Deposits vs Retainers: Are They Refundable?

Do you know the difference between the terms “Deposits” and “Retainers”? Did you know one is usually refundable and one usually isn't? Let’s discuss the differences between “Deposits”, “Retainers”, and/or “Reservation Fees/Booking Fees”, whether using a certain term allows for refundable payments, and which term The Legal Paige recommends you should use in your service-based contract!

Deposit? Retainer? Reservation Fee? Booking Fee?

Historically the term “deposit” is used to reserve something, like a rental property, and is usually returned once the service or item has been completed. This term “deposit” is rooted in landlord-tenant law, but has since become commonplace in everyday American life to mean a pre-payment for something. A “retainer,” on the other hand, is defined as a fee paid in advance to hold a service and is typically non-refundable. This term is primarily used in legal services, where a client pays a retainer to an attorney to represent them.

Often small business owners will use the terms “deposit” and” retainer” interchangeably. Some people even use the term “reservation fee” or “booking fee” instead. All of them are intended to be a fee paid upfront to reserve something…. BUT they can all legally be interpreted differently when written in a contract. It’s important to understand that all these terms are legal terms of art, and their definition varies based on case law precedent in each state.

If you haven’t defined these terms in your contract, you may run into difficulties if the parties to the contract end up disagreeing on what the term means–especially if refunds are on the line. And, if the dispute gets to court, a judge will interpret the meaning of the term in the contract based on legal precedent. For example, if you use the term “deposit”, a judge may default to landlord-tenant law precedent, which may not be applicable to your industry and could be less favorable to your situation.

At The Legal Paige, we recommend using the term “Retainer” because the case law favors the retainer language as being nonrefundable, whereas “Deposit” does not have that same legal ramification. Again, the term “deposit” has a lot of case law that deems it a refundable payment in certain circumstances. If you don’t want to use the word “Retainer”, the terms “Reservation Fee” or “Booking Fee” also suffice, just as long as you clearly define the term in your contract to avoid confusion.

How to define the term so upfront fees are non-refundable...

Once you decide what term you should use in your contract you need to define the term clearly and conspicuously in your contract. The key is to convey to the client what amount of the upfront fees paid that you are allowed to keep as the service provider in the event that the client cancels voluntarily. This is important to outline definitively in your contract because you have reserved a date on your calendar for them which prevents you from taking on other clients during that time period.

For example, let's say you're a wedding photographer and a client requests a popular date that is known at the beginning of the year to book up quickly. The first person to book you for that date is essentially paying you a booking fee to reserve your services and book you out for that day. Thus, if they cancel voluntarily sometime thereafter, you need to clearly define in your contract what portion of that fee you are entitled to and explain that any services rendered up to the date of cancellation are to be paid by the client (usually in addition to the booking fee).

It's also important to note that regardless of the term you use, you can make it non-refundable if you clearly state it in your contract as liquidated damages. 

The industry standard is for the non-refundable retainer to be around 25-30%. You can also itemize your services and offer payment plans. For instance, wedding planners should always use payment plans, which can include a non-refundable retainer that covers the initial booking fee and then additional payments for services provided up to the wedding date. You can justify this fee by breaking it down, say, into separate payments of 20% each. This way, you can keep the next payment as work progresses toward the wedding date. If a client cancels closer to the wedding, you can keep up to 60-80% of the fees paid, as stated in the contract, versus just the 20% initial booking fee.

There is no one-size-fits-all policy for a non-refundable Retainer. Some prefer to keep 50% of the total service cost. A flat fee retainer could be a reasonable alternative. We discuss this at length in THIS podcast episode. A flat fee that is paid by the clients upfront covers booking your services, initial communications and time spent on the client, and the opportunity cost of rejecting other potential clients for the same date. We really like flat fees as a booking fee here at The Legal Paige because it's easier to explain to a judge why you chose that particular amount for every client instead of charging different rates (if it's percentage-based) on various package prices.

It is also extremely important to include the language "liquidated damages" in your contract’s fee clause. Liquidated damages refer to the specific amount of money agreed upon by both parties in the contract if say “x” occurs. Here, all this means is that all parties have agreed that the liquidated damages for a voluntary client cancellation equals the Retainer fee paid. This legally helps ensure that the client can’t ask for a refund of the Retainer since they already agreed to it being liquidated damages.

Understanding the legal differences between "Deposits," "Retainers," "Reservation Fees" and “Booking Fees” is crucial for any small business owner who sends clients service-based contracts. Using the wrong term can lead to confusion and unfavorable legal outcomes. At The Legal Paige, we recommend using the term "Retainer" (or “Reservation Fee” or “Booking Fee”) and clearly defining it in your contract to avoid any ambiguity. Don’t leave out what portion of that upfront fee is non-refundable and why, and that it will be liquidated damages if cancellation occurs.

Need a proper fee clause for your contract? Check out our full-length template contracts HERE, which include specific fee clauses tailored to your industry.

THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.

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