Options when a client can’t or won’t pay?

Company insolvencies are reported by the Insolvency Service to be at their highest levels since the 2009 financial crisis. Recruitment businesses may be worried about the risk of hirer insolvency or financial difficulty. Where does a business stand if a hirer client is still trading but can’t or won’t pay, and are there steps that can be taken to improve the prospect of recovery? 

Non-payment by a client can have a significant impact on any business. For those in recruitment supply, the impact can be far greater. This is because the majority of funds due are to be paid to candidates and third parties such as HMRC and often before payment is received from a client.

Subject to whether there is an opt-out in place from the Conduct Regulations and the right contractual provisions, there may be scope to withhold payment from a contractor (see our article and our webinar for more information). But what can you do to maximise recovery from a client?

Assuming that a client is not at the stage of formal insolvency, then there are practical steps that can be taken to reduce risk. These can be actions such as tightening credit control, credit checks (which ideally would have also been done initially), agreed payment plans and even (subject to availability and affordability) credit insurance.

Having the right contractual terms in place is key. A good contract is essential to minimise the scope for a client to argue that payments are not properly due, for example, if work is carried out but argued to be of insufficient quality. Strong contracts can address the consequences and costs of late payment and protect transfer fees if the client decides to engage directly or look for a cheaper source of supply. Strong termination or suspension rights can also help if the risk is considered too great or to leverage prompt payment if continued supply is business critical.

If the worst happens and your client is formally insolvent, then recovery of sums often depends upon the assets of the client. If arrangements are terminated, a good contract should avoid any dispute relating to previously incurred charges. However, recruiters must be careful in terminating due to a formal insolvency, as doing so may fall foul of the Corporate Insolvency and Governance Act 2020 (“CIGA”) unless undue hardship can be demonstrated. It is always best to seek advice. Further information on CIGA can be found in a previously published Lawspeed article.

A well-crafted contract can mean the difference between safeguarding your business, protecting your income, and managing risks effectively or losing what you’ve worked hard for. By investing the time and resources in having a comprehensive and legally sound contract, you can ensure that your business is protected from potential legal disputes and financial losses.

Lawspeed has been empowering recruitment businesses since 1997. We have consistently provided unparalleled assistance, expert advice, and unwavering support to our clients through multiple economic downturns. Our in-depth understanding of the risks that businesses face is reflected in our contractual terms, which cover all aspects of recruitment services and supply, including clients, contractors, umbrellas, and candidates. We take pride in our contractual terms, which are designed to ensure that our clients are fully informed, protected, and confident in their business dealings.

Ensure your business has the best terms and support possible, contact us today on 01273 236 236 or email [email protected].