Switching Payroll Funding Agencies Can Lead to Trouble

Steve Capper/Flexible Funding - August 19, 2020

There are two reasons that one might want to switch payroll funding companies. You are unhappy with the service, and/or the second company has product offerings that the current company does not have. The termination of the current funding company contract AND the sign-up with the newer company must both be done very carefully or legal problems may ensue.

When somebody is not satisfied with their funder, they will sometimes search out and sign a contract with a new funding company. It is understandable that they want to have new financing fully set up, to be covered for when they leave their current/old funding company. However, once they sign the contract with the newer funding company they may simultaneously be in a contractual relationship with the current/older funding company AND with the newer incoming funding company. Although the newer company may not have funded your company one penny or performed any services yet, they may still consider themselves to be in full contract with you, and you with them.

In many cases a customer will communicate with their current/older funding company weeks or months before ending the contract.... with any of the following:

1. "I am not renewing the contract, am unsatisfied with the service, and am going to be leaving no matter what."
2. "I want more of something (or less of something), and I am going to give you the opportunity to improve, or offer more, and if I am not satisfied we will go elsewhere."

In this second case #2, the current older funding company may make a sincere effort to improve their services and product offerings. They would still be in contract with you and therefore have every right to renegotiate. They may be able to prove that you have been mislead by the new takeover lender... and that the grass is not always greener on the other side of the hill. Or the current/older funding company may finally offer a deal which is far better than the newer/incoming company. If you are convinced that the older/current payroll funding company truly has the superior deal for you, you may want to stay with the current/older company. And now you can have a real problem on your hands.

Sometimes, the newer payroll funding company will not accept losing the prospective deal--the prospect of losing your future business volume --when you decide to stay with the older original funding company. The newer company will play hardball with you; they will threaten to sue you, and/or will definitely sue you, if you don't switch over to them. They may not care that you or your staffing company no longer wants to go with them. They believe they are in full contract with you--and will take you to court to get you to perform on the long-term contract, or to get the full amount of early termination fees out of you, or a large settlement. It is possible that you would even have to pay some or all of the funding company's legal fees to fight you in these matters.

You might think it is not reasonable for a funding company to force you to fund with them if you don't want to be in a relationship with them. Unfortunately, with some funding companies their short-term or medium-term profits are more important than being reasonable. One large funding company blamed their insistence on performance of the contract (with threat of a lawsuit) so that their sales rep who brought in the deal could get his commissions. If the deal were killed and the rep did not get his future commissions, they felt that it would forever kill his incentive to produce more deals. They maintained this position/threat even though it was surely not in the best interest of, and against the wishes of the staffing company.

If you are in contract with two funding companies at the same time, or both of the companies believe so, it is likely that you have now breached the terms of the current/older funding company's contract. For instance, it is often held in funding contracts that you shall not further encumber the collateral. If the current/older funding company has accounts receivables as the security collateral for the loan, you usually cannot pledge to another company the same collateral of accounts receivables (or without permission). To do so may constitute a breach of the current/older funding company's contract.

If the newer funding company gets aggressive with you to perform on their contract, as described above, they might be 'inducing' you to breach contract provisions between you and your current/older funding company. The collateral could be encumbered by two funding companies at the same time as explained above. Or, in another example, suppose the second/newer funding company sues you to perform on their contract but the current/older funding company has a provision in their agreement that establishes a contract breach anytime you are involved in a lawsuit.

When a third party (such as the newer funding company) intentionally induces a contracting party (your company) to commit a breach of contract (such as the contract between you and your current/older funding company), there can be a lawsuit for wrongful or 'tortious interference' with contracts. The purpose of tortious interference laws is to allow parties to contract with one another and fulfill their contractual obligations without third-party meddling. In this particular example, the first current/older funding company might sue the second newer/incoming/meddling funding company. The facts of each case are different and there is no telling who would win, but the important thing to know is that you would likely get drawn into the court case where you would have to pay your own legal fees, likely the legal fees of one of the funding companies, or possibly legal fees for both of the funding companies. You might be paying legal fees to argue that you should not be responsible for the legal fees of the funding companies. Tortious interference with contract claims are controlled by state law and not federal law, therefore each states laws need to be considered.

The fight over tortious interference claims may not ever make it to court--you may be legally responsible just for the two funding companies to argue with their attorneys for some time before one of the companies compromises or backs down.

Before you ever sign with a second/newer funding company, it would be wise to get the advice of a competent attorney. One idea to consider: Prior to the execution of any contract with a prospective second newer funding company, it should include in any agreement an express condition that the newly executed funding agreement shall not commence until the take out of the older funding company relationship is completed, they have received payment in full, and there has been duly recorded UCC Uniform Commercial Code termination statement filed at the Secretary of State. The unwillingness of a prospective newer funding company to agree to such terms may give you an idea of who you are dealing with, andtheir reluctance to relinquish powers that may be used in attempts to strong arm you.