When you work as a subcontractor, freelancer, or white-label partner for an agency or prime contractor, nonpayment disputes create unique leverage challenges. The agency often claims it can't pay you because its client hasn't paid. This guide shows you how to recover payment regardless of upstream payment delays.
⚖️ Core Legal Principle: Flow-Through Obligations
In most subcontractor and agency relationships, the prime contractor (agency) is obligated to pay you regardless of whether it has been paid by its client. Unless your contract explicitly makes payment contingent on the prime receiving payment ("pay-when-paid" or "pay-if-paid" clauses), the agency's cash flow problems are not your legal concern.
Exception: "Pay-if-paid" clauses (which make payment contingent on upstream payment) are heavily disfavored and often unenforceable in many jurisdictions unless drafted with extreme clarity.
When to Send a Demand Letter
✅
Work Completed and Accepted
You delivered the work product, the agency accepted it (or passed it through to the end client without objection), and no quality issues were raised at the time.
✅
Payment Terms Expired
Your invoice due date has passed (Net 30, Net 60, or per your agreement), and the agency has not paid or proposed a concrete payment plan.
✅
"Client Hasn't Paid Us" Excuse
The agency is blaming slow payment on upstream collection issues but hasn't offered evidence of a valid "pay-if-paid" clause.
✅
Non-Circumvention Concerns
You're concerned the agency might be delaying payment to pressure you into direct arrangements with the end client, violating non-circumvention terms.
✅
Platform Policies (Upwork, Fiverr, etc.)
If working through a freelance platform, you've exhausted platform dispute resolution and need to escalate to formal demand or small claims.
Structuring Your Subcontractor Nonpayment Demand Letter
📝 Essential Components
Contract Chain Diagram: Clearly map the relationship: End Client → Prime/Agency → You (Subcontractor). This establishes that you have no direct relationship with the end client and must rely on the agency.
Your Agreement with the Agency: Summarize your subcontract terms, including scope, deliverables, payment terms, and critically, whether payment is contingent on upstream payment.
Performance Summary: Detail what you delivered, when, and evidence of agency acceptance (forwarding to client, deployment, "looks good" emails).
Agency's Payment Obligation: State clearly that the agency owes you regardless of its client payment status, unless the contract has an enforceable pay-if-paid clause.
Invoice History: List all unpaid invoices, due dates, amounts, and any partial payments received.
Upstream Payment Excuse: Address the agency's "our client hasn't paid" defense directly—explain that this is not a valid reason to withhold payment unless contract explicitly allows it.
Non-Circumvention Notice: If applicable, note that you have not and will not contact the end client directly, and you expect the agency to honor its contractual obligations.
Platform Reputational Leverage: For Upwork/Fiverr disputes, note that nonpayment may result in negative reviews, platform reporting, and damage to agency's freelancer reputation.
Demand and Deadline: Specify exact amount due, payment method, and 10-15 day deadline.
Next Steps: Litigation, arbitration, small claims, and (if applicable) reporting to platform or business bureau.
⚠️ Pay-If-Paid vs. Pay-When-Paid
Pay-when-paid: A "timing" clause—payment may be delayed, but the agency still owes you. Generally enforceable.
Pay-if-paid: A "condition precedent" clause—the agency only owes you if it gets paid. Courts require extreme clarity in language and often strike these down as unconscionable. In California and several other states, these clauses are disfavored or unenforceable outright.
Your Strategy: In your demand letter, argue that ambiguous payment language should be read as "pay-when-paid," not "pay-if-paid."
💡 Non-Circumvention as Leverage
Many subcontractor agreements include "non-circumvention" or "no direct contact" clauses. If the agency is slow-paying you, it may be hoping you'll reach out to the end client directly—a violation that gives the agency grounds to withhold payment or terminate.
Strategy: In your demand letter, explicitly state you have not and will not contact the end client, reinforcing that the agency must fulfill its contractual duties. This removes one of their potential defenses.
Freelance platforms have built-in dispute resolution, but often favor the paying party (the agency). After exhausting platform processes:
Emphasize platform policies: Note that nonpayment violates platform terms and may result in account suspension or negative feedback.
Small claims threshold: Many platform disputes fall under small claims limits ($5k–$10k depending on state), making formal litigation accessible and fast.
Escrow failures: If the agency failed to fund escrow or improperly released funds, this may be a platform violation separate from contract breach.
📨 You're an Agency That Received a Subcontractor Demand Letter
As an agency or prime contractor, receiving a nonpayment demand from your subcontractor can be stressful—especially if your own client hasn't paid you yet. Here's how to assess your exposure and respond strategically.
🔍 Immediate Triage Questions
What does your subcontract say about payment timing? Is payment explicitly contingent on upstream payment, or are you unconditionally obligated?
Did the subcontractor perform as agreed? Were deliverables timely, within scope, and accepted by you or your client?
Have you been paid by your client? If not, is your client disputing quality, or are they just slow?
Do you have insurance or indemnity coverage? Some professional liability or E&O policies may cover subcontractor payment disputes.
What is your reputational risk? On platforms like Upwork, negative reviews or disputes can significantly damage your business.
Response Strategy Options
💰
Pay Promptly If You Owe It
If your contract doesn't have a valid pay-if-paid clause and the subcontractor performed, pay them. Delaying only increases exposure to interest, attorney's fees, and litigation.
📄
Assert Pay-If-Paid Defense (If Valid)
If your contract clearly conditions payment on upstream payment, provide the subcontractor with proof that your client hasn't paid and explain your timeline for collection.
⚖️
Quality Defense
If the subcontractor's work was defective or incomplete, document this thoroughly and explain why you're withholding payment (or why you're only paying a reduced amount).
📆
Propose Payment Plan
If cash flow is tight but you acknowledge the debt, offer a short-term payment plan (3-6 months) with good-faith partial payment upfront.
🔄
Tender Subcontractor to Upstream Client
In some cases, you may be able to bring the subcontractor and client together to resolve payment directly, though this requires careful contract navigation to avoid non-circumvention violations.
⚠️ What NOT to Do
Ignore the demand: Silence often leads to small claims litigation or platform escalation, both of which are costly and damaging.
Blame the end client without contractual basis: "Our client hasn't paid us" is not a defense unless your contract explicitly makes payment contingent.
Threaten or retaliate: Threats to give negative reviews, withhold future work, or report non-existent contract violations can backfire and expose you to counterclaims.
Delay without communication: Even if you can't pay immediately, responding professionally and proposing a timeline buys goodwill and often avoids litigation.
💡 Upstream Collection Rights
If you're stuck between a demanding subcontractor and a slow-paying client, prioritize your upstream collection efforts. Send your own demand letter to the client, consider arbitration or litigation, and document your good-faith efforts. This may give you negotiating leverage with the subcontractor.
📋 Evidence Checklist for Subcontractor Nonpayment Claims
For Subcontractors (Claimants)
📄
Subcontract Agreement
Written contract, email agreement, or platform order defining scope, payment terms, and (critically) whether payment is contingent on upstream payment.
✅
Deliverables and Acceptance Proof
Files delivered, agency emails acknowledging receipt, evidence that agency forwarded your work to their client, or proof of deployment/use.
💬
Communication History
Email threads, Slack messages, platform messages showing project milestones, approval, and any discussions about payment delays.
🧾
Invoice Records
All invoices sent to the agency, showing amounts, dates, due dates, and descriptions of work performed.
🔔
Payment Reminders
Follow-up emails or messages requesting payment, and any agency responses ("our client is slow," "we'll pay next month," etc.).
🚫
Non-Circumvention Compliance
Evidence that you have not contacted the end client directly and have honored all non-solicitation and confidentiality terms.
For Agencies (Defendants)
📋
Subcontract Terms
Your written agreement with clear language on payment timing and conditions—especially pay-if-paid or pay-when-paid clauses.
🔍
Quality Issues
Documentation of defects, client complaints, rework requests, or scope deviations that justify withholding payment.
💳
Upstream Payment Status
Your prime contract with the end client, invoices you sent them, and proof of their payment status (paid, disputed, pending).
📧
Communication About Delays
Any messages where you informed the subcontractor of payment delays, reasons, and expected timelines.
💰 Settlement Patterns in Agency-Subcontractor Disputes
Agency-subcontractor nonpayment disputes typically settle quickly once both sides understand their exposure. Here's what to expect:
📊 Typical Outcomes
No valid pay-if-paid clause, clear performance: 85-100% recovery within 30-60 days, often with payment plan.
Valid pay-when-paid clause, agency actively collecting upstream: 70-90% recovery, sometimes delayed 60-120 days pending upstream resolution.
Quality disputes: 50-75% recovery depending on severity and documentation.
Platform disputes (Upwork, Fiverr): 60-90% recovery; agencies often settle to avoid negative reviews and platform penalties.
Leverage Factors for Subcontractors
⚖️
No Pay-If-Paid Clause
If the contract is silent or ambiguous on payment conditions, courts interpret this as unconditional payment obligation—huge leverage for you.
💬
"Client is Slow" Admissions
Agency emails admitting they owe you but blaming the end client are powerful evidence of liability.
🌟
Platform Reputation Risk
For Upwork/Fiverr agencies, negative reviews and dispute escalations can destroy their ability to attract future freelancers—strong settlement pressure.
Small Claims as Fast Track
Most subcontractor nonpayment claims fall within small claims limits ($5k-$10k depending on state). Benefits:
Speed: Hearing within 30-90 days of filing in most jurisdictions.
Low cost: No attorney required; filing fees typically $50-$200.
Settlement pressure: Many agencies settle once they receive small claims summons to avoid court appearance and judgment.
✍️ Subcontractor Nonpayment Demand Letter Snippets
Opening – Contract Chain Diagram
This letter constitutes formal demand for payment of $[AMOUNT] owed under our subcontract agreement for services I performed on your behalf.
Contract Chain:
• End Client: [CLIENT NAME]
• Prime Contractor/Agency: [AGENCY NAME] (you)
• Subcontractor: [YOUR NAME] (me)
I performed [DESCRIBE SERVICES] pursuant to our [written agreement / email confirmation / Upwork contract] dated [DATE]. All work was delivered on time, accepted by you, and (to my knowledge) forwarded to your client without objection.
Payment Obligation (No Pay-If-Paid Clause)
Our agreement requires you to pay me within [NET 30 DAYS] of invoice date. Critically, our agreement contains no language conditioning my payment on your receipt of payment from [END CLIENT].
Under California law and general contract principles, your obligation to pay me is independent of your client's payment to you. You assumed the risk of client nonpayment when you engaged me as a subcontractor.
The fact that [END CLIENT] has not yet paid you does not excuse your breach of our subcontract.
Addressing "Our Client Hasn't Paid" Defense
In your emails dated [DATES], you stated that you cannot pay me because [END CLIENT] "hasn't paid you yet." I understand your cash flow frustration, but this is not a valid legal defense.
Our subcontract does not include a "pay-if-paid" clause. To be enforceable, such clauses must be drafted with extreme clarity and are disfavored by courts in most jurisdictions. Your payment obligation to me is unconditional.
If you believe our contract contains such a clause, please identify the specific language and section. Otherwise, payment is due immediately.
Non-Circumvention Compliance
I have fully honored the non-circumvention and confidentiality provisions of our agreement. I have not contacted [END CLIENT] directly, nor have I attempted to establish any direct business relationship with them.
I expect you to honor your contractual obligations with the same professionalism. Delaying my payment in hopes that I will violate the non-circumvention clause is not acceptable and will not succeed.
Platform Leverage (Upwork/Fiverr)
This engagement was performed through [Upwork / Fiverr], and nonpayment violates both our contract and platform policies.
If this matter is not resolved by [DATE], I will:
• File a formal dispute with [Platform]
• Leave an accurate review detailing the nonpayment issue
• Report this matter to platform support for potential account penalties
I prefer to resolve this professionally, but I will use all available remedies to protect my rights.
Closing Demand with Small Claims Warning
I demand payment of $[AMOUNT] no later than [DATE] ([NUMBER] business days from this letter).
If payment is not received by that date, I will file a small claims action in [COUNTY] County without further notice. Small claims judgments accrue interest at the statutory rate, may result in wage garnishment or bank levies, and can negatively impact your business credit.
This matter can be resolved quickly and professionally. Please remit payment immediately or contact me to discuss a payment plan.
[SIGNATURE BLOCK]
⚖️ How I Handle Agency-Subcontractor Payment Disputes
I represent both subcontractors seeking to recover payment and agencies responding to subcontractor demands. My approach focuses on efficient resolution and minimizing business disruption.
For Subcontractors (Claimants)
Contract Review: I analyze your subcontract to determine whether payment is unconditional or contingent on upstream payment, and I evaluate the enforceability of any pay-if-paid language.
Demand Letter Drafting: I prepare a comprehensive demand letter that addresses the agency's likely defenses (client nonpayment, quality issues) and leverages all available pressure points (platform policies, small claims, attorney's fees).
Small Claims Representation: For claims within small claims limits, I assist with filing and case preparation. In some jurisdictions I can appear with you; in others I prepare you for self-representation.
For Agencies (Respondents)
Exposure Assessment: I review your subcontract and the subcontractor's performance to determine your actual liability and realistic settlement range.
Response Drafting: I prepare a professional response that protects your interests without making unnecessary admissions or escalating conflict.
Upstream Collection Strategy: If your nonpayment is due to your client's nonpayment, I advise on parallel collection efforts against your client to resolve the full payment chain.
Schedule a Subcontractor Payment Dispute Consultation
Whether you're a freelancer seeking to recover payment from an agency or an agency responding to a subcontractor demand, I can help you understand your rights and develop an efficient resolution strategy.
Use the Calendly link below or email me directly at owner@terms.law.
Generally, no—unless your subcontract contains a clear "pay-if-paid" clause. Most contracts either say nothing about upstream payment (meaning the agency owes you unconditionally) or have "pay-when-paid" language (which allows delay but not complete non-payment). Courts heavily disfavor pay-if-paid clauses and require extreme clarity to enforce them.
No, unless you have clear permission from the agency. Most subcontracts include non-circumvention or non-solicitation clauses that prohibit direct contact. Violating these can give the agency grounds to withhold payment or terminate. Keep all collection efforts focused on the agency.
Start with the platform's dispute resolution process. If that doesn't resolve it, you can send a formal demand letter and, if necessary, file in small claims court. Platforms dislike agencies that abuse escrow, and negative reviews/disputes can pressure settlement.
Demand letter: Flat fee $450. Hourly rate $240/hr for extended negotiation. Contingency 33-40% for litigation if appropriate.
If your subcontract doesn't have a valid pay-if-paid clause and the subcontractor performed properly, yes—you should pay to avoid escalating legal exposure. Consider this a cost of doing business and focus your collection efforts on your client. Delaying only adds interest, potential attorney's fees, and reputational damage.
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