Payroll Funding Contract Termination Strategy
Staffing payroll funding contract termination or a funding contract exit strategy is of crucial importance to a staffing agency searching for funding. Numerous legal and financial misunderstandings result every year between funding or factoring companies and staffing agencies from the need to get out of funding contracts early. The majority of the temp funding companies have long-term agreements lasting one or two years with automatic renewal clauses.
The first thing to look for in a contract is an early termination penalty. Some funding companies get three months of the fees that they would have earned (or half of that amount) if you did not get out of the funding contract early. The monthly fees that the funding company would have earned may be an average of some period, or the highest three months of fees during a certain period of time. Another example of a termination fee or liquidated damages for early exit is the most recent month of fees earned times the number of months left in the contract term.
The mathematical formulas for the early termination penalties are usually pretty clear, so take a moment to see what it could be. It will usually be in the thousands of dollars, and can get into the tens of thousands of dollars.
The penalty you incur may not even be identified or expressed explicitly as an “early termination penalty”. In the staffing payroll funding contract there may be a “monthly minimum fee”. Combine the monthly minimum fee with a contract term of one year or longer and you automatically have the enforceable equivalent of an early termination fee. For example, it may be stated that the monthly minimum fee is $500 per month. Most staffing agency funding shoppers would not care about the monthly minimum because they know they would always easily hit or exceed that level. But if they have to get out of a one- year term contract six months early, and pay $3,000 ($500 x 6 months) to get out, they are never happy about it.
When or why may a staffing agency need to stop funding and get out of a payroll funding agreement or accounts receivable factoring program? Most funding companies have seen staffing companies want to exit their payroll funding programs for any of the following reasons:
- Lower cost of funds available elsewhere
- Business partner disagreements
- Divorce or marital problems
- Family succession or no family succession
- Health problems of the owner, a family member, or key employee
- Workers comp pressure or problems
- New staffing agency competitors stealing business or driving down margins
- Embezzlement or fraud by employees
- Funding company change of ownership and/or management
- Funding company level of service declines
- IRS issues
- Non Compete or trade secret problems
- Legislative (new law squeeze)
- Bankruptcy of concentration customer
- Better business opportunity comes along
- Outside unrelated-to-staffing investment of owner declines or collapses
- Business sale or merger
- Need to convert accounting and software systems
A one year (or two year) long term contract will end on a single specific day of the year. The biggest problem with a long term funding contract is that it is not very likely that all of the above events of the business will coincide with that single, specific day that the contract ends.
Most long-term funding agreements have a sixty day window of time to notify them of your intent to terminate. It may be within the sixty day period before the ending date of the contract, or it may be prior to the sixty day window before the ending date of the contract. Read the fine print very carefully; many staffing agency owners do not pay close attention to this clause going into the contract. Far too many staffing owners and managers are so busy with life and the business that they miss the window of opportunity to terminate. This is extremely common. Because they miss the window they are automatically renewed for another long term. Unfortunately, quite a few of the staffing payroll funding companies and factors have no leniency with the notification window. You could miss the proper time for notification of termination by one hour and they will hold you to an additional long term renewal.
If you do give proper notification for termination of your long-term contract period, and the events of the business require that you need just a few additional weeks or months of funding beyond the end of the term (on a month-to-month basis), it is possible that a funding company will carry you the few extra weeks or months. Ask well ahead of time to be sure they will do this.