How do you minimise your exposure to contractual risks ?

Avoid Vicarious Liability !

My previous APSCo AdvisoryLink Blogs published in February and July 2023 examined the reasons why recruiters need to worry about Contractual Risk and then examined how to effectively manage Contractual Risk exposure as a critical part of a recruiters business growth strategy (you can read the Blogs on SRC’s Website Contractual Risk and Managing Risk). This Blog asks the question - How do you minimise your exposure to contractual risks ?

As a recap, in the previous Blog I defined ‘Contractual Risk’ as ‘issues or problems that inherently arise during the performance of a contract’. Such risks have the potential to harm your operations. The four reasons why Recruiters need to worry about Contractual Risk were identified as:

1. Negative impact on the profitability of your business

2. Not all losses are covered by insurance

3. Missed opportunities for lower insurance premiums or enhanced coverage

4. Lower valuation of your business

In terms of effectively manage Contractual Risk exposure, I suggested the three most important steps were:

1. Identifying and assessing risks

2. Mitigating risks

3. Monitoring risks

To minimise a Recruiter’s exposure to Contractual Risks, the first important step is to understand what risks are being accepted in contracts with clients. I have experience of negotiating high value and complex contracts in more than 40 jurisdictions across the globe. I focus on the appropriate allocation of risks to the contracting parties, to minimise the exposure to onerous liabilities for recruitment agencies.

To help review client contracts, I typically put the Terms into four buckets as follows:

1. Fundamental Commercial Terms (related to pricing, payment terms, etc)
   

2. Standard Recruitment Terms (related to recruitment processes, compliance with employment laws, breach of data protection, confidentiality, etc)
   

3. Boilerplate Terms (related to con loss, death or injury, termination, dispute resolution, governing law, etc)
   

4. Terms related to risks associated with the workers placed with clients (including responsibility for managing the workers, vicarious liability, etc)

In this Blog, I will focus on the last bucket, as these Terms could result in significant financial losses and reputational damage for recruitment agencies.

The first step to minimise this exposure is to clearly separate the ‘Recruitment Service’ of the agency from the ‘Work’ performed by the worker / contractor. Often I see the definition of ‘Service’ in contracts being both the Recruitment Service and the Work. This is far from ideal. Why ? Effectively the agency becomes liable for the defective work and lack of skill of a worker - the agency is accepting ‘Vicarious Liability’.

As an agency has no ability to manage or supervise the Work of the worker, why would an agency accept risks that it has no control over ? The probability of the risk occurring is much higher when there is an illusion that the agency is controlling the situation, when in reality it is only the client that is capable of controlling the Work being performed. It is also only the client who should have the responsibility for providing a safe working environment and operations.

In conclusion, these responsibilities should remain with the client, rather than attempt to transfer and allocate such responsibility (and liability) to an agency. From my own personal experience, effective Contractual Risk management is an essential part of building a successful business. By taking steps to minimise exposure to Vicarious Liability, Recruiters can protect themselves from costly financial losses, reputational damage, and other negative consequences.

With over 20 years working for multinational engineering companies and 16 years as the Group Commercial & Legal Director of an international recruiter, I have honed my skills in managing risk in contractual negotiations with clients and suppliers. These negotiations required me to have an in-depth understanding of the obligations, liabilities and indemnities that clients set out in their contracts. I have served a total of 8 years on the UK APSCo Representative Committee and twice as the Chair. Now as an APSCo AdvisorLink Trusted Advisor and Director of Strategic Risk & Compliance Consultancy Limited (SRC), I seek to share my passion for managing risk to help businesses in the professional recruitment sector mitigate their risks and achieve compliance, so they can enhance shareholder value through the adoption of best practice. Let’s Connect via LinkedIn linkedin.com/in/stephenrookes.