KEY POINTS:
- You should only pay a success fee for candidates you decide to hire as a direct result of the recruiter’s efforts within a reasonable time after the initial introduction.
- According to industry standards, the fee can be between 10 to 20% of the candidate’s salary.
- Headhunters should compete for your business by bringing you the best talent, not by locking you in.
When your company wants to hire a professional recruiting company (also called a headhunting firm), the recruiting firm will send you its standard contract. Before you sign it, here are a few common issues to think about and industry-standard positions on these terms. As you review the agency’s recruiting agreement, make sure you’re comfortable with how they are each addressed.
1. Payment for Candidates
Recruiting firms will present you with several candidates as part of your search. You should only pay a success fee for candidates you decide to hire as a direct result of the recruiter’s efforts within a reasonable time after the initial introduction (typically between six to 12 months). Not for people you were already negotiating with or for a former employee whose resume you already had on file.
2. Fee Amount
Fees for recruiting services are often based on a percentage of the salary of the hired candidate. According to industry standards, the fee can be between 10 to 20% of the candidate’s salary. But be sure the fee is calculated only based on a percentage of the new hire’s first year, annual, guaranteed, cash base salary. Bonuses, options, equity, or other benefits should be excluded from the calculation. You might also want to consider an absolute cap on the fee if the salary is widely variable and you want to ensure that you don’t exceed a certain budget.
3. Guarantee & Refunds
The recruiting agency will typically want you to pay the fee as soon as the person is hired. Be sure you ask for the contract to include a refund if your new hire leaves the job for any reason or is fired within the first 90 to 180 days (considered the probation period). After the probation period, ask for a tiered guarantee with a partial refund (reducing over time) if the person leaves or is fired for cause after the probation period but still within the first year. As an alternative to the refund, the recruiting firm may offer an option to repeat the search at no additional cost to you. You can decide whether this is an acceptable compromise, but a cash guarantee is always preferable since you never know if the second search will be successful, or how long it might take.
4. Non-Solicitation
Because the agency may meet key personnel in your company during the search, you want the contract to ensure they will not poach your best talent, for other jobs they’re trying to fill, for their other clients. If you can, try to limit this non-solicitation clause to be one way (so they won’t poach your employees). This is fair and reasonable, because they recruit for, and therefore need to source, a wide variety of positions, while the only role you might be able to poach from them is an HR recruiter.
5. Confidentiality
You may not realize it, but a lot of the information you share with a headhunter can be confidential. This could include salary ranges, compensation strategy, hiring sources and methods, past HR issues, budgets, business plans and future needs. So be sure to include confidentiality provisions in the agreement. It is OK if this is mutual.
6. Acting Professionally
When the headhunter is recruiting on your behalf, they’re acting as an emissary for you. Their bad acts during that process can damage your brand and reputation. You want the contract to require the recruiter to act professionally, not disparage you, and comply with all applicable laws (e.g., discrimination, spam, do not call requests, etc.). You also want to ensure the recruiter describes the position and compensation package accurately so they don’t end up misleading the candidates (intentionally or inadvertently) about the new role, or making unauthorized guarantees about potential promotions or future compensation increases.
7. Indemnity
Ask for the headhunter to indemnify you for harm they cause to you (such as via breach of confidentiality and representations and warranties). As mentioned above, you should not be responsible for any laws broken by your recruiter, or for unauthorized promises made. Be sure that the indemnity obligations from both sides make sense.
8. Hiring Discretion
You make the final hiring decision in your sole discretion, and the contract should clearly say so. You don’t want to be forced to hire a candidate that doesn’t meet your requirements or needs.
9. Non-Exclusivity
Headhunters should compete for your business by bringing you the best talent, not by locking you in. Have the contract clarify that you are free to work with other recruiters and/or hire on your own, in which case, no fee would be paid.
Recruiting agreements can be beneficial to hiring companies by reducing the risk of making a bad hire, managing recruitment costs with fixed or known fees, and streamlining the hiring process. The above positions are common for the industry, so don’t let a headhunter tell you otherwise.
