Freelancers, here’s your cut-out-and-keep legal guide to…Payment Terms

That self-employed designer we advised before the covid-19 outbreak now knows about Statement of Works.

But there are four other contractual sections we directed the freelancer to; Payment Terms being chief among them and this clause is relevant to all independent creatives, writes Lily Morrison, legal consultant at Gerrish Legal.

What are payment terms?

The Payment Terms clause sets out arguably the most important part of a contractual relationship for freelancers -- how they are going to get paid, and what happens if they do not.

What your clause should include

The Schedule of Works which we considered in more detail in the last instalment of this series sets out the specific price for a project. But the Payment Terms clause will set out the general procedures for when payment will be considered due, how this should be paid, and what happens if this is not done.

Late payments are every freelancer’s worst nightmare! So, you need to ensure this clause sets out when payment is due -- precisely. Usual practice will see an invoice being issued and payment being due in a certain number of days after issuing. What are the days specified in your contract?

The carrot and stick

There are a number of ways to encourage ‘contracting parties’ (that’s the party or parties you’re in a contract with) to pay in a timely way. A provision can be added into your contract stating that if invoices are not paid on the date agreed, or by ‘x’ number of days after invoicing, interest will be added on to the amount outstanding. An interest rate between 2% and 4% above one of the major bank’s base lending rates is common in commercial contracts.

Alternatively, a provision can be made (inserted by you in your contract) for a discount to be deducted from the total amount if payment is made early. This can really appeal to clients!

At the other end of the spectrum, if suppliers or clients are paying in instalments, it is possible to carve out that if one of the instalments is late enough, the entire amount becomes due. Or, if a freelancer can include a clause in their contract pertaining to if payment is not made, they might wish to add that they are entitled to withhold services until the matter is settled or full payment received.

Sometimes, suppliers (i.e. those who use your services to supply a service or product to their end-client -- for example, a marketing company using your freelance digital marketing skills to enhance their marketing offering to their customer), can require that their end-clients pay them before freelancers receive their payment for work. For freelancers contracting with such suppliers with no control over their relationship with the end-client, this can be problematic. Therefore, watch out for wording to this effect and try to ensure that payment will be due when work is considered complete by the freelancer.

Can a client or supplier make deductions or ‘set-offs’ to the amount owed?

Sometimes, disagreements or issues can arise between freelances and their customers. When this occurs, it is common in commercial contracts for customers to seek to withhold the sums that are due under an invoice. This might be by making ‘set-offs,’ which is the deduction of any sums that the customer believes that the freelancer owes to them, from the amount due under an invoice. For example, if a freelancer sends an invoice for £5,000 and the customer thinks the freelancer owes them £1,000, this could be taken away from the original invoice amount, and only £4,000 would be paid to the freelancer. Another way is through ‘abatement,’ which involves withholding all or part of the price due.

It is possible to contractually carve out these practices. But clear wording is required to exclude the rights that suppliers and clients might have, specifically referencing the exclusion of any “deduction, discount, set-off, or abatement.”

Final thoughts (includes our top payment tip for the current climate!)

Given the adverse effects that the Covid-19 pandemic is having on all types of businesses, payment terms are at the forefront of everyone’s mind right now. Therefore, you should take care to thoroughly check that your payment terms are favourable -- to you.

Notably, if taking on a large project, which will require a lot of work and will not be finished until some date in the future, it can be useful to negotiate a percentage of the total price as an upfront fee, or state that a percentage for work completed will be required each month.