How to Deal with a Deliquent Client

PSP member advice for dealing with a client that does not pay their invoice.

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Disclaimer: This post has been written for educational purposes only by Park Slope Parents and was not meant to be legal advice and should not be construed as legal advice or be relied upon. The post may contain errors, inaccuracies and/or omissions. You should always consult an attorney admitted to practice in your jurisdiction for specific advice.

 

As the original poster asks:

"Can anyone offer advise on what I can do to get paid for my work? My last invoice for $2K to this client was submitted four months ago. After several attempts to contact 1.5 months ago received some communication letting me know that my client was waiting to get paid from “their” client (their client being the island of Barbados, which, if not bankrupt, is having some serious financial issues) and  is working on figuring out a way to pay me. 
Anyway, I’ve had a similar issue in previous years. It took them 6 months to pay me last year. I know, I know - my fault for agreeing to work with them again. Except it seems that the client has just disappeared. I tried to contact them several times about the invoice in the last 2 weeks without any success.
Does anyone know if I have any legal leverage to get my money back? Is it worth the hassle? I am a sole proprietor. I had a contract signed with them when we first engaged in 2014. The contract is not limiting in dates of engagement - has no end date.
Feeling frustrated. Thank you so much for any advise!

 

Advice:

 

You've just described the biggest challenge my business faced in its first ten years... I'm also in design services and it is an incredibly difficult sector for cash flow. People undervalue our work yet they always expected it to be delivered in advance of payment. Here are the things I've learned:    

Get a very large deposit up front and hold it against the final invoice, not the first invoice. State this clearly in your initial proposal and your contract terms. The more uncertain the client, the bigger the deposit.    

Build prompt payment terms into your contract even if (or especially if!) your payment depends on your client getting paid by a third party. When my business suffers a cash flow emergency due to non-payment, the debt servicing costs are enormous because I'm such a small business my access to credit is lousy. My clients are usually able to take on debt at a much lower expense so they are sometimes willing to agree to contract terms that force them to pay for my services, or at least a portion, even if they haven't yet been paid by the end client.

Spell out payment milestones and deliverables as clearly as possible in your contract terms, as well as 'stop work' terms. Design work is highly subjective, but there should be no grey area about what you will get paid for and when. The more uncertain the client, the more payment milestones, and don't be afraid to enforce the stop work terms if an invoice ages beyond the agreed timeframe or the total amount owing exceeds the agreed threshold.     

Separate your "invoicing" persona from your "client services" persona. In the early days when my business was just my husband and I, we had a really hard time collecting because we didn't always feel comfortable bugging our clients for payment while also being the great service providers that they would want to recommend to all their friends. Or sometimes their invoice was overdue, but I kinda felt guilty calling them because I also owed them a follow-up on some other design-related issue... One day I had the stupidest brilliant idea ever, and created an email address that was "accounting@" my domain. From then on, all invoices and collections notices could go out from "our accountant," and we could call clients to bug them for payment "because our accountant reminded us that their bill was overdue." That mean old money-grubbing (imaginary) accountant was always on our case! And all the while, we were still the chummy and lovable professionals that our clients wanted to hire again and again and again. I know this is totally ridiculous, but it helped me overcome a huge psychological block in asking for the money I was owed.    

Secure a line of credit against your signed contracts. This can be done in a number of ways -- if you sign a large contract, most small business lenders will hold that contract as collateral against a loan. Some will even suspend interest payments until you get the first payment from the contract. So if you have a government contract, for example, that requires immediate mobilization but usually has a one- or two-quarter lag before payments begin, you can get the money up front and interest doesn't start accruing until the client starts paying. On a smaller scale, you could look for invoice factoring, a system in which the lender pays your invoices on the date of issue and then becomes the receiver for the client's payment. They charge interest to your client and some will even become your hired bloodhound for tracking down late payments and bad debts, at a fraction of the cost and hassle it would take for your business to collect.    

Incorporate and take advantage of NYC's Small Business Services resources! You mentioned you're a sole proprietor.  If you are operating under your social instead of an LLC or other form of incorporation, I highly recommend investing the several hundred dollars it takes to become a registered small business. Not only does this afford you vital protection of your personal assets, it allows you access to a wealth of resources for small businesses through city, state and federal programs. The city in particular has incredible resources for business planning, access to and management of capital, mentoring and networking, legal services and more.     And as for your original question... no, it is probably not worth cost and hassle to try to get the $2k you are owed. Write it off as a lesson and consider it a windfall if you ever do recover the money. Sorry for the negative outlook, but I have been down that road many, many times and that is the realistic answer.   Best of luck to you!

 

Know your rights!

 

Here’s a note from Brad Lander’s office about a new law passed to protect freelancers from being short-changed and stiffed:

Fingers crossed you’ll never need to enact it, but it’s there if you do!

Today at the New York City Council we made history by passing new a law to make sure they get paid on-time and in full for their work.

By passing my legislation, Intro 1017-C (a.k.a. the “Freelance Isn’t Free Act”) into law, NYC is the first city in the country to provide protections against non-payment for freelancers and independent contractors. You can read more about the new law in Gothamist, Crain’s, and the Village Voice. Thank you to Freelancers Union for tremendous organizing and creative thinking in leading this charge, to my colleagues in the Council, to allies like the Brooklyn Chamber of Commerce, SEIU 32-BJ, NYC Tech Meet-Up, and especially to the freelancers who told their stories.

We need this law now more than ever. There are more American workers engaged in “alternative work arrangements” than ever before, from 10.1 percent in February 2005 up to nearly 16 percent in late 2015. It’s already hard enough for the growing number of freelance and independent workers to cobble together a decent standard of living - and when clients don’t pay it gets next to impossible, but that’s exactly what’s been happening.

71% of freelancers have had trouble getting paid, and freelancers are stiffed an average of $6,390 every year. To make matters worse, since most federal and state labor laws don’t apply to freelancers, when freelancers aren’t paid they have very little recourse. Just 5% of freelancers take delinquent clients to court, in large part due to the very high cost of hiring an attorney, and the unlikelihood for that lawyer to take the case “on spec.” Those freelancers that do bring deadbeat clients to court are often subject to retaliation - an especially big problem for freelancers that work through agencies, or on an on-going retainer.

The Freelance Isn’t Free Act aims to put an end to this growing nonpayment epidemic. Here’s how it works:

    • The law, which will apply to contracts of $800 and up, requires any company that hires a freelance worker to execute a simple written contract (it could be as simple as an e-mail), describing the work to be completed, the rate and method of payment, the date when payment is due, and basic contact information for both parties.  
    • Payment in full is required within 30 days of the completion of services or of the payment due date under the contract, whichever is later. Companies who fail to pay would face penalties, including double damages, attorney’s fees, and civil penalties.
    • Under the law companies would be prohibited from retaliation against freelancers who seek to exercise their rights under this bill.

The NYC Department of Consumer Affairs will act as a navigator for freelancers facing nonpayment. DCA will provide model written contracts in multiple languages, accept complaints from freelancers, issue a “Notice of Complaint” to hiring parties that don’t pay, and make it easier for an aggrieved freelancer to bring charges to court.

By passing this law, NYC is helping to address a big gap in state and federal laws for protecting workers. The Freelance Isn’t Free Act can serve as a model for cities across the country to take action to protect the growing number of “gig economy” workers. In the midst of partisan gridlock in Washington and in state capitals, cities can and must take the lead in writing new laws to keep up with a changing economy.

The challenges facing freelance, independent, contingent, gig, and shift workers do not end here, of course. As we outlined in a recent report from my office, Raising the Floor for Workers in the Gig Economy: Tools for NYC and Beyond, there is much more we should do: like extending the employment protections of NYC’s human rights law to independent contractors, helping establish “portable benefits funds” (I was pleased to co-sponsor a bill that would do that for taxi and for-hire drivers, sponsored by Council Member Corey Johnson), and making sure that fast-food and other shift workers have predictable and stable schedules.

For today, helping to make sure that Elizabeth, Mauricio, Raymona, Ellen, Jessica, and the other 1.3 million freelancers in NYC get paid -- on-time and in full -- for the work they do is a great step forward.

 

 

Related resources from PSP:

Setting up an LLC