Regulation and Licensing of Employment Agencies

The term employment agency means any licensed person or corporation engaged in the business of finding positions or employment for applicants.  State agencies that provide free employment services are also deemed to be an employment agency.  Some statutes specify that in order to secure a license to operate an employment agency, the license applicant must have a minimum one year’s experience with an employment agency or equivalent experience in the opinion of the bureau[i].  Thus, where an employment service merely publishes job information and does not have contact with prospective employers on behalf of individual applicants, the service is not an employment agency within the meaning of the Employment Agency Act[ii].  The agency charges a fee for bringing together the employer and the prospective employee.

However, an employment agency may not include labor union organizations and temporary service contractors.

The operation of private employment agencies and the control of the relations between an employment agency and its clients are generally regulated by statutes.  Statutes regulating private employment agencies do not apply to personnel consultants retained and paid exclusively by employers, with no fee charged to the job seeker.  An agency generally performs services including matching applicant qualifications to jobs, offering interviews and resume-writing advice, and arranging interviews.  The services rendered by the agency are completed at the time of referral of a qualified person who is hired by the employer and who actually begins work.  This is why the agency fee is ordinarily deemed earned at the time the employee is hired[iii].

In order to establish entitlement to recover employment agency fees, courts require: a request by an employer to an agency for referrals; that the agency, in response to the request, made suitable referrals; that the employer hire an applicant sent by the Agency; and that there is an agreement as to fee arrangements[iv].

Some agencies offer services including resume preparation and the publishing of job opportunities.  In such cases, courts may or may not consider such agencies within the meaning of the regulatory statutes.

The purpose of regulating agencies is to protect prospective employees from fraud or incompetence of employment agencies and an agency’s failure to comply with the licensing requirement generally renders the contract unenforceable[v].

The Fourteenth Amendment to the United States Constitution protects the right to engage in the business of an employment agency.  However, a state is free to impose reasonable restrictions upon the private employment agencies in the interest of the public at large.  Thus, state governments can fix a cap on the placement fee charged by the employment agencies.  The burden of proving the unconstitutionality of an employment agency statute is on the party challenging the statute.

In determining the validity of a statute passed pursuant to the police power, courts generally apply a tow-prong test.  First, the court will inquire whether the challenged statute tends to promote the health, peace, morals, education, good order, and welfare of the people.  Secondly, the court will analyze whether the requirements imposed by the challenged statute bear a reasonable and substantial relation to accomplishing the purpose of the enactment[vi].  The court will inquire whether the statute fulfills the legitimate object of the legislation.  In this case, courts generally analyze if the rates set by the statutes are reasonable, and not unnecessarily prohibitory and confiscatory.  In this analysis, there is a strong presumption for validating the constitutionality of the statute.  Due process only demands that the law shall not be unreasonable, arbitrary, or capricious.  Thus, courts have held that licensing requirements that treat employment agencies differently from newspapers or other publishers of generic job lists did not violate the right to equal protection of the laws.

The Law does not prohibit the delegation of the power to regulate fees to a state administrative agency.  However, this has to be done after providing sufficient guidelines and adequate procedural safeguards to control arbitrary administrative action and avoid any abuse of discretionary power[vii].  The local agency should conform to the metes and bounds of the power delegated and cannot impose additional, unmandated requirements.

An employment agency applying for a license is required to furnish to the Department of Labor an affidavit stating that he/she has “never been a party to any fraud, has no jail or prison record, belongs to no subversive societies, and is of good moral character, is of business integrity, and is financially responsible.  The application is required to be accompanied by such evidence of the applicant’s business reputation for integrity and such evidence of the applicant’s financial responsibility as the department may by regulation require[viii].”

Prior to granting the license, the government will generally inquire into the qualifications or character of the applicant to assess the solvency and moral character of the employment agency.  Also, those agencies which receive their fees from employers rather than employees are least monitored and are not subjected to licensing requirements because the chances of harm to the public interest caused by such agencies is minimal.  The license of an employment agency may be suspended for unprofessional conduct.  Out -of-state agencies that conduct business within a particular state are usually regulated by the state statute and such a regulation will not be perceived as an unconstitutional interference with interstate commerce.

The foregoing statutes stipulate that the licensed agencies shall maintain accurate records, post a bond, establish contract forms and fee schedules, and limit the area within a state where an employment agency is licensed to do business.  The invoices sent to any employer shall bear the employment agency’s name.

Statutes may contain a provision to the effect that an applicant sent to a prospective employer for a job interview must have been personally interviewed by the employment agency[ix].  Moreover, the employment agency must have communicated with at least one former employer of the applicant if the applicant is to work in a private family or is to be employed in a fiduciary capacity.

An agency’s failure to secure the necessary license and to file the appropriate fee schedule renders a contract with an employer void.  Failure to comply with licensing requirements also prevents an agency from maintaining tort and contract claims against another agency.

[i] Cal. Bus. & Prof. Code § 9941

[ii] Sacramento Data Processing Etc. Sales v. Department of Consumer Affairs, 129 Cal. App. 3d 348 (Cal. App. 3d Dist. 1982)

[iii] Career Blazers Agency, Inc. v. Corporate Graphics, Inc., 111 Misc. 2d 47, 49 (N.Y. Civ. Ct. 1981)

[iv] Half v. Levine-Baratto Associates, Inc., 126 Misc. 2d 169 (N.Y. Civ. Ct. 1984)

[v] Accountemps Div. of Robert Half, Inc. v. Birch Tree Group, Ltd., 115 N.J. 614 (N.J. 1989)

[vi] State ex rel. Faulk v. Csg Job Ctr., 117 Wn.2d 493, 504 (Wash. 1991)

[vii] Barry & Barry v. State Dep’t of Motor Vehicles, 81 Wn.2d 155 (Wash. 1972)

[viii] Management Recruiters of O’Hare, Inc. v. Process & Environmental Equipment Unlimited, Inc., 137 Ill. App. 3d 513 (Ill. App. Ct. 2d Dist. 1985)

[ix] Michael David Associates, Inc. v. GTE Network Systems, Inc., 182 Ill. App. 3d 87 (Ill. App. Ct. 1st Dist. 1989)


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