Late Payment within the self-employed sector

• Late payments continue to plague freelancers, with the average amount currently owed to freelancers rising to £5,230
• Late payments are seriously damaging the financial wellbeing of self-employed workers, with one in five (20%) finding themselves without the money to cover basic living costs

• One in five freelancers (18%) are waiting over three months beyond the payment deadline for payment from a client and one in five agency workers (18%) are waiting over three months for payment from an agency

   

Despite the government’s support for improvements to company payment practices, including through the Prompt Payment Code, freelancers are still plagued by late payments, with over a third (35%) reporting that they haven’t been paid on time by a client in the last 12 months. Concerningly, the average amount that freelancers are currently owed in late payments has remained relatively stable at £5,230 - up from £5,140 in 2020.

With inflation rising and the cost-of-living crisis worsening, the failure to get businesses to pay self-employed workers on time is forcing many freelancers to make difficult decisions around their financial wellbeing. One in five self-employed workers (20%) have reported that they found themselves with no money to cover basic living expenses such as rent and bills after an experience of late payment. Moreover, nearly a quarter (23%) have had to use their credit card or overdraft facility and a further one in five freelancers (21%) have used up all or most of their savings as a result of a late payment.

The report found that self-employed workers aren’t just suffering from late payments. They are also suffering from nonpayment for work they’ve completed for their client. In fact, a third of freelancers (31%) reported that they have completed work and not been paid for it, with 16 per cent of these experience an instance of unpaid work in the last 12 months.

Length of delay in payment

When analysing how long self-employed workers are waiting for payments from clients, the research revealed that nearly three in 10 freelancers (28%) have to wait between a month and three months beyond the agreed payment deadline for payment from a client. Concerningly, nearly one in five freelancers (18%) reported that they had to wait over three months for a payment from a client.

For those freelancers working via an agency, the picture is very similar, with almost a third (30%) reporting that they had experienced a delay in payment. Moreover, over a third of agency workers (35%) have stated that they have had to wait between one month and three months beyond the agreed payment deadline for payment.

The impact of late payments on mental health

Late payments are also impacting on the mental health of self-employed workers. Almost half of freelancers (49%) state that they have felt stressed or anxious as a result of not getting paid on time, whilst almost one in three (31%) indicated that they felt less productive due to an instance of late payment. The report also found that a further three in ten (28%) have lost sleep over worry and that over a fifth (26%) have experienced a lack of confidence as a result of late payment.

The Coronavirus pandemic only exacerbated the issue of late payment, with over a third of freelancers (36%) reporting that late payment became more common between 2020 and 2021.[1] As a result, close to a quarter (23%) reported that they had to use all or most of their savings to get by and a fifth (22%) stated that they had to resort to using credit cards or overdraft.

Previous IPSE research has also revealed that experiences of late payment during a self-employed career are more prevalent for groups such as lower paid freelancers (65%), women (67%) and younger freelancers (65% of those aged 16-34). [2]

Currently, late payments are governed by the Late Payment of Commercial Debts Act 1998 which allows for interest and debt recovery costs to be claimed if another person or business is late paying for goods or a service. [3]

The creation of the Office of the Small Business Commissioner and the Prompt Payment Code have provided some extra incentives for companies to demonstrate good payment practices, such as the threat of suspension and removal from the Code. [4]

This report will assess the prevalence of late payment from clients and agencies and evaluate the impact of late payment on freelancers’ mental health and the knock-on consequences for their finances. The report also seeks to understand the scale of nonpayment within the sector, the measures that freelancers adopt to ensure timely payment and concludes with a series of policy for recommendations for government to address the issues of late payment and nonpayment.

In order to assess the prevalence of late and nonpayment within the sector, we asked freelancers whether they have experienced instances of such payment practices in their self-employed career and for those that had experienced these, the time beyond the agreed payment deadline they had to wait for the payment.

We asked freelancers that have experienced late payment to estimate the average amount of money that they are currently owed by clients for the work they have completed. Respondents reported that they were currently owed an average of £5,230 for work they have completed which closely aligns with our findings from 2020 where freelancers who experienced late payment were owed an average of £5,140 for the work they had completed. [7]

In order to understand the financial impact of late payment on the sector, we also asked freelancers that have experienced instances of late payment about the knock-on financial consequences experienced as a result of late payment.

Nearly a quarter of respondents (23%) stated that they had to use their credit card or overdraft facility as a result of late payment whilst 21 per cent reported that they used up all or most of their savings.

In addition, one-fifth of freelancers (20%) reported that they found themselves with no money to cover basic living expenses such as rent and bills after an experience of late payment.

A further 19 per cent stated that they had to borrow money from friends and family whilst 17 per cent indicated that they had to withdraw money from their business.

Other responses when asked about the financial consequences experienced as result of late payment included having no money to cover work-related expenses (17%), not being able to pay taxes or complete self-assessment on time (9%) and having to borrow money from a non-bank financial institution (8%).

Concerningly, five per cent of freelancers reported that they, as a result of late payment, have had to register for income support such as Universal Credit whilst an additional five per cent also indicated that they have had to face withdrawal penalties for accessing savings such as pension funds early.

Experienced nonpayment for completed work.

Percentages do not add up to 100% because respondents were able to select multiple responses

In order to understand how experiences of late payment impact on freelancers’ mental health, we asked whether they had suffered from any negative effects often associated with poor mental health as a result of late payment.

Almost half (49%) of freelancers reported that they felt stressed or anxious as a result of late payment whilst almost one in three (31%) indicated that they felt less productive due to an instance of late payment.

A further 28 per cent reported that they lost sleep over worry and 26 per cent experienced a lack of confidence as a result of late payment.

Other responses included feeling unable to concentrate on work (24%), feeling depressed (22%), experiencing feelings of inadequacy or failure (19%) and finding it hard to make decisions (14%).

Concerningly, 13 per cent also reported experiencing mental health problems whilst nine per cent indicated that they had experienced relationship breakdowns as a result of late payment.

On the other hand, almost one in three freelancers (30%) reported that they have not experienced any negative effects of late payment on their mental health.

Negative effects experienced as a result of late payment.

Percentages do not add up to 100% because respondents were able to select multiple responses

In order to understand how the actions of the sector can mitigate the potential for late payment, we asked freelancers which measures they currently adopt to ensure prompt payment.

The overwhelming majority of respondents (76%) reported that they make sure to invoice their clients on time in order to ensure timely payment whilst 74 per cent reported that they maintain good client relationships.

One in three freelancers (34%) also stated that they frequently chase for late payments whereas 23 per cent indicated that they go further and include a billing schedule in their contractual agreement or bill their client in instalments.

Other measures adopted by freelancers to ensure prompt payment included using accounting software that sets up recurring reminders and alerts (22%), asking for upfront payment or a deposit (17%), including penalties for late payment in the contractual agreement such as charging interest (16%) and not delivering the work until payment is received (10%).

A further eight per cent reported that they get customers to pay by standing order or direct debit whilst six per cent offer a payment plan to clients who have troubles paying on time and 5 per cent actually offer a discount for prompt payment.

Measures adopted to ensure prompt payment.

Percentages do not add up to 100% because respondents were able to select multiple responses

While late payments have long been a scourge to freelancers, the cost-of-living crisis means that their impact is even more damaging. Bills and other household costs have risen exponentially in recent months and without the safety of regular payments, many more contractors will be forced to rely on savings, credit cards and overdrafts to survive.

With the mental health of contractors suffering and the amount owed per year rising to £5,230 – up from £5,140 in 2020 – government and business leaders need to act now. The government must build upon its work to improve commercial payment practices by providing an even stronger incentive for companies to pay their freelancers promptly. For business leaders, they need to understand that their actions impact their reputation as well as the livelihoods of thousands of freelancers that help drive growth for their companies and the wider economy.

Policy Recommendations

• Make 30 days the UK’s standard commercial payment term. As the number of people generating income from self-employed work increases, the need to ensure that freelancers and side-hustlers are paid within a reasonable timeframe becomes more urgent.

However, our latest research suggests that despite agreeing payment terms with their clients, it is not uncommon for freelancers to receive payment weeks or even months after the deadline has passed, leading to stress, the depletion of savings and a reliance on borrowing to cover essential costs.

By making 30 days the UK’s standard commercial payment term, with new provisions to make it more difficult for large businesses to propose longer terms, government can help minimise a key driver of income volatility for millions of self-employed and other small businesses.

• Back the Small Business Commissioner with a bigger budget for advice, mediation, and raising awareness of payment rights. By lobbying the UK’s largest businesses and supporting small suppliers with payment disputes, the Small Business Commissioner plays an important role in making the case for paying suppliers promptly.

With the Commissioner successfully unlocking over £1 million in late payments in 2020/21, we believe there is a strong case to back the work of the Commissioner’s office with more resources and staff, generating even better returns for the UK’s smallest businesses.

• Build a SME online dispute resolution platform. Building on the Online Court Money Claims pilot and the proposal and feasibility study carried out by Lawtech UK and the Ministry of Justice, government should commit to building an online dispute platform for small enterprises.

The platform could allow for a ‘one-stop-shop’ for the self-employed and small businesses to negotiate, mediate and settle disputes with binding outcomes whilst also reducing the judicial caseload for payment disputes.

The accessibility of such a platform would also encourage affected SMEs to press forward with payment recovery and disputes, rather than be put off by judicial proceedings.

• Include payment practices within the remit of company audit committees and require them to report payment practices in annual reports. With large businesses already required to publish their payment practices under Duty to Report regulations, we’re backing the Federation of Small Business’ call for legislation to ensure payment practices, and their impact on key suppliers, are considered at company board level.