Contractor Doctor: Can my client refuse to pay me on the basis they’ve not been paid?

Dear Contractor Doctor,

I’m an IT contractor specialising in cloud computing. I’ve been working on a subcontract basis for a friend of mine, another contractor, completing a cloud migration project for his client, an international engineering firm.

Despite completing the project on time and to specification, I’m still owed money for work I completed over a month ago. When I chase my friend for payment, he says he won’t pay me yet because the client has not yet paid him.

Can my client, the friend I’m subcontracting for, refuse to pay me on the basis that he’s not been paid by his client?

Thanks

Andrew

Contractor Doctor says:

“Unless there is an express provision in the contract that states the contractor will only be paid when the client pays, the client should still pay on time, or the provisions of the late payment legislation will apply,” explains Roger Sinclair of contractor legal specialist Egos.

“However, if a contractor in Andrew’s situation agrees to a clause stating that he won’t be paid until the end client has paid his friend, the clause may be enforceable, unless the conduct regs apply” adds Sinclair.

Contractors should check for and reject ‘pay when paid’ clauses

Sinclair’s advice to contractors finding a ‘pay when paid’ clause in their contract would generally be to reject it: “A clause stating that the contractor will only get paid when their agency or client is paid means what it says, and most contractors probably would not want to accept that provision.”

Unless expressly provided for in the contract, contractors don't have to accept a 'pay when paid' attitude from their client or agency. But if they do allow such a clause to remain in the contract, it can be enforceable unless the conduct regs apply

Roger Sinclair, Egos

In fact, many contractors choose to contract via agencies specifically so that they can avoid the payment delays associated with many large client organisations, and so secure a regular income. Allowing a ‘pay when paid’ clause to remain in the contract would remove this major advantage of contracting via an agency.

If a contract has no ‘pay when paid’ clause, then according to Sinclair, it may be reasonable to imply business terms of 30 days or sooner: “If there is no provision for payment terms in the contract, then arguably payment may be due on presentation of the invoice. Should the invoice not be paid promptly, the late payment legislation will take effect.”

Sinclair also urges contractors to check payment terms carefully, particularly when contracting direct with the client, as many large firms try to impose lengthy payment terms with their business-to-business suppliers.

The ‘conduct regs’ may apply, requiring the client, or agent, to pay on time

Contractors who work to a degree under the control of a party other than the one they contract with, as in an agency-client scenario, and who have not expressly opted out, are likely to fall under the scope of the Conduct of Employment Agencies and Employment Businesses Regulations 2003, better known as the ‘conduct regs’.

Under the provisions of these, if there is a degree of control of Andrew by the end client, then Andrew’s friend’s business is likely to fall within the definition of an employment business. That’s because his friend is supplying Andrew’s services to the end client in the course of his own business.

“Should Andrew not opt out of the conduct regs before he is introduced to the end-client, then the conduct regs will apply, and will override anything inconsistent in the contract,” says Sinclair. “Under the terms of the legislation, Andrew’s friend may not delay paying him until the end client pays. If his friend fails to pay, the terms of the late payment act may also apply.

“And, of course, if Andrew is contracting personally to his friend’s company, ie without using his own company or an umbrella in between, then so far as his friend’s company is concerned, he cannot opt out.”

Consider contracts with friends carefully before putting the friendship at risk

Although ‘pay when paid’ clauses are a common pitfall that contractors should look for when reviewing a contract, in Sinclair’s experience doing business with friends can be fraught with other pitfalls, and the friendship may end up being the casualty.

“Andrew’s case highlights the problem contractors have if they contract through a friend’s business,” he says. “The contractor is totally dependent on their friend to pay promptly and has no control over the relationship with the end client, placing them in a vulnerable position.”

Sinclair concludes: “Unless expressly provided for in the contract, contractors don’t have to accept a ‘pay when paid’ attitude from their client or agency. But if they do allow such a clause to remain in the contract, it can be enforceable unless the conduct regs apply.”

Good luck with your contracting!

Contractor Doctor

Published: Saturday, October 22, 2011

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