Hire Calling Episode 10: What You Need to Know About Contract Staffing Master Service Agreements
Episode 10 Transcript recorded Fri, 10/16 12:17PM • 35:54
You’re listening to the Hire Calling Podcast. Your source for all things hiring, staffing, and recruiting. On today’s episode, I’m going to cover the various components included in nearly every contract staffing services agreement, or what’s commonly referred to as a Master Service Agreement, or MSA. If you’re a third party recruiter, or you work with a third party recruiter when hiring, this episode is for you. Let’s go.
Welcome, everyone, and thank you for listening to Episode 10 of the Hire Calling Podcast. I’m Pete Newsome, and the topic of today’s episode, staffing services agreements is, admittedly, not the most sexy or exciting topic that we could discuss. It is, however, not only the formal first step in a relationship between a third party recruiter and their end user client, but it’s a critical step to get right, and one that can often be the difference between a long lasting, mutually beneficial relationship and a relationship that ends badly, and potentially with a lot of unnecessary time and expense on both sides. So the way to avoid that happening is for both parties to understand the different terms and conditions included, understand what it is they’re signing before doing so, and be prepared to live with that hopefully for many years to come.
Now, I want to be clear and put in a disclaimer that I’m not an attorney, and I don’t want anyone to consider this to be legal advice. By all means, if you don’t understand what you’re signing, don’t take a chance; hire a qualified attorney That is a very safe, sometimes expensive, but a very safe way to avoid getting into legal trouble or getting yourself into an uncomfortable place with what you’re signing. The reason I’m comfortable talking about this subject is having owned a staffing company for the past 15 years, I’ve reviewed hundreds, if not thousands of these agreements, and I’ve realized that there are only so many moving pieces and parts. Most of the agreements, I would say 80 to 90%, all kind of say the same thing. But sometimes there’s some gotchas in there, and sometimes there are some pieces that can be negotiated to give a better chance of a healthy outcome, and not having regret after the fact. I’ve also noticed on some different message boards and associations that I’m part of that it’s potentially something that new staffing companies, or new recruiters who’ve hung their shingle and gone out on their own, struggle with on the front end, and 15 years ago, I was in that position too. So I wanted to try to be helpful to those who have to read these agreements, have to push them through and get them signed, but may not understand exactly what the different terms are.
I also want to draw one more distinction before we get going, which is this topic today, staffing services agreements, or what’s often referred to as a master service agreement, is specific to contract staffing. There’s a direct hire agreement, which is often separate, or a direct placement agreement as it may be called., and the terms included in those are significantly less., which makes sense. A direct hire agreement involves scenario where the candidate who’s hired goes directly on the payroll of the end user client or company, where a contract agreement, which is what we’re talking about today, has a more necessary terms and conditions because that person who’s hired is the employee of the staffing company working on site at their client’s location. So we’re going to go through what ended up being 16 different points. And considering or considerations, that quite frankly, is is more than I expected to have as individual components to talk about. I thought it was going to be maybe a third of those, but as I looked through our agreement, looked through seven or eight other agreements in preparation for this podcast, I ended up with a list of 16. So without delay, let’s get right to it.
Contract Staffing Master Service Agreement (MSA) Tip #1
The first one is, get the legal name of your client correct. If you’re a recruiter, this is a point that sounds easy, but the difference between ABC Company Inc, and ABC Company LLC could be the difference between a deal moving along and happening in the right timeframe, or a deal dying on the vine. Because in most cases, when a staffing services agreement is going to be signed, there’s an impending need, or maybe even an immediate need, and any unnecessary delay lessens the chances of that happening – especially with a bigger company that may have a team of attorneys that has to review a small change. Even if it is as simple as just adding, a single word or when making one change to get the legal name of a company right.
So make sure you ask on the front end before you start typing anything into agreement: what is the legal name of your client, and if you are the client filling out the contract, and if you have a need to move quickly with a staffing company, then you want to do the same on their end. So, get the legal name right.
Contract Staffing Master Service Agreement (MSA) Tip #2
The second piece is the contract term length. This is an area that no one really thinks too much about. I shouldn’t say no one, but many folks don’t think too much about it at the onset of a relationship, when you’re thinking about how it’s beginning, and you’re thinking about how great it’s going to be. But you also need to consider what happens when it ends, specifically in terms of the contract. Does it have an end date included that needs to be recorded on the front end, so you don’t forget to renew the agreement ahead of time? You don’t want to let a contract expire. Now, many staffing services agreements are evergreen in nature, which means they don’t have an end date, and I will tell you, that’s always preferable.
And I’ll just step aside for a moment. This is probably going to come up a couple other times throughout the podcast, that depending on whose agreement is being signed, either the recruiting firm or their end-user client’s agreement, the terms may be very favorable one way or the other. Now, that is not ideal., and that can easily be avoided by just having terms that benefit both parties equally. But I can tell you with 4 Corner Resources’ agreements, we never have an end date. We don’t want the relationship to end, and we anticipate that it won’t, so we’re not going to penalize ourselves and in reality, create unnecessary work that needs to be done through the process of renewing a contract. So our contracts are always evergreen, but you need a system of recording those dates up front, so they don’t catch you off guard after the fact. I’s easy for it to happen when you’re not thinking about on the front end. So the second point is the contract term: pay attention to it up front.
Contract Staffing Master Service Agreement (MSA) Tip #3
Number three is insurance. This is one, especially for new staffing entity, either an individual contributor or a company, it’s may come as a surprise to you how significant the insurance requirements can be from client to client, and this is this is an area that we do see vary quite a bit from some pretty light requirements, to what I would consider to be way over-the-top excessive requirements. And specifically, I’m talking about liability insurance and the different components therein, which is errors & omissions, auto, crime, cyber insurance. There’s also EPLI considerations, which is employee practice liability insurance. Once again, depending on whose contract is being signed, you may have these requirements put on you by your soon-to-be client, and you need to be able to adjust your insurance policy accordingly. If they require a $5 million umbrella policy, a liability umbrella policy, and you only have $1 million dollars’ worth of coverage, you’re going to need to make sure you take care of that before you’re able to sign the agreement and do business with them. Once you’ve been in business for a number of years, you’ll realize that you probably will eventually hit the highest caps. I’m rarely surprised anymore by requirements that we see, but I would say maybe once every other year or so it does happen where we see those numbers continue to go up, and then we have to make a decision either to raise our insurance to cover what’s being asked for that new agreement, or potentially decline the opportunity to do business with that new organization. And like I said, After 15 years in business, it’s rarely an issue for us anymore. We really don’t see requirements higher than what we already have, because we do business with such a wide variety of companies including some large companies with very, very significant insurance requirements that we’ve had to accommodate already. But be prepared for it, and one of the ways to really make that not be a lingering problem as a staffing company is to have a very good insurance broker. I won’t go into excessive detail about that now, but I think it makes sense on a future podcast to probably bring in a specialist in that area and to dig into the individual parts of liability insurance. Pay attention to it on the front end, make sure you have the coverage before you sign.
Contract Staffing Master Service Agreement (MSA) Tip #4
The next component is indemnification. Now, unlike some of the contract areas that we’re discussing that may be a matter of delay or minor inconvenience, indemnification is an important one to pay close attention to. The reason is because these clauses in contracts can often be very one sided, and potentially extremely harmful to the party who is on the wrong side of that. It is worth understanding, at a deep level, what is really being asked of you as a staffing company if your client if is asking you to indemnify them. This is an area to be very specific and clear, and when you do see a contract that’s slanted, it is fair and reasonable to ask for mutual indemnification; to ask them to change that clause. Many times, that’s going to be a quick yes, but if and when it’s a quick no, or just a no, I advise everyone to strongly consider whether they’re comfortable entering into that agreement and why it would be a “no”. Of course, a legal team, in doing their job, is going to try to make all the terms and conditions in their client’s favor, but in our world of staffing, we have to be pragmatic and reasonable about what we’re agreeing to, where our responsibilities really lie, what we could impact, and just what’s fair. S pay close attention to that to that section.
Contract Staffing Master Service Agreement (MSA) Tip #5
The fifth area of the contract is payment terms, and that is a big one. Of course it’s a big one, and in the staffing industry, net 30 is very common. But if you’re writing the contract, and you have the ability as a staffing company to ask for your invoice to be paid sooner than later, by all means do it. And you should be willing to do that, without hesitation, because there are a lot of carrying costs, which goes without saying when you’re in staffing, because you have to front the money for payroll. The longer the terms, the more payroll you have to front, and it really may inhibit your ability to do business. That’s also a topic for another day, that can be a separate topic later, on how a staffing company can handle their financing – what their option are. But the best way to handle it is to not have to handle it at all, and you can accomplish that by trying to get your money as quickly as possible it you’re the staffing company. From the client’s perspective too, although they also want to hand hold on to their cash, it becomes a give and take – If you are making your staffing company wait to get paid, they’re probably just going to have to charge you more for their service, because something’s got to give. So, net 30 is pretty much the industry standard, but don’t be shy if you’re a staffing company, a new staffing company in particular, about trying to get your money as soon as possible. Ask for payment upon receipt of the invoice or maybe even Ne 15 days.
I would caution anyone against signing, ever signing, an agreement that has terms longer than Net 60. I’ve seen them. There was an agreement that I saw once that had 90 day terms, and it would only be invoiced once a quarter. So, it could have effectively been almost six months without payment going to the staffing company, which is of course ridiculous. But these things do exist, so make sure you’re you look at that section understand what it means. Also, and we may want to just call this number five-A, what happens if the client doesn’t pay? Are there collections fees or late fees associated with that? If you are writing the agreement as the staffing company, you should try to build that in because you have to have some security when you’re fronting so much of the costs up front in terms of payroll.
Contract Staffing Master Service Agreement (MSA) Tip #6
Topic six is, and I’m going to kind of lump these together because they’re generally written in the same section, but confidentiality, nondisclosure, and ownership of work product. Those are, of course, very standard, and pretty much a given, and so probably not something worthy of spending too much time on. But the reason I wanted to add it to the podcast was just to make sure that you pass whatever is required of you on to your contractor. If you’re the staffing company, when it comes to ownership of work product and confidentiality, you want to make sure that you don’t agree to something on behalf of your contractors that they’re not aware that they’re obligated to adhere to. Pat attention to that clause of the agreement that you’re going to sign so you know what to pass on to your contractors.
Contract Staffing Master Service Agreement (MSA) Tip #7
And then and then the seventh point of this section of just preparing to do business, or knowing that you’re going to be able to live within the parameters of the agreement, is attorney’s fees. If there is a dispute, although we hope there’s not, and it has to be resolved somehow, if you are in the right, you want to make sure that you have a clause for attorney’s fees, to be paid for by the losing party.
Contract Staffing Master Service Agreement (MSA) Tip #8
Now, everything we’ve talked about so far is not really about the individual transaction associated with a candidate, because those are a different set of considerations. Let’s talk about those now, but you have to make sure that you can live with everything we talked about up front, long before you worry about what happens when you have an individual candidate. Now this is an area that is rarely thought about at the onset of a relationship, but one that is probably as consistent a sticking point as much, if not more so, than anything else. And that’s candidate ownership. I think of it in two different ways. One is, what kind of ownership do you have of any candidate who’s being submitted to a client if you’re the recruiter compared to their other vendors, and then what kind of ownership rules exist around the recruiters candidate versus a candidate who may already be, and I’m using air quotes for this, “known” by the end-user client. Many times companies will claim that a candidate is known to them if the candidate is in their database. At 4 Corner Resources we have almost half a million resumes in our database. Now, I’d love to claim ownership for all of them, but the reality is, it’s just not practical. How one company handles this from the next can be vastly different, and it really requires a strong understanding on the front end to know how protected each party is when it comes to investing time and effort into an individual candidate.
Depending on how loose or tight those those policies are, it can really guide how much time you’re willing to invest (if you’re the recruiter) into that candidate prior to submitting them to a client, because you may just be told that you don’t have ownership of the candidate after investing significant effort into them, and no one wins in those cases. That can become a recurring theme. Because we want these relationships to be healthy, both parties want them to work, but something like candidate ownership can really get in the way of that, where it, companies start to question whether their time is well spent. And it’s better to know that on the front end, and either negotiate that part of the agreement, or as with some of the other areas of the contract, you may have to be prepared to walk away from an potentially unhealthy relationship. But you always want to go into any situation like this with your eyes wide open. So, make sure that is a scrutinized area of the contract and negotiated on the front end if it’s not satisfactory.
Contract Staffing Master Service Agreement (MSA) Tip #9
Area number nine: Subcontracting. is it allowed? Some end user clients are okay with it, and some are adamantly opposed to it. I’m not here to make a case one way or the other, but it is important to understand what your options are. Can you, as a staffing company, use 1099 contractors where appropriate? Can you use H1B visa holders for contractors? Sometimes the answer is unequivocally
“yes”. Sometimes it’s “absolutely not”. If it is not written in the contract, you probably can, it’s probably something you could make some assumptions with, or even figure out after the fact. If it is in the contract, it’s a good indication that the company is very serious about it, which is good to know on the front end. So if you’re a staffing vendor, who is in the habit of using a lot of H1B contractors, and you have a client, as many of ours do, have policies that they only want us to provide W2 employees, then you need to know that on the front end. And you also don’t want to get into misusing 1099 contractors, but that as is its own topic. But understand what you’re agreeing to there as well; it’s really important. And can you subcontract at all? Sometimes the answer is a hard “No”. Sometimes it’s not addressed at all, and it’s probably okay. But it’s an area to be aware of going in.
Contract Staffing Master Service Agreement (MSA) Tip #10
Number ten: What kind of financial obligation are you signing up for? Is there an obligation in terms of markup? Depending on the contract, it may be very detailed in this area. I would say probably 70% of contracts that I’ve seen over the years don’t mention it, but when and where it is mentioned, it’s another area to take very seriously and be willing to live with what you’re agreeing to. And some staffing companies will draw parameters in place to say here are the markups that we’re willing to live with, and we won’t go below this percentage. Sometimes we see some very low percentages in the marketplace, but if you’re not asked to agree to it up front, then odds are they’re working under different terms. Once you start transacting business at the individual candidate level or the individual job requisition level, maybe it’s off of a bill rate, but always understand what markup you’re willing to agree to, and then just stick with that along the way. I mean, that is giving advice beyond the scope of this podcast, but don’t agree to business that you’re not taking seriously on both sides. If you’re not, if you as a client, who is hiring, isn’t serious about working with the staffing company, you shouldn’t be entering into an agreement with them at all. And conversely, if you’re the company who is willing to sign a contract, but not willing to do so enthusiastically and be committed to having it be a successful relationship, my strong advice is don’t sign it at all. Instead go on to the next piece of business.
Contract Staffing Master Service Agreement (MSA) Tip #11
Number eleven is drug and background requirements. As time goes on this is a moving target. Depending on which state you’re in, they may be very loose, or may be very tight. Often the existing contracts out there don’t take that into consideration. You don’t want to sign something that doesn’t even fall within the current laws of your state or where you’re operating. That goes without saying. But it’s important to understand who’s responsible for what. In addition to the legal ramifications, it’s critical to be aware of the costs associated with what’s being asked. Every company is different. If it’s a healthcare end-user client, they may require certain certifications and educational checks that need to be done. Sometimes those things can be very costly. They may require excessive drug testing, or immunizations that need to be done prior to the contractor starting on site. So there are limitless requirements that could be put in place here. And the key thing to understand is what are your responsibilities either a staffing company or the end user client, and what are the legal obligations or allowances and then what are the expected costs And sometimes these can be very expensive. So pay close attention to that section as well.
Contract Staffing Master Service Agreement (MSA) Tip #12
Number twelve. What kind of guarantee is involved? Now we typically think of that in terms of the direct hire world, if an employee is placed directly on the payroll of an end user client, a guarantee period may very well exist. It typically does. But it also can come up for contract staffing, I would say, generally, I rarely see a guarantee requested of longer than a week. Sometimes I have and I am pretty averse to that. I’ll just be clear: I don’t believe staffing companies are in the retention business, I don’t think they should claim to be, nor should they be held accountable for retention. es, there are certain things that we can do to make sure someone we place is happy at in the job that we place them in. And of course, we try to do that. But, ultimately, our expertise and our value in the market lies is in our search capabilities and screening capabilities. Our ability as a staffing company is to find the right person, but finding someone and keeping someone are very, very different things. Once that employee, if it’s a direct hire or contractor walks into the door, the first day and their new job, our role diminishes rapidly, no matter how hard we try to stay involved or how motivated we are to keep that person happy. Because we’re not their employer, in terms of the directing their work, the team environment, the culture, the expectations, all of that really falls with the client that they’re working for. Now, of course, it falls on the shoulders of the of the contractor, as well. But the staffing company plays a diminished role for sure. And so some of those guarantees that are lengthy, probably should be avoided. It’s an area that I understand whoever’s writing a contract, writes it in their favor, but if it’s ultimately going to be the reason that one company decides not to work with another because of unrealistic requirements, then it wasn’t worth doing in the first place. And that’s really the salient point here, which is, you can ask for it, and you can probably get someone to agree to it, but they’re not going to want to live with it. So pay attention to the guarantee. Hopefully, it’s a non-issue, but sometimes it can be.
Contract Staffing Master Service Agreement (MSA) Tip #13
Number 13 is invoicing. should have included this up front. I’m realizing right now that it was out of order in the podcast, but we’re 30 minutes into this, so I’m going to stick with it. On the front end, find out how invoices should be handled, who they should be sent to. Sometimes it’s a different contact altogether than you would normally have. Sometimes it is a different physical address or email, or how that is handled is a huge component on how payment will be processed. So don’t wait until after the placements have happened like I’m doing out of order in this podcast, but address invoicing early on as you’re signing a contract. And really just make sure all parties understand what’s expected on both sides.
Contract Staffing Master Service Agreement (MSA) Tip #14
Number fourteen is restrictive covenants. How soon can the contract employee be converted to the payroll of the end user company? I’m not sure if this is the most important part of the contract, but it’s equally important to anything else. This is how your profit is made as a staffing company, or if you’re on the other side, it’s how long you’re agreeing to be paying for a contract employee before you can convert them to your own payroll. And while there is some legislation that’s being talked about, I don’t know that any currently exist at the state level today, but it is being talked about at the federal level to some degree, although I’ve seen that it’s probably not going to pass or at least not anytime soon. But it’s legislation that if put in place, would restrict how long a contractor could remain in place before having to convert to a direct employee. If that happens to pass it’s going to be a big shock to the staffing industry as a whole and we will all have figure out how to adjust accordingly. But until that happens, the big consideration really has to do with tolerance by the staffing company and to determine how soon they’re willing to let one of their contractors convert, and tolerance by their client for how long they’re willing to wait while. Now I don’t focus on the contract employee in this context, because there are just as many folks out there who want to be in want to remain a contractor, as there are who desire to be a direct employee. That is a separate podcast altogether. Today, we’re really just focused on that agreement up front and commitment to when that conversion can take place.
Sometimes it’s based on hours worked, sometimes it is a hard date on when that will happen, but there’s always a provision that specifies when exactly it can take place without a conversion fee. So just think long and hard before you sign the contract about what you’re willing to live with over time. And it’s a point that I would highly recommend negotiating as thoroughly as necessary to make sure that there’s not going to be regret after the fact. That is the big takeaway on this point, for sure. So always look at the restrictive covenants, and make sure that you’re content with how it it’s going to end up.
Contract Staffing Master Service Agreement (MSA) Tip #15
That ties in very clearly with the next point, which is what happens if there is an early conversion. What kind of fee, or sometimes it’s even called a penalty. I do not think that it’s really a penalty, because I think it’s a positive outcome for an early conversion, but there is typically some proration, maybe of what the original direct hire fee would have been. The only guidance I will give here is to make sure if you’re the staffing company, that you have the restriction in place, and then make sure it’s spelled out very clearly. This is an area that you can always show flexibility after the fact, in my opinion, in terms of making concessions. If you have an extreme conversion fee, which would discourage your client from doing it, and by that I mean converting a contractor early, you can always come off of that, if it makes business sense for you. And there’s myriad reasons why that could be the case. You can’t, however, decide that you want to charge more after the fact, nor would that ever be appropriate to do. So just as with pretty much every section that we’ve talked about today, just consider not just getting the contract signed to get it over the goal line, but how content you’re going to be with it over the over the long term.
Contract Staffing Master Service Agreement (MSA) Tip #16
The last point is what happens when the contract does come to an end or the relationship comes to an end, therefore, creating a need to terminate the agreement. There’s often some non-solicitation clauses in the contract. You don’t want to go into the relationship, thinking too much about how it’s going to end. That doesn’t sound like a great way to start, but you have to be aware of that possibility and prepared for the day after if that does happen, and you always want to consider it before you sign on the dotted line. And I and I leave that as the last point, because it’s one that, I’m going to be optimistic about and hope that very few people listening will ever have to deal with, or when they do deal with it, it’s going to be very infrequent. But be aware that it is a necessary evil in a staffing agreement, and you want to just be thoughtful up front before you make any sort of agreement that can’t be undone.
And that is it for today. 16 different points, talking about master service agreements, contract staffing agreements, and on a future podcast, an abbreviated podcast from this for sure, I’ll talk about the direct hire contract and what different terms and conditions are typically included there.
Thank you for listening to Hire Calling. As always, I welcome and encourage and would really appreciate any feedback or new topic ideas, please email me at email@example.com. I look at every email that comes in and we’re not yet at a point where we’re getting so many requests that I won’t be able to add the topic, there’s a good chance that I will be so if there’s anyone out there in need of help, who wants advice and would like to have that be a topic on a on a future show, please email us firstname.lastname@example.org and before you go please rate review and subscribe the podcast I would greatly appreciate that too. Thank you and have a great rest of your day.