Good News for Employment Agencies

The 6th of April 2006 saw the handing down of an important Judgment by the Court of Appeal in the case of EURO LONDON APPOINTMENTS LIMITED v CLAESSENS INTERNATIONAL LIMITED

What is the effect of the case?

This Judgment affects the way in which an employment agency may govern its relationship with its clients. This decision makes it possible for an employment agency to make a partial refund in respect of the early termination of employment, conditional upon the client having discharged the agency´s fee within the agreed time (which may be as short as 7 days).

Previously such a term would have been viewed as a penalty clause and as such unenforceable (The rule against penalties is an exemption to the general principle of English law that a contract should be enforced in accordance with its term).

Relevant Facts

In this case two applicants were engaged by the client who´s employments were terminated (one resigned and one dismissed) within the stipulated 12 week period. The employer applied for the appropriate level of refunds in accordance with the sliding scale.

The agency did not accept that the client was entitled to any refund because the agency’s fee fee had not been paid within 7 days of the invoice date.

Relevant Terms

In this case, the employment agency’s terms of business for the introduction to a client of permanent and contract staff provided that:-

1. the clients shall pay a fee to the agency for an "introduction" resulting in an "engagement".
2. no fee would be payable by the client until the applicant commenced the engagement.
3. the agency would invoice the client and payment must be made within 7 days of the date of the invoice.
4. a refund / partial refund of the agency’s fee would be made where a permanent worker´s engagement terminated prematurely (in this case within 12 weeks) which refund would be calculated on a sliding scale.

The employment agency’s terms of business also made the right to the refund / partial refund conditional upon the following clause:-

"In order to qualify for the following refund, the client must pay the agency´s fee within 7 days of the date of invoice and must notify the agency in writing of termination of engagement within 7 days of its termination".

The Proceedings

Proceedings were issued; the main point being whether the agency should be allowed to rely on the clause and refuse the partial refunds because the agency fee had not been paid within 7 days, in accordance with the agreement.

At first instance, Judgment was given for the client on the basis that the clause was merely a disguised penalty clause and therefore could not be relied upon.

The agency appealed this decision. The appeal was dismissed. The appellant Judge´s reasoning was more or less identical to the Judge of first instance.

The agency went on to make a second appeal to the Court of Appeal. Lord Justice Chadwick gave the leading Judgment and concluded that the dominant purpose underlying the condition was not a penalty and for this reason there was no reason in principle the condition precedent (prompt payment) should not be enforceable.

The Court of Appeal has in effect decided that a clause making refunds against an agency´s fees conditional upon the client discharging the agency´s fee within 7 days, is enforceable.

Opportunities

In reality few clients will actually pay within 7 days therefore agencies can substantially improve their position should a candidate leave the client´s employment prematurely.

Agencies should revisit their standard terms of business to incorporate such a clause and make it standard practice to review records on each occasion a refund or partial refund is requested, to consider whether the term could be relied upon and refund saved.

For more information contact:Grahame Love on 01204 677000 or at glove@keoghs.co.uk

Disclaimer of Liability: Nothing in this document constitutes legal advice. You should always consult a suitably qualified lawyer about any specific legal matter. Keoghs assumes no responsibility for the information in this document and disclaims all liability relating to such information.