Major VMS Provider Declares Bankruptcy

01/14/2008

Ensemble Chimes Group (Chimes), a major provider of vendor management services, has ceased operations and filed for bankruptcy. This leaves staffing firms in doubt as to their ability to collect payment for services provided under their VMS agreements.

VMS firms contract with staffing clients to manage the clients' use of staffing services. VMS firms typically use proprietary software systems to manage timekeeping, payroll, and billing functions of participating staffing firms. Clients pay the VMS firm for the staffing services provided, and the VMS firm in turn pays the staffing firms. Some VMS relationships pose higher risks for staffing firms than others. If VMS firm funds are commingled with client monies, as apparently was the case with Chimes, staffing firms will likely be treated as general creditors—and in some cases, payments made to staffing firms prior to the bankruptcy may have to be returned. Some VMS agreements offer greater protection to staffing firms by placing client funds in secured escrow accounts.

Chimes filed for bankruptcy Jan. 9 under Chapter 7 of the federal bankruptcy law, which means the company is seeking to liquidate its assets rather than reorganize. Chimes's parent company Axium International Inc., a major supplier of payroll services to the entertainment industry, filed a similar petition Jan. 8.

Chimes's bankruptcy means its staffing firms must stand in line with other creditors for any outstanding amounts owed under their VMS agreements. Collection may be problematic, because the bankruptcy petition indicates that Chimes has no assets available to pay unsecured creditors.

Another issue is whether clients can now deal with their staffing firms directly to avoid disruption of the clients' operations and to ensure that temporary employees can continue to work and be paid. This may depend on the terms of the clients' VMS agreements. Because Chimes has ceased operations and therefore effectively breached its agreement, the bankruptcy trustee may determine that clients are free to deal directly with their staffing firms. Affected staffing firms are urged to consult with their lawyers regarding their rights and obligations.

ASA has retained counsel to provide guidance on the legal issues involved and the steps the staffing industry can take to ensure that the bankruptcy court understands the unique issues relating to VMS agreements and their impact on staffing clients and temporary employees.

- By Ed Lenz

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