Recruitment Agency Agreement Checkpoints: Placement Fees, Refunds and Direct-Hire Clauses

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

It is not unusual for an employee who joined through an agency to leave after only a few months, sending the company back to reread the refund provisions in its contract in a hurry. When a hire is made, attention tends to go only to the amount of the placement fee, and the conditions for refunds and the treatment of direct hires are left unchecked. Rather than handling the contract with a recruitment agency as a routine form that stands in for a purchase order, it is important to understand its terms in advance.

Licensing of Fee-Charging Employment Placement Businesses and Advance Checks

As a starting point, recruitment (fee-charging employment placement) is a business that requires a government license under the Employment Security Act. Article 30 of the Act requires anyone who intends to operate a fee-charging employment placement business to obtain a license from the Minister of Health, Labour and Welfare.

For the hiring company, the first step before signing is to confirm that the counterparty holds a valid license number. The license number is usually shown on job postings or at the beginning of the contract. If no number is shown or its format looks unusual, it is wise to ask the agency before signing. Contracting with an unlicensed agency does not immediately expose the hiring company to administrative sanctions, but an advance check is essential to avoid paying fees to a counterparty that lacks the disclosure of terms and the complaint-handling arrangements required under the relevant guidelines.

Two Fee Methods and the Duty to Disclose

The law provides for two methods of collecting placement fees. One is the "capped fee," whose ceiling is set by ministerial ordinance: under Article 20 of and the Appended Table to the Ordinance for Enforcement of the Employment Security Act, the ceiling is 11/100 of the wages paid (10.3/100 for tax-exempt businesses). Where the same person has been employed for more than six months, the wages for six months form the basis of the calculation. The other is the "notified fee," collected under a fee schedule notified in advance to the Minister of Health, Labour and Welfare, which allows each agency to set its own rates and calculation methods.

The common explanation in practice, "theoretical annual income times a fixed rate," reflects the fact that many agencies use notified fees and maintain fee schedules that multiply an expected annual income by a percentage. However, the specific rate and the method of calculating theoretical annual income depend on what each agency has notified; they are not uniformly set by law. It is important to compare the fee schedule as well as the contract and confirm the basis of calculation, such as whether only base salary is included or whether allowances and expected bonuses are also counted.

Article 32-13 of the Employment Security Act requires agencies to disclose matters relating to fees to both employers seeking workers and jobseekers. Because the disclosed terms will serve as the benchmark if views later differ on refund calculations or direct hires, it is reassuring to obtain the disclosed fee schedule itself, not just the rate written in the contract, and keep it on file internally.

Tiered Refund Clauses and Refund Conditions

A refund system is an arrangement under which the agency returns all or part of the fee it received when a person placed through it leaves early. The Ministry of Health, Labour and Welfare's guidelines also state that it is desirable for fee-charging employment placement businesses to establish such a system. In actual contracts, a common design returns a higher percentage the shorter the period since the start date, with the refund percentage falling in steps as the period of employment grows longer.

What the hiring company should check is the range of reasons for leaving that trigger a refund. Whether only voluntary resignations are covered, or whether departures for company reasons and a decision not to confirm employment during the probationary period (dismissal) are also included, changes the scope of the protection available. Many clauses also extinguish the refund claim unless the agency is notified in writing or by similar means within a certain period after the departure, so it is important to build into HR procedures in advance who in the company will contact the agency, and by when, if an early departure occurs.

For the agency, too, a discrepancy in period brackets or refund percentages between the fee schedule and the refund provisions in the contract could invite a finding that it has breached its statutory disclosure duty. It needs to confirm that the contract and the separately provided fee schedule are consistent.

Direct-Hire Clauses and the Ban on Cash Incentives

When a candidate introduced during the selection process is hired directly, bypassing the introduction, the direct-hire clause comes into play. Even if it appears that the candidate and the company reconnected through a different route, many contracts provide that the introduction remains effective as long as the company first received the candidate's information from the agency.

Such a clause requires payment of an amount equal to the placement fee, or a set percentage of it, if the company directly employs the candidate within a specified period after the introduction. The length of that period varies by contract. The hiring company should confirm the scope in advance so that it does not extend to people who previously withdrew from selection or who applied on their own through a different job board. For the agency, unless it can identify which introduction document a candidate was covered by and when it was provided, disputes over proof are likely to arise later.

Candidates' personal information also requires careful handling. The guidelines in principle prohibit storing or using it for purposes other than the intended ones, and in principle do not permit collecting matters that could give rise to social discrimination, such as race, beliefs or labor union membership. The hiring company, too, should avoid diverting résumés and other materials it receives to selection in another department without permission or keeping them in an internal database indefinitely, and must handle them within the scope of the purpose of use.

Another point to note is the handling of so-called celebration payments. The guidelines on the responsibilities of employment placement businesses prohibit encouraging jobseekers to apply by providing them with money or other benefits exceeding what is considered reasonable by social norms, under the name of "celebration money" or similar (applicable from April 1, 2021). They also provide that an agency must not encourage a person who took up employment for an indefinite term to change jobs for two years from the date of employment. To avoid agencies that use casual cash incentives to make people change jobs repeatedly, and to prevent the early loss of the people you hire, it is important to judge whether the counterparty operates in line with these rules.

Reviewing the Recruitment Agency Agreement

Like a service agreement or a master transaction agreement, a recruitment agency agreement is an important contract that forms the foundation of the business relationship that follows. Sorting out the fee structure, refunds and special terms on direct hires in advance helps prevent unnecessary disputes in the future.

Contract review perspectives are also covered in Reviewing a Master Transaction Agreement and Points to Review in Service Agreements.