your agreement should also list the situations where the guarantee doesn't apply.

For example, you may exclude the guarantee if:

• The client's role changes materially after the candidate starts
• The client makes the candidate redundant
• The client restructures, relocates or changes reporting lines
• The candidate leaves because of workplace culture, management issues or unsafe conditions
• The client fails to pay the original placement fee on time
• The client doesn't give you a fair opportunity to find a replacement
• The candidate leaves after the guarantee period ends

This isn't about being difficult. It's about making sure the guarantee covers the risk you actually agreed to carry.

How Do You Deal With Candidate Ownership And Backdoor Hires?

You deal with candidate ownership and backdoor hires by clearly defining your introduction, your ownership period and the types of engagement that trigger a fee.

This is often where recruitment commission disputes start. A client might say, "We already knew that candidate", "They applied directly later", or "We hired them in another team, not for the role you worked on." Your terms need to deal with these scenarios upfront.

What Is An Introduction?

Your agreement should define an introduction broadly, but fairly.

An introduction might happen when you:

• Send a candidate's CV, profile or details to the client
• Discuss a candidate's identity, experience or suitability with the client
• Arrange an interview or meeting
• Put the client in contact with the candidate
• Submit the candidate through a recruitment platform or client portal

If your agency works in a niche industry, you may also want a process for when the client claims they already knew the candidate. For example, the client must notify you within a short period after the introduction and provide evidence of an active recruitment process already underway.

How Long Should Candidate Ownership Last?

Your candidate ownership period should be long enough to protect your work, but reasonable enough that clients will accept it.

Many agencies use periods such as 6 or 12 months from the date of introduction, but this is a commercial choice rather than a fixed legal rule. Senior executive search, hard-to-fill roles and retained assignments may justify longer periods. High-volume recruitment may use shorter periods.

Your terms should say that if the client or a related entity hires or engages the candidate during that period, your fee is payable, even if the engagement is for a different role.

What Is A Backdoor Hire?

A backdoor hire is when a client hires or engages your introduced candidate without paying your fee.

This can happen in obvious ways, like the client waiting until your involvement slows down and then contacting the candidate directly. It can also happen less obviously, such as when the client refers the candidate to another company in its group, a franchisee, a major customer or a hiring manager's new business.

Your agreement should cover direct and indirect hires. It should also say whether the client must pay your fee if it passes the candidate's details to another business that then engages the candidate.

The practical consequence is simple: if this clause is missing, you may struggle to show that the later hire came from your work and should be paid for.

What Happens If A Client Disputes Your Commission?

If a client disputes your commission, your agreement should give you a clear process for dealing with the dispute while preserving your right to be paid.

Commission disputes in recruitment often come down to evidence. Your terms help, but so do your internal processes.

To reduce disputes, keep records of:

• When your terms were sent and accepted
• When the candidate was introduced
• Which role the candidate was introduced for
• Emails, portal submissions, interview confirmations and feedback
• Any client comments about already knowing the candidate
• The candidate's start date, remuneration and engagement type

Your agreement can require the client to give you the information needed to calculate your fee, such as the candidate's salary package or contract rate. It can also say that if the client doesn't provide that information, you can calculate the fee using the best information available to you.

You may also want clauses covering:

• When invoices are due
• Interest or reasonable recovery costs for overdue invoices
• A process for raising invoice disputes
• A requirement to pay undisputed amounts while a dispute is being resolved
• Your right to suspend work on current roles if fees are overdue

Be careful not to make your terms too aggressive, especially if you deal with small business clients. Under the Australian Consumer Law, unfair contract terms can be void and, since changes that apply from 9 November 2023, can also attract penalties when used in standard form consumer or small business contracts.

That doesn't mean you can't protect your agency. It does mean your clauses should be clear, balanced and tied to legitimate business interests.

What Laws Affect Recruitment Agency Terms Of Business?

Several Australian laws can affect your recruitment agency terms of business, even though the agreement is mainly a commercial contract.

The main areas to keep in mind are contracts, consumer law, privacy, employment and any state-based rules that apply to employment agents.

Australian Consumer Law

The Australian Consumer Law, which sits in Schedule 2 of the Competition and Consumer Act 2010, applies to many business dealings.

For recruitment agencies, the key issues are usually:

• Don't make misleading claims about candidates, your success rates or your services
• Make sure your fees, guarantees and exclusions are clear
• Avoid unfair terms in standard form contracts, especially with small business clients
• Don't bury important fee triggers in wording a client wouldn't reasonably expect

If your client terms are standard form and you often deal with small businesses, it's worth having them reviewed with the unfair contract terms regime in mind.

Privacy Act And Candidate Information

If you collect, store and share candidate information, privacy matters.

The Privacy Act 1988 and the Australian Privacy Principles may apply to your business, depending on factors such as your turnover, the services you provide and the type of information you handle. Even where you're not strictly required to comply, clients often expect recruitment agencies to handle candidate data carefully.

Your agreement should support good privacy practices by covering:

• How client information and candidate information can be used
• Confidentiality obligations
• Whether candidate details can be shared within the client's group
• Who is responsible for obtaining consents and handling privacy notices
• What happens if confidential information is misused or disclosed

You should also make sure your own privacy policy and candidate consent process match how you actually operate.

Employment And Labour Hire Issues

If you're only introducing candidates for permanent roles, your service agreement may not need to deal heavily with employment law. But if you supply temporary staff, contractors or labour hire workers, a labour hire agreement may be needed and the legal picture can change quickly.

You may need to think about:

• Who employs or engages the worker
• Who is responsible for pay, superannuation and workplace entitlements
• Work health and safety responsibilities
• Whether labour hire licensing rules apply in states such as Queensland, Victoria, South Australia or the Australian Capital Territory
• Whether the Fair Work Act 2009 affects the work arrangements

These rules are more complex than a simple placement fee clause. If your agency supplies workers rather than just introducing them, your client terms should be tailored to that model.

Common Mistakes To Avoid

The most common mistake is assuming a simple invoice or email is enough to protect your fee.

Sometimes it is. But when a client changes their mind, delays the hire or uses a related entity, vague paperwork can leave you exposed.

Watch out for these issues:

• No signed or accepted terms: send your terms before introducing candidates and get clear acceptance.
• Unclear fee trigger: say whether the fee is payable on offer acceptance, start date or engagement.
• Narrow definition of placement: cover employment, contracting, consulting and related entity hires where appropriate.
• No candidate ownership period: state how long your introduction is protected.
• Weak backdoor hire wording: cover indirect hires, referrals and hires for different roles.
• Open-ended guarantee: define the period, conditions and exclusions for replacement guarantees.
• Privacy gaps: make sure your candidate consent process lines up with how you share CVs and profiles.
• Overly harsh standard terms: protect your agency without creating unfair contract term risk.

Templates, including candidate terms and conditions, can be a useful starting point, but recruitment agreements often need tailoring because your fee model, client base and guarantee policy can make a big difference.

Key Takeaways

• A recruitment fee agreement should clearly state when your placement fee is triggered and how it's calculated.
• Your terms should define a placement broadly enough to cover employees, contractors, consultants and related entity hires.
• A replacement guarantee should have clear conditions, a set time period and sensible exclusions.
• Candidate ownership and backdoor hire clauses are essential if you want to protect introductions after the first conversation.
• Australian Consumer Law, privacy rules and labour hire laws can all affect how your recruitment agency terms should be drafted.
• Clear records and accepted terms make commission disputes much easier to manage.

If you'd like help with your recruitment agency terms, placement fee clauses, replacement guarantee wording or candidate ownership protections, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.