Why your 50% retainer deposit won't hold up in court and what to do instead
If you’re charging your clients a 50% deposit/retainer/initial payment at the time of their signing a contract with you, it may be time to stop.
In the summer of 2020, a whole lot of contract disputes went to court over canceled weddings due to COVID with couples wanting their 50% deposits back. And most of those couples won over their wedding vendors.
Why?
This post will explain exactly why and what you should do instead as a creative business owner.
One thing to note however before we get started is that this recommendation doesn’t just apply to wedding industry professionals.
Web designers, copywriters, graphic designers, digital marketers, and coaches also need to be wary of not charging 50% deposits.
Here's what’s likely to happen with your 50% deposit in court
first
In order to have a payment provision that is upheld in court, a judge is generally looking for 3 things:
Was it clear to the client that:
The deposit or retainer was nonrefundable;
Why it was nonrefundable (do you literally spell this out?); and
Was the amount reasonable?
second
50% at the time of signing is not a reasonable percentage to a judge in most instances. (One exception to that is mentioned below, so read on to see if you fall into the exception category!)
Let’s talk about what would happen if you ever had to defend your 50% deposit and contract in court.
A judge will ask you to explain in black and white (ie. an itemized spreadsheet) where you incurred 50% of the cost of the service or when you did 50% of the work to justify that amount.
Of course, as creative business owners, we do have some upfront work, managing the client onboarding, preparing for the project/service, as well as paying for equipment, software, office/studio space, and taxes just to name a few.
And of course, there’s the very valid point that when that client books in for your services, you’re unable to sell that space to anyone else and that’s a legitimate reason for justifying a deposit in the eyes of a judge. As a wedding photographer, there are only 52 weekends in a year, or as a copywriter, maybe you only have 20 project spaces available in a year.
But for most creatives, that amount of work/expense is not close to 50% when the client signs the contract.
So just know that if you were called before a judge, what they’ll ask for is a breakdown of where you incurred 50% of the cost of offering the service at the time of the client signing.
If you’re unable to do so, the judge is likely to side with your client.
Now it’s up to you to do a financial analysis on your business and determine when you do work for a project and how much overhead cost you incur when a client books.
Our shop attorney Paige Hulse defended two wedding vendors over the summer in front of the same judge on the same day. One was a wedding venue, one was a wedding DJ.
When the cost analysis was completed for both businesses it turned out that when the client had canceled their wedding 1 month prior to the scheduled date, the venue had incurred 80% of their costs and the wedding DJ only 20% of their costs.
So again, it’s worth looking at what those numbers are for your business.
Third
COVID-19 has taught us that clients will try to get non-refundable payments back, no matter what your contract says.
If your retainer is less than 50%, you're in a better negotiating position to allow for a refund, less the retainer amount.
So in the event of a cancellation, you’re actually better off having a lower percentage non-refundable retainer amount than a higher one, because it’s more likely to be upheld.
fourth
Simply put, some states don't uphold 50% retainers or deposits at all, so you're gambling anyways depending on the state.
Exceptions to the ‘don’t charge a 50% deposit’ rule:
If you offer a service with an extremely quick turnaround, say a 1-day service then you’re in a much better position to justify a 50% deposit.
What might that look like?
Say you offer a day rate as a copywriter where you do as much work for the client within 1 day as possible, or you’re a coach or consultant or another professional with a VIP day service that again takes just 1 day, or you’re a web designer who promises a 1-day website, all these are exceptions to the usual rule.
What to do instead of a 50% retainer deposit
If the contract you’re entering into is going to run for 9 to 12 months, we suggest charging four 25% payments to your client.
If the contract you’re entering into is going to run for 6 months, then three 33% payments would be the suggestion.
If you’re a florist, your costs are a more challenging case to determine, because even if it’s a shorter 6-month contract, your floral invoices fluctuate a great deal because of the variability in floral costs. For florists, we recommend charging a 40% deposit and having the remaining payments broken down into smaller amounts and then the last invoice would include the total additional costs that have arisen, such as if the couple has chosen more expensive flowers or fixtures.
Can you call it a non-refundable deposit?
There isn’t a lot of case law on the subject, simply because case law is set based on litigation, and a judge makes a final ruling at the end of the case.
The vast majority of cases (as in, over 80% of cases) don’t ever go to court, and those that do get to court typically result in settlement, simply because of the costs involved.
So, outside of a tiny handful of photography cases, there aren’t many cases involving this question and the creative world (ironically, the most amount comes from the legal world itself, because attorneys work on retainer bases).
In our contracts, we call it an ‘initial payment’ to be on the safe side.
Why? We’ve found that the term initial payment is the most widely accepted across state lines.
At the end of the day, you can call it whatever you want to but do know that it does depend on the state as to what they accept in terms of terminology.
While we wouldn’t say there’s uniformity in terms of which terminology is preferred, there is uniformity in what a judge looks for in determining if that provision in the contract should be upheld.
Basically, what’s more important than the terminology however is that your payments pass this test:
Was it clear to the client that:
The deposit or retainer was nonrefundable;
Why it was nonrefundable (do you literally spell this out?); and
Was the amount reasonable?
Should I call it a ‘non-refundable initial payment?’
We suggest adding a line to the beginning of the payments paragraph of your contract which states that ‘all payments are non-refundable and non-transferable.’
(We suggest you bold this line in your actual contract.)
And then you may continue in the paragraph also calling it a ‘non-refundable, non-transferable payment’.
Why should I add ‘non-transferable’ to my payments?
This is a question not asked often, but which should be asked.
We suggest adding ‘non-transferable’ to your payments for purposes of giving yourself leeway and negotiation ability with your clients.
If your client is about to take you to court, you could offer to waive the non-transferable aspect and let the client apply the payment to a new project/date, potentially avoiding court by giving a slight concession.
Should I put specific dates on payments in the contract?
This one is up to what you prefer, you may specifically date payments such as, ‘Wednesday, February 17th, 2021’ or you pay state ‘30 calendar days after this contract is signed’ or ‘5 business days before the project state date.’
If you’re stating a number of days just specify if it’s calendar days or business days.
One tip we do have, however: Your clients will likely appreciate actual dates in the contract so they can skip the mental math.
