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I (Washington State, USA) worked, under contract, for an LLC (Los Angeles, California, USA) and never received payment. I was considered an independent contractor; contract specifies Californian jurisdiction. I have limited legal counsel and anticipate legal action in small claims court. I anticipate that no representative of that LLC will come to court, and expect a default judgment. For purposes of this question, let's say that the contract specified US$500 for my services, and I have received none of this.

What awards can I expect? In what ways would a judge's decisions about awards be legally limited? $500? Interest? Time spent pursuing collections? Filing fee? Anything else? My research so far suggests $500 plus reasonable (less than credit card) interest.

I am primarily interested in this because it doesn't seem that there are any legal incentives for LLCs to actually pay their contractors; if only a fraction of contractors seek justice, and the award never exceeds the originally agreed upon amount, then the rational decision would seem to be, don't pay the contractor. Are there any other legal disincentives for this behavior?

I'm aware that Los Angeles has recently passed a Freelancer Protection Act, but to my knowledge, I am not covered by this act-- I am located outside of LA and the contract was entered into prior to the passage of this act.

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    @ComicSansSeraphim Would it be more appropriate if I removed some information? Which information would you like removed? Jun 7, 2023 at 18:29
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    As an independent contractor you send them a bill. If they don’t pay, you get a lawyer. If an LLC is unable to pay you may be out of luck. In some countries you can get insurance for payment, they will have to accept the contract and if they don’t, you shouldn’t accept it either.
    – gnasher729
    Jun 7, 2023 at 18:31
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    And entering a contract to pay you for your work, if you have actually no intention to pay, is likely fraud (criminal).
    – gnasher729
    Jun 7, 2023 at 18:49
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    @gnasher729 "If they don’t pay, you get a lawyer." For the amount at issue it is not worth. The OP is better off pursuing the matter in Small Claims, where he will get some helpful exposure to litigation. Jun 7, 2023 at 20:38
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    @ComicSansSeraphim I see this as a two part question a) is this what the law says in this situation? b) why is the law written that way? This seems to create perverse incentives. Looks totally legitimate to me.
    – quarague
    Jun 8, 2023 at 6:40

1 Answer 1

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What awards can I expect? In what ways would a judge's decisions about awards be legally limited? $500? Interest? Time spent pursuing collections? Filing fee? Anything else? My research so far suggests $500 plus reasonable (less than credit card) interest.

Your lawsuit would be for breach of contract, probably filed in California small claims court for this small dollar amount.

An award for breach of contract includes:

  1. the amount not paid pursuant to the contract,

  2. pre-judgment interest from the date that payment was due at the statutory rate in California (the legal rate specified in the contract applies until the contract is superseded by the verdict, but if the prejudgment interest rate is not specified in the contract, the rate is ten percent per annum from the date of the breach, California Civil Code § 3289),

  3. post-judgment interest at the statutory rate in California (10% per annum in a contract if not otherwise specified), and

  4. out of pocket costs incurred in filing the lawsuit (typically, the filing fee, the service of process fee, postage, copying costs incurred for trial exhibits, and any court fees incurred to collect the judgment if it is entered).

Attorney fees are not available unless the contract says so. You are not entitled to any recovery for time spent pursuing collections.

Often you have have a collections agency collect it for a percentage of the amount recovered (probably 50% in a claim of this size) plus a small fee, although they might not accept such a small dollar amount debt to collect. The main virtue of this is that it hurts the credit of the person who owes the money, a harm to the non-paying customer that is often far worse than not paying the amount owed on time.

Are there any other legal disincentives for this behavior?

A well drafted contract can provide for an award of attorney fees incurred in collecting the debt, can set a non-usurious interest rate and late fees for non-payment, and can take steps like requiring a deposit up front, or consenting to service of process by mail, to make collection more likely and to create stronger incentives to pay.

Also, if the non-payment rate is low enough and the value of your time doing what you normally get paid to do is high, it may not make economic sense to pursue bad debt which takes some time and some money to get a small potential recovery, as opposed to letting it slide and doing more work that does pay.

A small claims lawsuit is probably ten to thirty hours of work for which you will not be compensated even if you win. Depending upon your average hourly rate for your labor, and the percentage of your billings that go uncollected, it may not make economic sense to collect the unpaid bill, or you may want to delegate the job to someone else whose effective hourly rate of labor value is lower.

Courts are cost effective places to collect large debts, and can be cost effective if many people owe you money and you can mass produce your collections process (as, for example, credit card companies do). But courts are often not cost effective for collecting one off small dollar amount debts, despite the streamlined process and reduced filing fees that are available in small claims court.

if only a fraction of contractors seek justice, and the award never exceeds the originally agreed upon amount, then the rational decision would seem to be, don't pay the contractor.

Consumers are not purely rational actors on a transaction by transaction basis in these matters. The vast majority of the time, people pay as agreed even though they could get away with paying less by forcing the person who did business with them to sue them to get paid. On a case by case basis, this is often not rational, but as a long term strategy for all transactions that a consumer enters into, it often does make rational sense.

In small dollar transactions, blacklisting people from future business and harming their credit records is usually enough of an incentive to make uncollectible invoices an acceptable cost of doing business. But a good business person does evaluate every customer to whom trade credit is extended for creditworthiness if the customer does not pay in advance.

On the other hand, as a business person, you may have a strategic interest in pursuing every unpaid invoice even if it isn't cost effective to do so when considering that unpaid invoice in isolation, in order to instill in your customers the knowledge that when you say you will sue them if you aren't paid, that you are making a credible threat. This may discourage people from not paying you in the first place.

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    not just the credit strike, but also the recovery rate is better.
    – Trish
    Jun 7, 2023 at 19:21
  • In general this is a good explanation of how this process works and what the incentives are but I'm not sure how much of that applies if the debtor is a part of the government. A bad credit rating would definitely be a negative for OP but does it apply to the city of Los Angeles and if so does it make any difference to the city? As a one-person company doing services for the city I would also strongly doubt OP has any power to change the contract in his favor in practice. It will probably be a take-it-or-leave-it deal the city offers.
    – quarague
    Jun 8, 2023 at 6:47
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    @quarague Is there anything to suggest the debtor is "part of the government"? The OP talks of having worked for an LLC.
    – TripeHound
    Jun 8, 2023 at 7:01
  • @TripeHound Seems like I overlooked the unfamiliar term and focused on the Los Angeles afterwards, my bad.
    – quarague
    Jun 8, 2023 at 7:02
  • I have never done this, so I am unfamiliar, but isn't it a better idea to sell the receivable at a discount (factoring) rather than writing it completely off? Jun 8, 2023 at 15:18

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