Many staffing firms have experienced financial abuses inflicted on them by clients or VMS/MSP agents. Originally lifted from traditional purchasing contracts, these ideas are now widespread in staffing deals. The following are some of the worst financial abuses that you may encounter, along with nutshell summaries of how to fix them.
Stale invoice forfeitures. This clause nullifies staffing firm invoices that are not complete, correct and submitted within 60 days after the assigned employees’ work, regardless of who caused the delay (even clients or VMS/ MSPs). Clients claiming stale invoice forfeitures get free work for administrative imperfections that actually confer a benefit on them (paying later instead of sooner). Meanwhile, staffing firms advance about 80% to 90% of the invoiced amounts to pay wages, burdens and other expenses while awaiting payment from clients.
Fix: Reject the forfeiture entirely, or reduce the amount forfeited by a percentage approximating gross margin.
“Pay when paid.” A feature of most VMS/MSP contracts, this clause absolves the VMS/MSP of liability for payments to staffing firms until clients pay the VMS/MSP. Staffing firms under VMS/MSP programs usually have no direct or contractual relationships with clients, so they have no way to collect from clients that refuse to pay. Because they have a very small stake (2% to 4%) in client payments, VMS/MSPs have little incentive to pursue collections on behalf of staffing firms.
Fix: Require unconditional VMS/MSP payment, or require assignment of client receivables to the staffing firm (plus sharing of information and documents) after a specified number of days of client nonpayment.
Interest-free financing of staffing invoices. This becomes more important as interest rates rise. Staffing firms aren’t banks, and there is no reason why staffing invoices should not be paid immediately or even in advance by deposits that clients replenish, as the PEO industry requires. Long interest-free payment periods not only cost you the use of your money but also reduce the clients’ incentive to pay you. It also leaves you with greater risks of clients’ bankruptcies.
Fix: Allow interest-free payment for a short period, but charge interest on overdue accounts by the day after a certain time, retroactive to the invoice date.
Volume discounts. Such discounts decrease clients’ rates as billings, hours, wages or employee counts rise. But the economies of scale assumed to justify the discounts may not exist; and there may actually be diseconomies of scale because of large-client servicing expenses — like on-site staffing, quarterly reviews, special reports, audits and free conversions.
Fix: Reject the discounts or modify them with deferred annual rebates (which deter account termination), instead of discounts applied throughout the year.
“Continuous improvement” discounts. An outgrowth of the “re-engineering” and “quality assurance” fads of the 1990s, these establish automatic annual rate reductions. In the competitive staffing market, these cumulative discounts soon turn accounts unprofitable.
Fix: Reject this feature, or offset it with programmed rate increases.
Rate sharing with client affiliates. This requires you to offer low rates to unspecified client affiliates (or even contractors) whose operations or locations might require much higher rates.
Fix: Limit your rates to named entities, or rate other entities only with specific amendments.
Preferential payment refunds. Bankrupt clients can legally require repayment of 90 days of already-paid staffing invoices. When clients pay staffing firms through VMS/MSPs, the VMS/MSPs required to make refunds to bankrupt clients must retrieve the money from the staffing firms. Preferential payment demands are usually settled for roughly 50% of the amount claimed. VMS/MSP contracts require staffing firms to refund 100% of the payments — and the VMS/ MSPs have little financial incentive to negotiate compromises with bankrupt clients, making these refunds twice as expensive for staffing firms.
Fix: Require VMS/MSPs to assign the debt and bankruptcy claims to you, plus all supporting information and documents.
“Most favored customer.” These clauses make you bill clients at the lowest rates that you charge any client, even if the clients agreed to higher rates.
Fix: Apply the rate-matching obligation only to identical client situations, which don’t exist.
Each of these unfair financial terms can be fixed with simple contract modifications. The first step — as with other kinds of abuse — is to tell the client that abuse is unwelcome. Then propose amendments to fix it.