Not getting paid on time.
It’s a global problem.
If you’re working in Europe or you have European clients, stay with me.
What you’re about to learn is important because the rules have changed. Before I tell you about new regulations that are in place to protect you, consider this.
As a freelancer or small business owner, it’s easy to feel intimidated and to believe that your payment problems are isolated incidents and irrelevant in the grand scheme of things.
They are not.
As the economic crisis continues, being paid late is more and more the norm. Written-off debt is rising every year.
The European Commission was blunt in assessing the situation and wrote:
Companies go bankrupt waiting to be paid. Jobs are lost. Dreams die. Across the European Union, paying suppliers late is common. It costs little and is considered acceptable. But it does great harm. Every year, hundreds of thousands of European businesses have closed waiting for late payments.
Small and medium-sized enterprises are particularly exposed to late payment, and business selling across borders are especially vulnerable. The late payment culture has to change, and the European Union is equipping business with the tools to make this change happen.
HOW BAD IS IT?
According to the 2011 European Payment Index (EPI), the average time from an invoice being issued until payment is received was 56 days for business-to-business payments and 65 days when the public sector was to pay an invoice. That means government institutions are the worst offenders! In Italy, it takes an average of 170 days to be paid by the government.
28% of all companies in Europe see late payments as a threat to survival whilst 45% believe late payments impact their growth. In the UK 55% of companies see late payments as a threat to survival and 65% see it as prohibiting growth.
“Around 25 percent of all bankruptcies in Europe are due to late payments,” says Intrum Justitia, a Swedish-based credit management service that compiled the data.
Get this: If all European businesses, public authorities and consumers paid their bills and invoices in full and on time, the money saved from written-off bad debt would equate to a €312 billion (422 USD) cash injection for businesses throughout Europe. That is more than the Greek, Irish and Portuguese EU/IMF bailouts combined!
With that in mind, the European Council decided to rewrite the rules and protect small and mid-size business in particular against late payment. A Directive on combating late payment in commercial transactions was adopted on 16 February 2011 and had to be integrated into national law by Member States by March 16th 2013.
Generally speaking, the European Council wants to create an environment where paying on time is the norm and late payment is seen to be unacceptable across the business community.
No matter how comprehensive, this new regulation can never be a substitute for effective customer relationships and cash flow management, and will always be the option of last resort for suppliers (many of which are in established and mutually beneficial relationships with their customers).
THE NEW RULES
1. These regulations apply to commercial transactions in both the public and private sectors. In other words: they apply to B2B as well as to government contracts. If your uncle owes you money, that’s between you and him.
2. Under these regulations, there’s no requirement to send your client a reminder to pay, as long as you have fulfilled your contractual and legal obligations and you have not received the amount due on time, unless the debtor is not responsible for the delay.
3. If you’re owed money, you are automatically entitled to interest for late payment. The interest rate chargeable for late payment is the European Central Bank main refinancing rate plus 8 percentage points unless otherwise agreed.
4. Any clause in a contract which seeks to exclude interest for late payment or compensation is held to be grossly unfair, and the regulations provide that such a clause is either unenforceable or gives a rise to a claim for damages.
5. For business-to-business payments, the general deadline is 30 days after receipt of the invoice or receipt of the goods or services, unless otherwise stated in the contract. If both parties agree, it is possible to extend payment terms up to 60 days. The period may be extended beyond 60 days only if “expressly agreed” by the parties in the contract and provided that it is not grossly unfair to the supplier.
The standard deadline for public authorities to business payments is 30 days max. In very exceptional circumstances, payment can be extended up to 60 days only if it is “expressly agreed” and justified in light of the nature or feature of the contract.
6. You are entitled to charge a minimum of €40 (about 54 USD) in relation to expenses incurred as a result of the late payment and may also be able to claim any reasonable collection costs incurred. This could include expenses incurred in hiring a lawyer or a collection agency.
7. Parties may always agree on a payment plan. If any of the installments is not paid by the agreed date, interest and compensation provided for in the Directive is calculated solely on the basis of overdue amounts.
8. The seller retains title to goods until they are fully paid for, if a retention of title clause has been expressly agreed between the buyer and the seller before the delivery of goods. In layman’s terms: until your client has paid in full, you own the material, but only if transfer of ownership to you has been agreed upon in your contract.
9. Member States may continue to maintain or to bring into force laws and regulations which are more favorable to the creditor than the provisions of the new Directive. So, be sure to check the legislation of the country you live in.
10. These new rules are not retroactive. Contracts concluded before 16 March 2013 are excluded from these provisions.
If you’d like to read the entire Directive (PDF) in English, click here. Additional information for various Member States can be found by clicking here. Click here for a Dutch summary of the regulation.
The European Commission has organized a Late Payment Information Campaign in the 28 Member States that runs until December 2014. Click here to find out where and when events will be held in your country.
The Association of European Chambers of Commerce and Industry is a strong supporter of the new EU Directive. It has launched a special 30 Max website to inform entrepreneurs about the new legislation. On the site, you’ll find a map showing the European Union’s swiftest (and slowest) public payers, as well as a toolkit to help you take action against late-paying clients.
WHAT SHOULD YOU DO?
The first thing to remember is that this Directive harmonizes the legislation in all 28 Member States of the European Union. If you’re a contractor or client from outside of the EU, you’re not bound by these rules.
Assuming that you are based in Europe and you’re using a contract, it’s time to bring the terms & conditions in line with the new Directive (but even if the date or period for payment is not specified in a contract, these new EU rules and penalties still apply). I recommend going to a lawyer to make sure the new wording of the fine print matches national law, based on the stipulations in the Directive and/or national legislation.
As you may know, I’m originally from the Netherlands. If you’re based in Holland, I highly recommend getting in touch with the lawyers at De Witte Raaf Juristen. Known for a down-to-earth approach, they specialize in small to mid-size businesses and their rates are very reasonable. Click here for the text of the EU Directive in Dutch.
BUT I’M NOT A EUROPEAN!
If you’re operating a business outside of the European Union, the laws of the land you’re a citizen of apply, UNLESS you add a clause to your contract stating that your client will submit to the legislation of the court where they are located. Of course your client needs to agree to that.
Should you run into contractual or payment problems with European clients, let them know that you’re aware of the new EU legislation. Should they try to cut you a different deal, tell them it’s not fair to apply one set of rules for contractors inside the EU zone and another for those outside the European Union.
IF YOU RUN A BUSINESS IN THE EU
The UK government has published a short, step-by-step online guide called “Late commercial payments: charging interest and debt recovery.” It’s based on the new European rules. On page one there’s a wise warning:
Think about your relationship to the customer before adding interest or costs, and give them another chance to pay.
A more in-depth guide (PDF) is available by clicking here.
Clients don’t grow on trees. In many cases it’s much better to work something out and save your business relationship, rather than letting things escalate. Then again, if you’ve kept your end of the deal and your client isn’t keeping his or hers, you’re not the one to blame and you’re entitled to take action.
If the non-paying client lives in the same country, you should read my article “Give Me My Money.” In it, I outline several options to collect payment, one of them being Small Claims Court. My lawyer-friends at De Witte Raaf charge a flat fee of €60 for an official letter and a follow-up phone call, to put some legal pressure on your debtor-client. Usually, that’s all it takes to get a client to pay.
THE EU SMALL CLAIMS SYSTEM
If that client denies owing you money and you’re owed less than €2,000 (excluding interest, expenses and disbursements), you can use the European Small Claims Procedure. In theory, this procedure is free and is conducted mostly in writing using pre-defined forms. The judgment is made in the country you live in; it protects the defense rights and becomes directly enforceable in the country of the losing party.
Although this sounds like a good option, a September 2012 report concluded that there’s a lack of awareness among judges and lack of information or assistance for consumers when it comes to this procedure. Secondly, language issues increase the cost of the procedure because it’s expensive to translate all the documents that support your claim.
By far the biggest problem is the enforcement of judgments. As is the case with small claims that don’t cross borders, winning your case doesn’t mean that you will get your money. If you have to enforce a ruling in your favor, you’re probably going to need legal assistance which can cost even more than the value of the claim itself.
If your claim exceeds €2,000 you may have to use the national court system, and you should definitively seek legal advice.
If your case doesn’t cross borders and you don’t want to go to court, you could think of using a mediation service to resolve your issue. It is a confidential process that enables both parties to explain and then discuss what their needs and concerns are to each other in the presence of an independent third-party – the mediator – so that they reach an agreement between themselves.
Click here for more information on the cost of mediation in the UK. On this page you can also find a mediation service in your county. If you’re in the Netherlands, click here to find a registered mediator.
A NEW MENTALITY
The ultimate goal of the European Council is to create a new mentality regarding payment. It’s a tough message during an economic crisis in which many companies are hoarding cash and stockpiling reserves as a safety net against another downturn.
On October 14th, British Prime Minister David Cameron announced a consultation aimed at helping small businesses get paid on time. He said:
“It’s not right that suppliers are not getting paid on time for the work they do and the services they provide and I know that late payment can have devastating effects on our small and medium-sized businesses.”
The question remains: can a change in mentality be regulated? In December 2008, the UK established a Prompt Payment Code. Signatories to the Code commit to paying their suppliers within clearly defined terms, and commit also to ensuring there is a proper process for dealing with any issues that may arise.
According to the BBC, About 1,500 firms have signed up to it, but the Federation of Small Business (FSB) says some signatories have still managed to stretch settlement periods to as long as 120 days (source).
Apparently, good intentions aren’t enough to combat late payments. That’s exactly why the rules had to be changed.
Will it be enough to change the culture of late payment?
Only time will tell.
Paul Strikwerda ©nethervoice
Disclaimer: This article was written to provide general guidance only. It does not constitute legal advice and reliance ought not to be placed on it. No liability can be accepted by the author for its contents. The interpretation of the law on late payment is ultimately a matter for the courts and readers of this blog post should seek their own legal advice where appropriate.
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Next week I’ll talk about some of the responses I received from colleagues to this new legislation. Click here to read the story.