Bust Recruitment Agencies
Bust Recruitment Agencies – Could your agency go under and you lose weeks or months of money?
In a recession many IT Contractors lose fortunes when their agencies went under last time around. Loads of them did. Bust agencies hit quite a few of them.
Before you signed your last contract did you do a check on the financial health of your agency? I bet you didn’t. The great majority of IT Contractors don’t.
I never did in all my time as a contractor and was lucky never to take a hit from bust agencies.
Agency Sharp Practice
A lot of agencies were a bit fly in the downturn of the early noughties.
When they were struggling to pay their contractors they simply went into administration. They got in administrators friendly to them.
What the directors of those companies in administration then did was to set up a company with a similar name. For example, if the company was called Agency Services Ltd they then set up a new company called Agency Services Ltd (UK).
They then let the Agency Services Limited go under taking all its debts, mainly to contractors, with them.
There was one contractor who lost £48,000 last time around when his agency did this.
Buy Back Contract Assets
The new company then buys the contract assets from the friendly administrator for a pittance. The bust agencies go down with all the debt.
One agency who did this last time round bought all the contract assets from the administrator for just £91,000 even though the company had sales of £9 million in the previous year.
The administrator didn’t offer those assets for sale to any other agency.
The feeble excuse was that if the news got out the contractors would simply get up and leave.
I spoke to one top agency who said they would have paid hundreds of thousands and maybe millions for those assets of the bust agencies.
The new company took all the nice juicy lucrative contracts with them.
All those contractors who ceased to do work through the bust recruitment agencies but had no pay had no chance at all of getting their money back.
Although the new agency had a legal obligation to tell contractors that this was a new company many didn’t bother.
The bust recruitment agencies can’t legally set up a new company that sounds just like the last one.
They got round that by setting up a completely different company with a very different name and using that to buy the contract assets from the administrator.
When they completed that they then transferred the assets of the those agencies into Agency Services Limited.
One wondered at the time of there were a few nods and winks at the time.
Recruitment Agency Duplicity
Many of the contractors didn’t know any difference and if clients sent out a cheque for Agency Services Limited they would simply put it into the bank.
The bank would simply assume that the cheque was for Agency Services International (UK) if it was a different bank.
At renewal time the agency would simply make a slight alteration to the contract. They say that they want the client to pay thme through their UK arm.
The Sting for Agencies
Simple isn’t it?
You could almost make a movie about it perhaps called The Sting 2 – except that it is mostly legal.
However, it was a huge con on IT Contractors. Many of them lost heaps of money that they weren’t expecting to.
It was especially bad as many of them are now out of work in a downturn.
Very Plausible Agencies
I suppose many of you are thinking ‘why didn’t they simply up and leave when the agencies fell behind in their payments?’
They were legally entitled to.
However, agencies that are struggling are very plausible and have a great number of plausible excuses as to why they are behind in payments. They can keep this going for a long time.
The contractor doesn’t want to cause ripples. He or she doesn’t want to write off the money that he or she is owed (even though they are legally entitled to it).
Dealing with Bust Recruitment Agencies
However, it usually means that contractors throw good money after bad.
That is why one contractor ended up by being owed 48 grand by one of the agencies. He was eventually offered only 3p in the pound.
The best advice to contractors is that, if the agency is legally behind on payments insist on immediate payment.
If that is not forthcoming then start to take escalating steps to get it back. Say that you are going to terminate the contract and speak to the client.
Check Out the Agency
The simple thing to do before you sign a contract is to get your Accountant or Umbrella Company to check out the agency.
Don’t imagine that if you are in an Umbrella Company you are safe.
Many of them got caught out last time around.
Better safe than sorry.
We were able to warn contractors in the last downturn of two agencies that were financial wrecks nine months and a year before the two agencies went belly up.
Agency Red Flag
A while back we put a red flag sign on another one that is struggling and has negative net assets.
We will keep a weather eye out.
But, as a first step, get your agency checked out.
It won’t cost you much and could save you thousands.
It’s a scary market out there and bust agencies WILL go under.