It's Time We Spoke ... about Temp-to-Perm Fees
You might want to rethink the logic of your temp-to-perm fees after you read about this case.
I’m indebted to Martin Richardson of Ready Set Recruit Legal for bringing a recent Queensland District Court decision to my attention and engaging in learned discussion about it. Martin is working to find a solution that will avoid the pitfalls that currently face the use of temp-to-perm conversion fees. In the meantime, we need talk about this new case. Here's a note that might get us started.
Background
The case of Atlas People Pty Ltd v Carter Mills Hotels Pty Ltd (2023) involved a fee dispute under a labour-hire contract. Atlas was a labour-hire company that supplied staff to clients in the hospitality sector. Carter Mills operated a restaurant and entered into a contract with Atlas for a chef. The contract included various fees, such as a standard placement fee, introduction fee, and investigation fee. These fees were intended to compensate Atlas for imagined “losses” if the chef accepted a position with Carter Mills or a related entity. The contract also included a clause asserting that the fees were “fair and reasonable”, and not considered penalties under common law. The assertions proved to be wrong.
Issue
At issue was a question of whether the fees were enforceable or whether they were void as being either:
- a penalty;
- an unreasonable restraint of trade; or
- unfair under the Australian Consumer Law (ACL) as a term in a small business, standard form contract.
Outcome
The fees were void on all three grounds. Atlas failed in its claim against its client and was ordered to pay costs.
Key Take Aways & Discussion Points
Penalty
Fees stipulated in a contract that are intended to deter a party from certain actions (poaching a temp), rather than being genuine pre-estimates of loss, can be considered penalties and are therefore unenforceable.
For Discussion: What is the “loss” that a temp agency suffers when a client “poaches” a temp worker? Is it the loss of some opportunity – e.g., to extend an assignment or to make a direct-hire placement?
Restraint of Trade
Clauses in a contract that deter a party from employing or engaging a worker for a certain period, regardless of the worker's employment status or the nature of the employment, can be considered unreasonable restraints of trade and are therefore void unless they are no more than is reasonable in the protection of a legitimate interest.
For Discussion: What is the legitimate interest that the temp agency is entitled to protect? Is it its so-called “worker connection” or “candidate connection”? If so, can the measures taken to protect it ever reasonably exceed the extent of the worker’s liberty to seek alternative and even direct employment with your client.
For example, if you have only restrained your worker from direct engagement by your client for four weeks after the end of an assignment, or not at all, is that not the full extent of your “worker/candidate connection”; and how can it be reasonable to impose a six month conversion restraint on your client according to the logic that you are protecting your worker/candidate connection?
Unfairness
Terms in a standard form, small business contract that:
- create a significant imbalance in the parties' rights and obligations AND
- are not reasonably necessary to protect the legitimate interests of the advantaged party AND
- would cause detriment to a party, can be considered unfair contract terms under the Australian Consumer Law (ACL) and are therefore void.
For Discussion: The inclusion of an unfair term in a standard form, small business contract made or renewed on or after 9 November 2023 now attracts penalties of up to $50 million, and in some cases more! What do you see as being the risks of including an ambit cascading restraint in your contracts – i.e., one of those clauses that cascades the restraint downwards: 12 months, 6 months, 3 months… if a court finds that some part of it is unreasonable? Think about it. If a court does find that your 12 month restraint is unreasonable, are you not in some peril of exposure to eye-watering penalties?
A Thought
The case has me wondering if it might be time to reconstruct the logic of the temp-to-perm fee, which has traditionally been based on the imagined "loss" caused by disintermediation, in favour of a logic that views conversion as simply a different method for filling a position, with the fee representing the agreed value of the service as its upfront price.
You might want to think about that. We need to talk!
Andrew C. Wood
