Introduction

In my previous post I spoke about the difficulties of being a contractor and how sometimes you can be left high and dry when a customer doesn't pay. This can happen for a few reasons;

1. They CANNOT pay - this is common in startups when they run out of money,
2. They WILL NOT pay - they're unhappy with the work and refuse to pay,
3. They're just slow to pay - this is the most common reason.
4. They just decide not to pay - this is the most painful reason. It's often combined with gas-lighting and other tactics to make you feel like you're in the wrong.

Especially in my early contracting career I lost tens of thousands of pounds to customers who just decided not to pay. This is a painful lesson to learn and it's one that I hope to help you avoid.

Setting Up a Company

As a contractor you need to ensure that before you agree to a contract you have your business bank account, company registration and insurance in place. This is important for a few reasons:

1. It's a legal requirement in most countries,
2. It ensures that you're not personally liable for any debts the company incurs.
3. It makes it easier to get paid; you can have a standard invoice format, you can have a standard payment terms and you can have a standard process for chasing late payments.
4. It makes it easier to get work; many companies will only work with contractors who have a company set up.
5. It makes it easier to get insurance; you can get professional indemnity insurance, public liability insurance and other types of insurance that will protect you in case of a dispute (if you write code which takes down a company's website for example).
6. TAX - Keep an eye on this as a contractor; using an accountant is pretty essential to ensure you're paying the right amount of tax (and manage expenses, dividends, if you meet the VAT threshold in the UK etc.)

The Contract

When agreeing to do work for a customer it's important that you have a contract in place; this needs to be SIGNED before any work starts. This contract should outline the work to be done, the payment terms and the consequences of non-payment.

YOu should always (in the UK especially) ensure your contract terms are compliant with IR-35 and other tax laws. Or if it's an inside IR-35 contract you should ensure you're aware of the tax implications (>20% less take home pay).

When dealing with overseas clients this becomes tricky; you may be based in a different country with different laws and it can be difficult to enforce a contract.

Up Front Payment

For some customers I've also had a 'pay up front' contract where we agree on the number of days / hours contracted (this can be the full / a portion of expected hours) then at the BEGINNING of each month this sum is paid. This takes out the risk of non-payment; if they don't pay you don't work.

Deposit

In my experience this is rarer but some contractors do this; at the beginning of the contract some portion of the total contract cost (in IR-35 contracts you specify the expected amount up front) is paid. This is then deducted from the final invoice.

Invoicing

As I mentioned in my previous post it's important that invoices are timely and accurate. This is YOUR PART of the payment process. I've recently started using InvoiceNinja to ensure this is painless (standard format, includes all the details required by law etc.).

The Buffer

All contractors should have a few months of buffer; contracts are hard to find (specially nowadays or like myself they're remote and very senior) and you may find yourself without work for a few months. Especially if you have a family you need to ensure you can cover your bills during this time. If you just can't accept this likelihood then contracting may not be for you. You WILL be out of work for a few months at some point in your career. Remember; contracts pay more daily/hourly for a reason; you're not guaranteed work. In the UK 'inside IR35' contracts are a bit of a nightmare; you're paid less and you're treated like an employee but you don't get the benefits of being an employee.

When it goes wrong.

They CANNOT pay

This is a common issue with startups; they run out of money and can't pay you. This is a risk you take as a contractor; you're not an employee and you're not protected by the same laws. When you first sign up with a startup look at options for ensuring payment; can you get a deposit? Can you get paid up front? Can you get a guarantee from the CEO?

In the end though if they can't pay you can't get blood from a stone. You can try to get a debt collection agency to get the money for you but you're likely to only get a percentage of the money owed to you (if anything). As with everything startup related it's about balancing the risk with the reward.'

If a startup takes off you can make a lot of money with a lengthy contract (beware of the IR35 rules though); if it doesn't you can lose a lot of money.

They're just slow to pay

This is a depressingly common issue; your contract should state expected payment terms. It's THEIR part of the contract; they agreed to it they need to pay you on time. If you're in the UK there's even laws around late payment. If it gets CRAZY (more than 60 days) I write a letter clearly explaining the late payment laws.

I will then follow up with a Small Claims Court action; this is a low cost way to get your money back. You can then use a debt collection agency to get the money for you (as well as interest as defined in the late payment laws above).

However, don't DEMAND payment early on (give it AT LEAST the period stated in the contract). If you're too aggressive you may lose the customer and you may not get paid at all.

Be assertive; don't be aggressive unless they're really taking the piss.

They WILL NOT pay

This happens to the best of us, whether it's because they hadn't worked out what they actually wanted in the first place and your best guess based on the information they gave you wasn't what they wanted, or they're just unhappy with the work you've done.

First; I generally agree to remedy any issue they have with the work I've done on my dime. In the end I want all customers to be happy (if not delighted) with the work I deliver. In the early days of contracting I wasn't experienced enough to:

1. Ensure the requirements are CLEAR and push back on unclear requirements,
2. Ensure the timescales are REALISTIC and push back on unrealistic timescales,
3. Ensure the customer is HAPPY with the work I've done and push back on any issues they have.
4. Ensure the customer is LEGITIMATE; they have the funds to pay you and they're not going to just disappear.

They just decide not to pay

This is HARD to deal with; you've done the work and they just decide not to pay. Then the legal remedies or NAME AND SHAME are your only options.

In the past I had a customer who announced; out of the blue; that though I'd spent a few months working on their system; they were going to go in a different direction. This is FINE, especially with overseas customers they may decide to take work for FTEs to ensure they're in the same timezone, for customer data protection etc. In this case they also gave me the agreed to termination period where they didn't ask for any more work (but I was available for handover etc). At the end of this period sent the invoice then patiently waited for payment.

Now I should say that during the contract they seemed satisfied with all the work I'd done; any issues I of course resolved immediately, and they were happy with the results. As usual after 7 days I sent a reminder email that they had not paid their invoice, as I did after each 7 days.

They made no reply; there was no disputing the invoice, no asking for a breakdown of the costs, no asking for a discount. NOTHING.

THIS IS A VERY BAD PRACTICE. If your contractor had performed work for you that during the contract you weren't satisfied you NEED to indicate this before the invoice is sent / IMMEDIATELY afterwards.

Eventually I had to email the CEO's personal email address to get a response. They then gas lighted me; saying that in fact (despite never saying so before) they were unhappy with the work and that they wanted a discount to the invoice AND they wanted to pay in two installments.

Now as they'd never in the >30 days since the initial invoice (nor at any point before that) indicated they were unhappy with the work I refused. Inside that period I would have been happy to resolve any issues they had with the work. However as this was a startup I agreed to the two installments (startups and cash-flow is tricky; be understanding of this!).

Installment 1 was paid on time; installment 2 was not. I had to email the CEO again (multiple times) to get the payment of the final installment.

In the past I've also had customers who just decided not to pay; they were using my work on a live system and just flat out refused to pay. This is a very painful lesson to learn and one that I hope you can avoid.

1. Ensure you customer is legit; ensure they have the funds to pay you and ensure you have a contract in place.
2. ANY payment issues early on protect yourself; if they're not paying on time they're likely not going to pay at all.
3. Be persistent; you delivered the work, they agreed to the work, they need to pay. Keep emailing them every 7 days. Make it clear you expect payment.

What to do?

Now this is a tricky situation you may find yourself in as a contractor. There's a few ways to handle this:

1. Be persistent; you delivered the work, they agreed to the work, they need to pay. Keep emailing them every 7 days. Make it clear you expect payment.
2. Get a lawyer; this is expensive and time consuming but if the amount is large enough it may be worth it. Internationally you may need to get a lawyer in the country the company is based.
3. Write it off; this is the worst option. You've done the work and you're not getting paid. You can write it off as a loss and move on (and privately warn your network about the company and their practices).
4. Go public; this is a risky option. You can write a blog post about the company and how they've treated you; stay tuned to this blog because it MAY happen here!; (use Glass-door, go nuclear by making a Facebook / LinkedIn post etc). This can be a good way to get the company to pay up as it damages their reputation; but be prepared to defend yourself. You're likely to get a lot of negative feedback from the company and their supporters and possibly legal action.
5. Small-Claims court; if your customer is in the same country there's often a low cost mechanism to take them to court. This is a good way to get your money back but it's time consuming and you may not get all of the money owed to you. However they often won't even show up to court and you'll get a default judgement in your favour. YOu can then use this to get a debt collection agency to get the money for you.

If Nothing Else Works

If you've tried all of the above and you're still not getting paid you can go to a debt collection agency. This is a last resort and you'll likely only get a percentage of the money owed to you. For may companies (especially startups) reputation damage will be more important than the money so this can be a good way to get them to pay up.

In Conclusion

Being a contractor is a risky business; you're reliant on customers to pay you and sometimes they just don't. It's painful lesson to learn; sometimes by ensuring your customer is legitimate, having a contract in place and being persistent you can avoid this. Sometimes you just can't; a good customer can just decide not to pay. This is the risk you take as a contractor; you're not an employee and you're not protected by the same laws. You need to ensure you're protected as much as possible and that you have a buffer in place for when things go wrong.