The advantages and disadvantages of using recruitment agencies

Iraq / Corporate Commercial

The advantages and disadvantages of using recruitment agencies

Ali Al-Dabbagh
Senior Associate,
Corporate Commercial

Ammar Al-Humairi
Associate,
Corporate Structuring

Zainab Hassan
Trainee Lawyer,
Corporate Commercial

A recruitment agency or also known as manpower or supply agency means any commercial concern engaged in providing any service, directly or indirectly, in any manner for recruitment or supply of manpower, temporarily or otherwise. Recruitment agencies play an important role in helping to find suitable candidates for open positions. The agency’s primary business is providing a bridge between qualified workers and the businesses that require services. This Article will explore the regulatory requirements for operating recruitment agencies, continuing compliance obligations, and prevalent market practices in federal Iraq.

Only Iraqi companies that are fully owned and controlled by Iraqis may issue a recruitment agency license.

Corporate Registration and Licence Requirements

Recruitment agencies must be registered as companies at the Company Registry department of the Ministry of Trade in Baghdad and obtain a license from Ministry of Labour. Pursuant to Instructions No. 1 of 2018 issued under Article (23) of Labour Law No. 23 of 2015 (the “Labour Law”) only Iraqi companies that are fully owned and controlled by Iraqis may issue a recruitment agency license. In addition, the applicant must provide a bank guarantee of no less than 250,000,000 Iraqi Dinars issued in favour of the Ministry of Labour as the beneficiary and a support letter from a bank licensed by the Iraqi Central Bank. The bank guarantee must be kept valid for the duration of the license and would be used by the Ministry of Labour to satisfy any claims in connection with the license or other compliance obligations. A license application also requires a non-conviction letter from the Ministry of Interior certifying that the executive manager of the applicant has not been previously convicted of any crime. Moreover, the applicant must have an appropriate place to practice its business and provide appropriate housing for foreign workers. Finally, the license applicant needs to be registered as an employer with the Pension and Social Security Department of the Ministry of Labour and sign an undertaking not to collect any fees from employment seekers. A recruitment agency licence is valid for one year starting from the date of issue and is renewable via application within 30 days from the expiry date.

Ongoing Compliance Obligations and Enforcement by the Ministry of Labour

The Ministry of Labour license terms and applicable labour law prohibits recruitment agencies from charging any commission to employment seekers in exchange for employment. Recruitment agencies must employ at least %50 Iraqis. The applicable labour law regulations require recruitment agencies to monitor foreign employees and prevent them from exiting the residence notified to the Ministry of Labour. Furthermore, the recruitment agency must register all of its employees with the Social Security department of the Ministry of Labour and pay social security contributions.

Recruitment agencies provide weekly reports on the status of foreign workers to the Ministry of labour and their sites as well as records are subject to regular inspections by the Ministry of Labour. The Ministry of Labour refuses to issue work permits to foreign workers if the %50 Iraqi employees requirement is not met. Noncompliance with the other license requirements would result in fines, license withdrawal, and blacklisting of the recruitment agency.

The Prevalent Market Practices and Business Models Used by Recruitment Agencies in Federal Iraq

A. Secondment of Employees
The prevalent model for large businesses is for recruitment agencies to hire the employees, hold employment contracts, and be the employer of record with the Ministry of Labour. The recruitment agencies then contract with the businesses to provide services. The recruitment agencies would pay employee salaries and other benefits then pass on said costs plus overhead to the businesses that purchase the employees services. The secondment model was not expressly envisioned by the Labour Law and has developed in practice to avoid creating a direct employment relationship between the businesses and the employees, with the recruitment agencies acting as a buffer between the two. The Ministry of labour have allowed the secondment model to continue even though it was not intended by the legislature or the Ministry of Labour Regulations because recruitment agencies are closely regulated by the Ministry of Labour even more so than regular employers.

Even though it is not efficient for businesses, the secondment model achieves its goal of not creating an employment relationship with permanent employees only if certain conditions are met. Such conditions include for example the recruitment agency paying the employees’ salaries, registering the employees for social security, and sponsoring foreign employees for visas and work permits. The Labour Law is not clear on the degree of involvement of the business that would give rise to a direct employment relationship with the seconded employees. Businesses who use recruitment agencies accept this risk in exchange for not having to deal with employment compliance obligations. However, a business would be jointly liable to the employees and the Ministry of Labour if the recruitment agency were not complaint with labour law obligations. Therefore, business are advised to seek legal assessment of the contracts and arrangements used by any given recruitment agency before engaging their services.

B. Referral of Employees
The model envisioned in the labour law and the Ministry of Labour regulations involves the recruitment agency only acting as an intermediary between businesses and employment seekers. This model is preferred by employers seeking a small number of employees such as households seeking nurses and small businesses seeking professionals or business who want to avoid the overhead of recruitment agencies or have other concerns such as confidentiality and employee retention. The recruitment agency would run background checks, help the employer select workers, and register the actual employer as the employer of record with the Ministry of Labour for social security and other purposes.

Conclusion

Through secondment, the business of recruitment agencies have developed to offer employers labour without having deal with ongoing compliance obligations. However, this is not without risk because the courts and Ministry of Labour hold the actual employer jointly liable if the recruitment agency is not compliant. The Ministry of Labour have allowed this development of the recruitment agencies business because it is a closely regulated sector. In addition, the statuary envisioned model is still available for businesses looking to employ directly.

For further information, please contact Ali AlDabbagh or Ammar Al Humairi or Zainab Hassan.

^{Published in January 2023}