Ask HN: How do you collect delinquent payment for contract work? | Hacker News Reader

Ask HN: How do you collect delinquent payment for contract work?

37 pointskabuks39 comments

I'm wondering if any of you have any experience pursuing legal action (small claims court? higher courts?) against clients that haven't paid for work. What is your strategy? What did you learn?

View on HN

No advice here, but an interesting story.

A friend of mine was owed about $10K on a contract. He had been working for the company for a couple of months and they had already paid him $15,000 more or less on time, so when a month finished and he was owed another 5K and it didn't come right away he didn't really sweat it.

Things went down hill in the middle of the next month when the employer said that they were retroactively reducing his rate because they really thought that they weren't paying him hourly, but rather a full time salary (though his contract specified an hourly rate) and they expected him to be working at least 50 hours a week for that salary.

He promptly quit, though the employer begged him to stay on for one more week as a "professional courtesy". Being the kind of guy that he is he stayed for the following week. The day after he quit the company (really just two people and a couple of other contract developers) got TechCrunched (they have been multiple times since) to announce a rather large round of funding they had received. I remember him joking that night that at least he was sure he would get paid now.

Fast-forward a three months and a check has still not arrived despite his boss saying that it had been mailed several times. Then it changed to "I'm putting it in the mail on Monday." Eventually he sent a polite email saying how he was really hoping to get the check soon because he was planning on using that money to support his family new family (his wife was 9 months pregnant at the time). A check finally came but only for 9K instead of 10K. I think he was just incredibly happy to have finally gotten something after all those months.

It turned out that other developers/designers were in the same boat as my friend and never got paid, or were only paid part of what they were owed. This all happened at the same time that the company was getting press and raising more money.

I remember just being shocked whenever I would see this company written up in tech blogs while thinking "But, these are the same people who are totally screwing my friend and at least three other people they hired. How can they actually be getting positive press, they're total scumbags."

Why don't the people telling these horror stories ever reveal the company names? Keeping silent only allows these scumbags to swindle more people.

I really don't feel like it is my place to mention the name. I wasn't involved. I know one of the other developers who didn't get paid took it to the investors (he happened to be friends with one of the better known ones). What the outcome was I do not know.

So don't tell the story in the first place IMO. Go all and prevent these guys from doing wrong by the next developer and all the community to decide on a COA re: company's actions or...don't. We all know that we can get screwed for doing business.

I used to do a lot of contract work and you need to have a good no nonsense contract. I always had a payment schedule in the contracts: 50% upfront and 50% payable immediately on delivery with milestones so they can check the progress of the work. Of course, when building Web sites or Web apps, it's easy to do. Sometimes, for larger contracts, we would have a 50%, 25%, 25% schedule. Of course, you either put the site/app in production with the last payment or advise it will be put offline if you don't receive it.

It just works. Worse that happened was a bad client who changed his mind at the last minute and we lost about 25% of paid work. If you profitability margin is within standards, you take your losses (which are almost none) home when you see they'll never pay unless you go to court (which they probably won't pay anyway because they're crooks in the first place). Not worth the stress or waste of time and money.

I have to agree with your observations, I know it does not help with the current situation but getting 50% up front does a lot to mitigate the risk of non-payment. If you receive half the project price up front then you are at least not walking away having worked for free. You have just made less per-hour than you would like. Also build the price of hosting the site or application on systems that are managed and paid for by you. This way you can legally withhold delivery of the final product until all payments are rendered. Too many times freelancer will work on client provided systems which immediately sets them at a legal disadvantage for seeking recourse by withholding the software. You run afoul of computer invasion laws if you enter their systems and remove it. If a client insists that it has to be done on their machines, you can insist back that you have an optimized workflow and system that support you achieving the goal in the least amount of time and that it is company policy that you work on your companies systems. The thing about doing this is it makes it easier for the court to discern who owns the code and more importantly when the conveyance of ownership was transferred. In the end though, try to avoid getting in the situation to begin with, it is a lot easier than trying to get out of it; because in the end unless it is over 10k it is probably less of a hassle to focus your efforts on getting more gigs. Legal remedies consume your time and cost your money.

Hm, I thought the general advice was to bill by hour, not by project. Is this wrong?

Depends. You just need to make sure you get paid the proper amount in the end. Some clients want hourly, some want fixed cost. In either case, you must invoice periodically, not all at the end.

If you work hourly, begin with an up-front retainer. If you bid fixed cost, get 50% or 25% or whatever up front. Don't start coding until you get a check.

Once someone has paid up front, the chances of them paying in the future go way up.

What about situations where a client wants you to "take a look at the code"? In my very very limited experience I've told them I'll spend an hour or two on spec going over the source to evaluate before giving an estimate. Is this too little, in your opinion?

Do whatever you have to do to get the sale, but realize it's on your dime. Once you have agreed to a contract, get paid and then start.

I usually meet with the client, look over their wireframes, and do a little research before signing a contract. Typically, that takes me an hour or two. Any more than that, I usually want to start getting paid. But do whatever works for you.

This is great advice on contracts: http://vimeo.com/22053820

Had this happen twice in the past 4 years. Three times in 10 years. First time was small amount, and they didn't really stiff me completely, just said they were closing, and they 'paid' in some hardware. Wasn't all that useful to me, but better than nothing.

Second time - I drove up to NYC (from Raleigh) to file in court. It was for > $5k, so it couldn't be small claims court. That was Aug 2008 - it's now almost Aug 2011 - still on the docket last I looked. Court will take a long time. Even if I 'win', I still have to collect, and if the guy won't pay when he's supposed to, collecting will suck. In retrospect, I wish I'd have told the client whose project I was working on for that guy - they'd have at least known what they were continuing to let themselves in for by dealing with him.

Last time was more recent, and it was just a bad project all around - sorry I took it, sorry the end client didn't get what they wanted, etc.

Lesson learned for me is to either never subcontract for someone else, or be very cautious. I'm doing it now for one other client, but I'd met them multiple times, they have a good reputation in their industry, and I was assured by another sub whose worked with them before that they pay (and pay pretty well). And they have - been one of the fastest payers I've worked with.

If you file a lawsuit - small claims might go faster than regular court - but file and forget. In my case, my suit was for $8700. It'd certainly be nice to get it, but I eeked by and moved on, and don't spend much time thinking about it now. It'll tear you up waiting - move on as best you can, even if you file a suit.

btw, are you on the lsc mailing list? bettermeans looks familiar.

First, develop your "spidey sense" for detecting bad clients, and don't take those gigs. That's the most important thing to learn, as it will drastically cut your loss rate.

Second, check the statutory limit for small claims in your jurisdiction. If the amount in question is under the limit, file in small claims. It's easy; and generally, lawyers aren't allowed. If the defendant is outside the jurisdiction of your local small claims court, you may have to file by certified mail. You'll get a judgment against them, but collecting will be more difficult.

Finally, as others mentioned, get half up front. Those people who are inclined to rip you off will hem and haw and give you all kinds of excuses about why they can't or won't pay half in advance. When you hear that, walk away.

Never let your receivables get to a point where you can't just write it off. Collect early and often.

If it is at all possible, it is best to maintain enough control over the system so that you can deploy it to their production environment upon payment. No pay, no deploy.

Second this. I also request a 50% deposit before I begin work, and tend to price projects at a level where I won't be completely put out if they never complete the project.

You can generally include an arbitration term in contracts. Arbitration can be cheaper and faster than suing. In some cases, arbitration can be even more binding.

Point in case - you get a contract with a Chinese company, and state that the appropriate court for all claims is in your home town, in California. You sue the company, and win (as they don't even show up). Then you go to the Public Security Bureau (police) office in their town, and ask them to help size assets. The Chinese police will ask for a Chinese court order, but when you go to a Chinese court they tell you that your contract explicitly states that you should be back in California, and they have no right to intervene. On the other hand, if the contract is worded right, international arbitration treaties will kick in (so the Chinese courts should accept the arbitration decision), basically everyone worth speaking of has signed them. At least, that's my (unprofessional) impression from reading the China Law Blog (i.e. http://www.chinalawblog.com/2010/02/arbitration_in_your_chin...)

But I am not a lawyer, and this is not advice.

Arbitration can be a bitch.

The Arbitration company has a tendency to rule in favor of whoever is going to bring them the most repeat business.

Can you expand, a bit?

Arbitration can be of a lower standard. The arbitrator will probably be a lawyer, but not a judge. And standards of evidence can be much lower.

I doubt that there are many arbitration companies siding with someone just to get repeat business. That might depend on the scale of business though. For two small businesses, I can't see how it would be a big deal. If a company the size of IBM nominates an arbitrator, I might be suspicious.

Expand I will.

>I doubt that there are many arbitration companies siding with someone just to get repeat business.

http://en.wikipedia.org/wiki/Jamie_Leigh_Jones

ctrl-F arbitration

Arbitration has its place. Maybe it shouldn't be legal to have mandatory arbitration clauses in employment contracts, or in other contracts without genuine negotiations of the terms.

A non-negotiable clause for a contractor going to Iraq is a whole world away from two companies negotiating a contract to construct a web site or something.

The only time this happened to me, after being ignored for nearly a year I just threatenened with small claims court, and they paid with in days. I didn't even send anything official.

What I did do was research into late payment law and found that not only would they have to pay the court fees, but also a standard 8% interest on the debt. I think givin them that info helped encourage them to pay up.

Hope you get what you're owed.

Same here. Laid out the estimated added cost of enforcing payment via the court system besides interest to them, received payment soon after. Somehow the psychology of getting a "discount" from avoiding litigation seems to work.

Yes, I have sued a client in small claims court. I recommend it because of my experience. I wouldn't have if it hadn't been a case where I was obviously owed the money.

All through the period of trying to collect, I would just wrap myself up in knots over the nonpayment and feel like a rube.

Finally, decided to file the claim which cost me about $60 including having the papers served. Two days later, there was a court date set for mediation.

From then until the night before the court date, I didn't get worked up about it. We spent about three hours in mediation and I wound up getting paid - of course I told the mediator that they could stick their sixty cents on the dollar offer up their ass and I was ready to go to court two and a half hours into it - and I was.

Again, once I filed, I was greatly relieved.

Now, I generally have better contracts and require a retainer which is applied against the final invoice for clients with whom I do not have a long standing relationship or about whom I have concerns over payment.

Good luck.

You haven't described the circumstances, but if you haven't been paid it most likely that the client is short on money, and that means there's probably a bunch of other people who haven't been paid either. The one to get paid first will be the one who is most annoying.

Be the most annoying.

I've been in this situation maybe 3x in 10+years, curiously, including my very first web project.

My solution: Turn off their web site. Replace their home page with a message: 'Site down due to non-payment. If you are the owner of this website please contact the administrator immediately' And a link to your own site with your logo on it. (Make the logo BIG! lol)

Never took more than 36hrs to get payment using this method.

Of course this is last-ditch effort, after other options such as asking politely, have been exhausted. And after they pay, I promptly end the business relationship because it's not worth it to do business with customers who drive you to such lengths to get your hard-earned cash.

If you do that on their systems, you are not only liable for damages, you can also do some time in the slammer for computer intrusion and hacking, no matter how trivial you make it to disable the application. This is the worst advice I see on these how do I get them to pay threads. If you want to be able to withhold the product for non-payment it must remain on your systems at all times, it must not be allowed to "go live" if it does you can be liable for loss or revenue even if you own the code. It also has to be stipulated in the contract that ownership of the work only conveys after payment in full and that the work is not to be used in commercial capacity until after final delivery and the conveyance of license. Just going in and turning it of has gotten a lot off developers in a metric-ton of trouble. I have seen it happen to a developer first hand.

Thanks for the info. I have used this method on small scale projects where I provide web hosting, and it worked then. At any rate you're spot-on on having everything in writing before a non-payment should escalate to draconian measures.

Would the DMCA be a relevant tool for things like website design work?

I can not tell if this is an awful joke or a huge misunderstanding of the DMCA?

It's not like I'm a copyright lawyer. If I'm misunderstanding something, enlighten me. If it's that huge and obvious, it won't take much of your time. "That's a stupid question" is a useless response.

If they don't pay up, why can't you assert copyright and block them from having the material hosted? I assume it wouldn't work in all cases, but why wouldn't it help in those where another party is doing the hosting?

IANAL But it seems like this is a straight forward example of contract law. Why try and muddy the waters with copyright law?

In order to claim that you are owed payment for the material the claimant would need to admit that it was a work for hire situation and the nonpaying entity was the actual owner of the intellectual property rights. How can they be in violation of intellectual property law if it is their property?

I have to agree here, contract law is going to be more straight forward than trying to deal with use of the DMCA. You could probably use it after the fact, but you would still be better to argue your case for a verbal contract. You can prove ownership, the business can prove payment if they have made any. The trick on a verbal contract will be proving the meeting of the minds that you had an agreed upon number and that that number was not paid to you. If you receive 50% up front the other party could argue that, that amount was the agreed to amount. In a situation like that it is almost better to not be paid at all, because you can prove that their was no consideration and therefore no meeting of the minds. Remember something in writing, no matter how crappy it is, is better than nothing in writing. Even if it is:

I am going to build an application for X and X will pay me Y the ownership of the software will transfer to X when Y is paid in full.

Happened to me once (in 10 yrs), I just let it go.

Same here, happened 2 or 3 times in 10 years. You need to decide if the amount is worth the continued ongoing aggravation of trying to collect. A direct phone call is a good place to start if you haven't already, it's easier to ignore email and letters.

In some cases, paying an attorney $100 to draft a letter on law firm stationery, and mail it certified US Mail, will prod the client to pay you. I did this once.

Start by telling us which legal jurisdiction?

Edit: Which two I guess, you and the client.

Happened to me once in 10+ years. Had to let it go because I lost too much time chasing and paying lawyers.

Now I insist on monthly payments and promise to walk if unpaid in 15 days. Seems to work.

Always sign a contract in conjunction with a statement of work. There are plenty of boilerplate docs out there for the sow, hire a specialized lawyer for contract docs. They can give you a blanket doc for short money. Even if the client tries not to pay, at least you have a binding agreement from which to negotiate or take them to court. Companies big and small renege on their contracts all the time, don't victimize yourself; it's how some business is done.

But if don't have a contract:

I'd have to evaluate the client first. If they're already a deadbeat, shame on you for doing business with them and like petervandijck says, just let it go. It's not worth the time and effort to chase them down as they have no means or intention of paying. Blackball them in the community is the worst you can do to them.

But, if they're a going concern and they've stolen your time and work and are making money from it, I'd have to engage the services of an attorney and send them a strongly worded letter indicating your intent to sue for unpaid services, a portion of the proceeds of your work corresponding to what you see as adequate (always over 50%) along with damages, legal fees and court costs. Usually that's enough to get them to write you a check, but make sure that you allow them 30 days to pay at first, remind them every week after that and at 60 days have the attorney send the letter. Just because they're not conducting themselves in a professional manner doesn't mean you don't have to. Always take the high road, be firm yet polite and document all communications.

Reply on news.ycombinator.com