From its humble beginnings as an occasional accommodation to clients of temporary services, the temp-to-perm conversion has become a major source of revenue to the placement industry. Its popularity can be directly traced to permanent placement (“full-time”) services entering the temporary field. They don’t look at the conversion as the loss of an employee, but the gain of a placement fee. It’s a way to keep a qualified candidate “on ice” while giving the client the opportunity to “try before you buy.”
Unfortunately, three problems exist in enforcing conversion fees: Confusion, collusion and conspiracies. Understanding them will enable you to collect when the conversion occurs.
Confusion
Temp services used to call a conversion fee provision in their contracts or time cards a liquidated damage clause. This meant the service and client agreed in advance that an exact amount would be due if the temp was hired.
You might think courts just rubber stamp liquidated damage clauses. After all, if the parties figured out the amount of damages in advance, why not simply award that number? Well, judges and juries don’t rubber stamp very much. Court clerks, yes. Judges and juries, no. Instead, they only enforce liquidated damages if they are:
- Difficult to measure.
- Reasonable
Let’s assume that your contract or time cards contain a conversion fee that’s the same as your permanent fee schedule. The client uses the temp on an hourly basis of $50, and you pay the temp $30 per hour. The temp is there for 45 days and the client wants to buy.
Are your damages difficult to measure? Not necessarily. Either you will have other temp assignments you can fill with the temp or you won’t. If you do, you’re under a duty to mitigate the damages (by trying to find another temp) before you can recover for breach of contract by the client. The typical temp is interchangeable, so your damages are limited to the time, effort and money to replace. If you don’t have other assignments, there are no damages you can prove from loss of the temp. When you assert your perm schedule is the basis for the fee, arguing your damages are difficult to measure is arguing with yourself.
Is the fee “reasonable”? Not if you back up into the temp situation. Either your documents or those of your competitors will probably have a provision that gives the temp to the client after a certain period on site (usually 90 days). Here, $20 per hour ($50 minus $30) computes to $160 per 8-hour day. Since the temp has already been on site for 45 days, the remaining 45 days would give you a (very) gross profit of $7,200 (45 days x $160). Weigh that against your scheduled permanent (regular) placement fee.
In addition to these problems, the temp could leave your employ at any time. How can you show that she would have completed this or subsequent assignments?
So the answer is to separate the two placements. The temp is an employee, but is also a candidate. The temp assignment can be handled in the usual way, but the perm placement should be handled by a different consultant who takes a perm job order, sends the fee schedule and presents the candidate. That way, we’re not talking about liquidated damages for the loss of the temp. We’re talking about a separate permanent placement fee.
Using a different name for the permanent placement business will help you even more, since there will be less confusion about the reason for the separate fee.
Collusion
From the beginning, you’re on the outside looking in. The client and the temp can ease you out with ease.
It’s so perfect. . . Unlike the permanent send-out where the client and candidate don’t know each other, the client and temp are very friendly. Clients run ads, temps respond. Clients post jobs on bulletin boards, temps respond. Employees refer temps they’re working with. Other temp services hire temps away from you on site and don’t charge a conversion fee.
The client thinks “H-m-m-m-m-m. Why should I pay $7.50 per hour and wonder whether she’ll be back tomorrow?” The temp thinks “H-m-m-m-m-m. Why don’t I ask for $6.00 per hour, and get all the fringe benefits?” When these thoughts become audible, collusion begins.
Employment agreements are sometimes used to prevent the temp from hiring direct. Generally there is just a promise not to do so or a requirement that the temp pay a conversion fee. Since employment (whether temp or perm) is terminable at will, it doesn’t take much imagination for the temp to quit, then hire direct. So this is one place where an employment agreement is relegated to only deterrent value.
As with Item 1, the best protection is to establish a separate perm placement. That way, the temp and client can collude all they like. Once they start doing it on company time, invoice the fee.
Conspiracy
Usually conversion fees are just breach of contract actions. However, when a client hires away a temp, two people are combining to breach the contract to pay your fee. Here, direct your attorney to the bible, American Jurisprudence (16 AmJur2d 60):
A conspiracy to induce one party to breach his contract with another, or to render one party incapable of performing his contract may be the basis of a cause of action for damages. A conspiracy in this category may be one to induce the breach of an employment contract. . . (Citing cases.)
For further motivation, read the brilliant decision of the Virginia Supreme Court in Worrie v. Boze (198 Va 533, 95 SE2d 192, 63 ALR2d 1315). It holds that even the breaching party (the client) can be liable for conspiracy:
[W]hat we deem to be the better-reasoned cases hold . . . one liable for conspiring to breach his own contract. . . The conspirators are jointly and severally liable for all damage resulting from the conspiracy. . . The general rule is that there is no fixed standard for the measure of exemplary or punitive damages, and the amount of the award is largely a matter within the discretion of the jury. (Citing many cases.)
Our law clerk was so motivated when he read it that he fired off a letter to the American Staffing Association suggesting they give an annual Worrie-Boze Award to the temp service that picked up the most conversion conspiracies. We thought excitement was catching until someone called it the “Worried Bozo Award.” Oh well, guess we’ll just have to stick to motivating judges and juries.
If breach of contract still doesn’t budge a judge, allege fraud. There’s always fraud in these deals anyway; the client concealed the material fact of the temp hiring in, and the temp agreed to keep it cool. Or maybe the temp falsely stated she had to stay home to take care of her sick canary, and the client didn’t object.
Unlike breach of contract, fraud is a civil wrong. This by itself is sufficient to escalate the damages beyond the conversion or placement fee. Instead, the judge or jury focuses on punishing the wrongdoer (punitive damages) and making an example of him (exemplary damages).
When two or more parties agree to defraud someone, they’re co-conspirators. It doesn’t take much imagination to see that $50,000 punitives and exemplaries can be doubled to $100,000 if two or more parties are involved. But conspiracy is also a separate offense. This means that it is possible to go beyond simple multiplication to geometry. Now, if there was just a Worrie-Boze Award.
And there it is: Confusion, collusion and conspiracy.
Enforcing conversion fees is really not so difficult if you know how to set them up properly and are prepared to fight for them. This PTL will help.
From its humble beginnings as an occasional accommodation to clients of temporary services, the temp-to-perm conversion has become a major source of revenue to the placement industry. Its popularity can be directly traced to permanent placement (“full-time”) services entering the temporary field. They don’t look at the conversion as the loss of an employee, but the gain of a placement fee. It’s a way to keep a qualified candidate “on ice” while giving the client the opportunity to “try before you buy.”
Unfortunately, three problems exist in enforcing conversion fees: Confusion, collusion and conspiracies. Understanding them will enable you to collect when the conversion occurs.
Confusion
Temp services used to call a conversion fee provision in their contracts or time cards a liquidated damage clause. This meant the service and client agreed in advance that an exact amount would be due if the temp was hired.
You might think courts just rubber stamp liquidated damage clauses. After all, if the parties figured out the amount of damages in advance, why not simply award that number? Well, judges and juries don’t rubber stamp very much. Court clerks, yes. Judges and juries, no. Instead, they only enforce liquidated damages if they are:
· Difficult to measure.
· Reasonable
Let’s assume that your contract or time cards contain a conversion fee that’s the same as your permanent fee schedule. The client uses the temp on an hourly basis of $50, and you pay the temp $30 per hour. The temp is there for 45 days and the client wants to buy.
Are your damages difficult to measure? Not necessarily. Either you will have other temp assignments you can fill with the temp or you won’t. If you do, you’re under a duty to mitigate the damages (by trying to find another temp) before you can recover for breach of contract by the client. The typical temp is interchangeable, so your damages are limited to the time, effort and money to replace. If you don’t have other assignments, there are no damages you can prove from loss of the temp. When you assert your perm schedule is the basis for the fee, arguing your damages are difficult to measure is arguing with yourself.
Is the fee “reasonable”? Not if you back up into the temp situation. Either your documents or those of your competitors will probably have a provision that gives the temp to the client after a certain period on site (usually 90 days). Here, $20 per hour ($50 minus $30) computes to $160 per 8-hour day. Since the temp has already been on site for 45 days, the remaining 45 days would give you a (very) gross profit of $7,200 (45 days x $160). Weigh that against your scheduled permanent (regular) placement fee.
In addition to these problems, the temp could leave your employ at any time. How can you show that she would have completed this or subsequent assignments?
So the answer is to separate the two placements. The temp is an employee, but is also a candidate. The temp assignment can be handled in the usual way, but the perm placement should be handled by a different consultant who takes a perm job order, sends the fee schedule and presents the candidate. That way, we’re not talking about liquidated damages for the loss of the temp. We’re talking about a separate permanent placement fee.
Using a different name for the permanent placement business will help you even more, since there will be less confusion about the reason for the separate fee.
Collusion
From the beginning, you’re on the outside looking in. The client and the temp can ease you out with ease.
It’s so perfect. . . Unlike the permanent send-out where the client and candidate don’t know each other, the client and temp are very friendly. Clients run ads, temps respond. Clients post jobs on bulletin boards, temps respond. Employees refer temps they’re working with. Other temp services hire temps away from you on site and don’t charge a conversion fee.
The client thinks “H-m-m-m-m-m. Why should I pay $7.50 per hour and wonder whether she’ll be back tomorrow?” The temp thinks “H-m-m-m-m-m. Why don’t I ask for $6.00 per hour, and get all the fringe benefits?” When these thoughts become audible, collusion begins.
Employment agreements are sometimes used to prevent the temp from hiring direct. Generally there is just a promise not to do so or a requirement that the temp pay a conversion fee. Since employment (whether temp or perm) is terminable at will, it doesn’t take much imagination for the temp to quit, then hire direct. So this is one place where an employment agreement is relegated to only deterrent value.
As with Item 1, the best protection is to establish a separate perm placement. That way, the temp and client can collude all they like. Once they start doing it on company time, invoice the fee.
Conspiracy
Usually conversion fees are just breach of contract actions. However, when a client hires away a temp, two people are combining to breach the contract to pay your fee. Here, direct your attorney to the bible, American Jurisprudence (16 AmJur2d 60):
A conspiracy to induce one party to breach his contract with another, or to render one party incapable of performing his contract may be the basis of a cause of action for damages. A conspiracy in this category may be one to induce the breach of an employment contract. . . (Citing cases.)
For further motivation, read the brilliant decision of the Virginia Supreme Court in Worrie v. Boze (198 Va 533, 95 SE2d 192, 63 ALR2d 1315). It holds that even the breaching party (the client) can be liable for conspiracy:
[W]hat we deem to be the better-reasoned cases hold . . . one liable for conspiring to breach his own contract. . . The conspirators are jointly and severally liable for all damage resulting from the conspiracy. . . The general rule is that there is no fixed standard for the measure of exemplary or punitive damages, and the amount of the award is largely a matter within the discretion of the jury. (Citing many cases.)
Our law clerk was so motivated when he read it that he fired off a letter to the American Staffing Association suggesting they give an annual Worrie-Boze Award to the temp service that picked up the most conversion conspiracies. We thought excitement was catching until someone called it the “Worried Bozo Award.” Oh well, guess we’ll just have to stick to motivating judges and juries.
If breach of contract still doesn’t budge a judge, allege fraud. There’s always fraud in these deals anyway; the client concealed the material fact of the temp hiring in, and the temp agreed to keep it cool. Or maybe the temp falsely stated she had to stay home to take care of her sick canary, and the client didn’t object.
Unlike breach of contract, fraud is a civil wrong. This by itself is sufficient to escalate the damages beyond the conversion or placement fee. Instead, the judge or jury focuses on punishing the wrongdoer (punitive damages) and making an example of him (exemplary damages).
When two or more parties agree to defraud someone, they’re co-conspirators. It doesn’t take much imagination to see that $50,000 punitives and exemplaries can be doubled to $100,000 if two or more parties are involved. But conspiracy is also a separate offense. This means that it is possible to go beyond simple multiplication to geometry. Now, if there was just a Worrie-Boze Award.
And there it is: Confusion, collusion and conspiracy.
Enforcing conversion fees is really not so difficult if you know how to set them up properly and are prepared to fight for them. This PTL will help.
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