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Jeff's On Call!

When the Client’s PSA Wants Liability Insurance, Just Say NO!


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Dear Jeff:

I am a regular reader of the Fordyce Letter and especially enjoy your Jeff’s On Call! column. Your information is very interesting and helpful to our industry.  You provide excellent advice, experience, and insight into various employment law issues!

Below is a paragraph from a good client’s contract. As you can see, they are asking for general liability insurance. I asked them about my exposure as a recruiter. You will see their response below. It is my understanding that general liability insurance will not provide the coverage they indicate. What are your thoughts?

10.  INSURANCE  RECRUITER shall maintain in full force and effect, at their own cost and expense, and in a form acceptable to us general liability insurance in the amount of $1,000,000.00 per occurrence, general aggregate limit of $2,000,000.00.  This insurance shall be kept current and in force for the term of this Agreement.  All policies must be written through an insurance company with an overall A.M. Best Rating of B+ or better.  RECRUITER must provide a certificate of insurance evidencing compliance with the above requirements upon request. 

We are looking for recruiting firms to carry insurance in the amount of $1,000,000 per occurrence to cover issues from their recruiting of an individual. For instance, if you recruit and we hire someone that you knew or should have known had a propensity towards violence and then the employee you recruited goes on a shooting spree, then you have insurance to cover the negligent hiring. Does that make sense? It is more along the lines of employment liability. We have had recruiters with other types of coverage also.

Thank you!

Howard Lehman

Hi Howard,

It’s a pleasure assisting you and our JOC readers across the placement plain!

When you ask me about your exposure as a recruiter, I answer a little differently than your client. I answer in four syllables: “UN-LI-MI-TED.”

While I’m working on my explanation:

  1. Go to www.placementlaw.com.
  2. Click the Placement Manager’s Law Quiz button in the middle of the bottom row.
  3. Take the PMLQ.
  4. Click the Answers to Placement Law Quizzes button at the end of the bottom row.
  5. Grade yourself.
  6. Get back to this screen.

Okay, thanks. I’m ready for that polysyllabic explanation now — and so are you. Here we go,

This is one of several ways clients attempt to shift the risk of loss from its common law (original judge-made common sense) and statutory (federal and state legislature-enacted) law. This risk will be shifted by pressuring you to indemnify it.

As you know from my background, I’m a “closer.” I worked a desk. Either you make a placement or you don’t. There’s no second place in the placement race. That isn’t recruiting rhetoric. It’s the recruiting reality we live with every day.Insurance claims file - freedigital

So I rarely answer “No” when a recruiter asks me whether a PSA (placement service agreement) provision can be reworked. We usually find a way. Except when we’re talking about any kind of express (direct) or implied (indirect) indemnification. (Implied indemnification usually arises by brochures and correspondence that over-promise.) Then I answer in one syllable: “NO!”

Just Say No to Indemnification

If you ask me why, I answer in one sentence: “Because it can ruin the rest of your life.”

If you ask me why again, I turn from recruiter to HR manager to placement lawyer. Then I answer in many sentences:

Indemnification legally means the recruiter agrees to pay whatever expenses the employer incurs as a result of hiring the candidate.

Your client is asking for it to be indemnified by you purchasing general liability (GL) insurance with the employer as an additional named insured. This is one of several ways insurance can be used to insulate the employer from liability for work-related conduct of its employees.

Other times, employers just insert indemnification provisions in the PSA whereby the recruiter agrees to pay directly if the candidate does anything — or everything — wrong.

Different For Temp Agreements

Indemnification provisions in PSA’s are usually lifted from some nifty staffing agreement the employer lawyer reviewed. If you’re sending out your employees to work for a client on a temp assignment, sure. You’re either completely liable for their acts and omissions, or you both are liable. It’s hard to wiggle out of liability when you’re an employer and it’s your employee that did or didn’t do the deed.

This joint and several liability business with temp clients is often hassled in workers’ compensation cases. Refer your lawyer to Riley v. Southwest Marine, Inc. (203 CalApp3d 1242) for a good review of the law on this subject. (It’s called the special employer doctrine and is used to nail temp clients.)

But you’re not sending out your employees. You’re sending out strangers to work with other (often stranger) strangers doing things you never see on your screen. It would be uncontrollable if you were on site, but at least you might know it was happening. Watching from your desk, it’s literally unimaginable!

Now that’s true “candidate ownership.”

Liability Without Knowledge or Control

You are assuming liability over something over which you have no knowledge or control. The best evidence of a recruiter’s inability to control other people is contained in your last placement with that client. Did your placed candidate’s background resemble the specs? Thank you. And knowledge? How could you possibly know what’s going on? Your search assignment is only a beginning.

When you indemnify an employer against anything that can go wrong with its employee, you are essentially issuing an unlimited warranty as to the candidate’s fitness for the intended position.

Legally this sounds like the products liability implied warranty theory of fitness for the intended use. That is the strict liability analogy used by employer lawyers when they want to nail you for the candidate’s mistakes or misdeeds. You’re indemnifying the client against virtually anything imaginable. In insurance parlance, you’re shifting the risk of loss to yourself in an unlimited, unascertained amount.

“Candidate ownership” indeed.

I’m going to get to the clever insurance device your client is proposing in a minute. But first, I want to teach everyone on the placement planet all they’ll ever need to know about candidate liability. We call it:

The Start-Stop Second

It’s that instant of time when a candidate starts work and liability attaches.

The only liability that attaches is attached to the employer. As to you, it’s contractual liability for payment of your fee. As to the candidate, it’s employer liability. As to employees and third parties, it’s tort (non-contractual civil) liability for the acts or omissions of the candidate.

Soliciting a contingency-fee job order from an employer and working the search doesn’t create a fiduciary duty of trust and confidence. You have absolutely no duty to an employer before a candidate starts. There is not even a basic contractual obligation.

During that start-stop second when the candidate reports for work, a unilateral contract is formed (by one party fully performing before the other). Your performance is complete and all conditions have occurred because the placement happens. The duty of counterperformance (payment of a full fee) then arises.

You have absolutely no duty to an employer after a candidate starts as well. There is no contractual obligation then either — unless you express one by your guarantee (or the court implies one because the facts show you intended to give it).

No Duty Before or After

Absolutely no duty to an employer before a candidate starts and absolutely no duty to an employer after a candidate starts! The first time I figured this out, I was ready to go back to working a desk. I even checked to see if “Start-Stop Second Search” was taken.

Why would you give up that amazing benefit?

There are two reasons your client is trying the classic “competitor close” (” Everybody’s doin’ it.”). First, your client knows that merely ruining the rest of your life won’t help it get paid for a placement gone postal. Second, your client undoubtedly knows you read the JOC column, and therefore need to be frightened into ruining the rest of your life.

Ask your client for the name of the insurance carriers issuing the certificates for your competitors. Let’s find out who’s willing to write a liability policy for some unidentified, unknown, unchecked, unplaced stranger doing anything wrong maybe while at work.

Since you’re unlikely to get a straight answer, let’s assume a carrier like that is out there. Would you pay for whatever a policy says that will satisfy the employer and essentially eliminate its duty to itself, its employees, its vendors, its customers, and the general public?

“Limited Negligence Insurance”

If you ask me “Why not?”, here’s my reply:

“Liability insurance” is really a misnomer (unlike “errors and omissions insurance” that unfortunately means what it says). There should be a law requiring liability insurance to be called “limited negligence insurance.”

The employer is going to be responsible for the employee’s “acts or omissions in the ordinary course and scope of employment.” That’s the way the law has worked pretty much since Mr. Slate hired Fred at the Bedrock Quarry.

The problem is that nobody knows what ordinary course and scope means. GL adjusters (general liability) adjust the definition down to nothing if they can. No activity is “ordinary” if it’s wrong. (In the case your client rep cited, is shooting guns a gig requirement?)

Just look at your client’s answer. It wants you to ensure that a stranger won’t have a “propensity towards violence.” Can your client rep ensure that about the one person he or she CAN control?

Reference Checking Gotchas

Here’s how it goes:

  • “Did you check references?” “No?” “Why not?”
  • “Yes?” “Then you checked further?” “Why?” “You were suspicious?” “So why didn’t you find out?” “You must not have checked enough.” “Maybe you really knew, but concealed it from us.” “No matter. . . you ‘knew or should have known’.” (Your client rep’s words verbatim.)

Is checking references — or not checking them — negligence? Who inadvertently forgets to check references? It’s a conscious decision. It’s an intentional act. Insurance does not cover intentional acts.

Go have that Q&A when your candidate executes an executive.

Anything that has you involved in that basic respondeat superior (“the employer must answer for the acts or omissions of its employee”) vicarious (substituted) liability that is imputed (pinned on) the employer, has you in a position of unlimited liability.

Can you limit it by stating that you won’t be liable if the insurance company denies a claim? How about that you won’t be liable if it exhausts the policy limits?

I wouldn’t try those things. My four-syllable answer about liability would deserve an exclamation point. It would sound like this: “UN-LI-MI-TED!”

You’re not just buying into a liability policy.. You’re buying into a liability!

. . . and that can ruin the rest of your life!

Thanks so much for asking, Howard. Remember the start-stop second — and you too must answer monosyllabically with an exclamation point: “NO!”

Image courtesy of Stuart Miles / FreeDigitalPhotos.net
More than thirty-five years ago, Jeffrey G. Allen, J.D., C.P.C. turned a decade of recruiting and human resources management into the legal specialty of placement law. Since 1975, Jeff has collected more placement fees, litigated more trade secrets cases, and assisted more placement practitioners than anyone else. From individuals to multinational corporations in every phase of staffing, his name is synonymous with competent legal representation. Jeff holds four certifications in placement and is the author of 24 popular books in the career field, including bestsellers How to Turn an Interview into a Job, The Complete Q&A Job Interview Book and the revolutionary Instant Interviews. As the world?s leading placement lawyer, Jeff?s experience includes: Thirty-five years of law practice specializing in representation of staffing businesses and practitioners; Author of ?The Allen Law?--the only placement information trade secrets law in the United States; Expert witness on employment and placement matters; Recruiter and staffing service office manager; Human resources manager for major employers; Certified Personnel Consultant, Certified Placement Counselor, Certified Employment Specialist and Certified Search Specialist designations; Cofounder of the national Certified Search Specialist program; Special Advisor to the American Employment Association; General Counsel to the California Association of Personnel Consultants (honorary lifetime membership conferred); Founder and Director of the National Placement Law Center; Recipient of the Staffing Industry Lifetime Achievement Award; Advisor to national, regional and state trade associations on legal, ethics and legislative matters; Author of The Placement Strategy Handbook, Placement Management, The National Placement Law Center Fee Collection Guide and The Best of Jeff Allen, published by Search Research Institute exclusively for the staffing industry; and Producer of the EMPLAW Audio Series on employment law matters. Email him at jeff@placementlaw.com.