Compensating Contractors and Vendors, CompDoctor December 1999

Q: A client I've been working for is having the usual cash flow problems that plague start-ups. The project may soar, or it may go bust. I have no illusions either way. My dilemma is that while the client has paid me every penny it promised, it has not yet paid a farthing to the people I hired to work under me. Their contracts are with the corporation, not with me. But it isn't right that I should get paid for my work while they get stiffed. And because I recruited them, this reflects on my reputation as well. Part of me says I should share whatever I've received from the client, and part of me says I shouldn't get involved in what is really a legal matter between other parties. What should I do? -R.C.

CompDoctor™: To be honest, R.C., I wish that you had written to Dear Abby instead of to me. While I am comfortable fixing compensation strategies gone awry, I get queasy when approached with a volatile mix of legal contracts, vendor relationships and questionable ethics. You see, in my field, once you agree to pay, you pay-provided the work that was agreed to gets done.

Outside of any remedies that your attorney might prescribe, there are really only two possible antidotes to your client's bad behavior:

1. The "strictly business" approach. It is well understood among people in business that a contract between two parties is the rightful domain of the parties to the contract. Therefore, since you are not party to the contract, you have no legitimate right to interfere with it. Even though you recruited the vendors who have not been paid, your rights are limited to the terms of your contract with the business owner and do not extend to the people who report to you.

According to the "strictly business" approach (which, by the way, involves all sorts of legal and tax considerations that require the advice of an attorney), you must avoid paying the vendors yourself unless you have established them either as employees or as independent contractors to your business. At this point you do not have any contract with the vendors. So by paying them, you would be acting as their employer and would be responsible for reporting income and withholding taxes. For obvious reasons, I wouldn't suggest that you do that, nor would I advise you to set them up as contractors at this point. It would involve, at the very least, soliciting more payment from the business owner for the work performed by all parties. And if that didn't work, you would have an obligation to pay your assistants out of your own pocket. To me, that doesn't sound like a risk worth taking. Fortunately, there is another way.

2. The ethical approach. You need not be in business long to learn that doing what's correct gets you a nod of approval, while doing what's right earns you a lifetime of respect. That's what the ethical approach is all about. It says that because you acted as the intermediary in recruiting the vendors, you should act as the intermediary in helping them to get paid. First set up a meeting with the business owner to talk about the issue. Perhaps there was a miscommunication in the first place about who is responsible for paying the vendors. If that is the case, the solution should be as simple as clarifying those expectations. On the other hand, if you discover that your client is not satisfied with the vendors' work, you will be in a position to negotiate on their behalf. As you pointed out, this is appropriate because you stand to lose valuable vendor relationships, so you have a stake in the outcome even though you already have been paid.

You need to state very clearly that the vendors were hired at the client's request and, assuming it is true, that they have performed quality work. Try to get your client to see that he is obligated to pay these people not only because he has signed contracts with them, but also because it is not fair to pay only you, when they also have contributed to the project. If you have no outstanding invoices, you also are safe in refusing to take on further work for the client until the vendor invoices are paid. If he refuses, you have only one option: walk away.

In trying the ethical approach, whether successful or not, you gain two things: healthy respect from your vendor partners and, if you've been tactful, from your client; and the satisfaction of knowing that you did the right thing. The trust you generate may even translate to new business once your client's company takes off.

Let me be up front about this. I like the ethical solution better than the "strictly business" approach. After all, in my book, contracts are simply a written record of a handshake agreement. Of course, when push comes to shove, the language of the contract rules. This is why, when you evaluate potential clients, you must take time to determine if they are people who will honor a contract even if there is a falling-out. If there is a question in your mind about a prospect, avoid them.

This situation reminds me of some advice that I received years ago. When my partner and I were setting up our business, we had the benefit of an advisor who had managed a similar start-up. Of all the financial, marketing and operations advice he gave us, one statement has served us particularly well. He said, "There are two kinds of people in this world: those that give you energy and those that take energy from you. Avoid those that take energy from you." That goes for clients and vendors alike.

Back to top

< Back