Payroll Funding Services Contract Early Termination Fees
Steve Capper/Flexible Funding - August 19, 2020
A wide view of early termination penalties and contract exit or cancellation fees in payroll funding services contracts is that you only need to be concerned about them many months down the road when you have reason to terminate. That is not always true. Services contracts of payroll funding companies can obligate you to pay large dollar penalties and cause costly legal problems at the beginning when you have just freshly signed the contract; this is before you ever fund anything at all and before the funding company has performed any services. These penalties can apply if you never fund anything at any point in time.
In a common scenario, a person will shop the market for payroll funding companies, decide on one of them, and sign the funding company services contract. Just after a person signs the contract, but before they start funding, they get a much better offer from somewhere else. They may discover onerous legal clauses in the contract that they had not recognized before. Staffing companies also put in bids for and/or believe they are going to get a big staffing contract(s) that do not materialize, which was the reason for shopping for payroll funding companies in the first place. Any one of a multitude of other issues may cause a need for cancellation; business partner disagreements, health problems, investor withdrawal, divorce or marital problems, inheritance, lawsuits, non compete or trade secrets, IRS issues, workers comp problems, etc. Cancel the payroll funding contract now for any of the reasons above and you are likely obligated to pay all penalties at their worst, for the entire length of the contract, or be sued.
In a second example, your staffing agency is already funding with a funding company for some period of time. When another new funding company comes along and offers some additional services, you come to the conclusion that it would be beneficial to switch. You sign the new funding company's contract. The old funding company will quickly learn of the new company's offer because you have to call them and tell them you are switching. Or, the old company's monitoring system will pick up the new funding company's UCC Uniform Commercial Code document filing at the Secretary of State, which indicates a new legal collateral interest in the accounts receivables of the staffing agency. The existing old payroll funding company then calls you up and explains that they too can provide the same additional service offerings (that you were previously unaware of.) It now makes sense to stick with the old company not only because the added services satisfies the needs, but also because you will not be confusing the staffing agency's customers with a change of payment address from the old funding company's P.O Box to the new funding company's P.O. Box. Again, you are now likely obligated to pay all of the new funding company's penalties at their worst--for the entire length of the contract, or be sued. (If the old funding company has exit early termination fees, you would be subject to their penalties also).
Exit fees or early termination penalties in payroll funding company contracts are not inherently invalid. A funding company may try to enforce them at the beginning of the contract. It may seem unreasonable to charge them if there has been no disbursement of monies and there has been no other payment or performance on the part of the funding company. Somebody might argue that since the funding company didn't pay anything, they are entitled to nothing in return--there is no contract because there is no consideration. The legal fees to argue these matters would surely sting and there is no way to tell who will ultimately win in any court. Payroll funding companies, factors and banks are well heeled and can financially ride out a legal battle if they want to play hardball. It would be better to stay out of court and understand beforehand whether a payroll funding company is likely to play hardball when it comes to exit fees.
For more specific information about early termination/exit fees/penalties & contract cancellation, see Flexiblefunding.com