A common question TLP gets asked almost daily is whether you should use the term “retainer” or “deposit”. And some people believe you can use these terms interchangeably in your contracts. It makes sense; both are fees paid in advance by clients for your services, right?! NO. By using the terms interchangeably, you are implying two different ideas of how fees will be used and if they are refundable. This may seem tedious but it needs to be very clear in your contracts to avoid any confusion. Let's dive a little deeper to see the difference between the two.
A retainer is a fee paid in advance to hold your services. Typically, a retainer is nonrefundable and should be seen as “securing” services for a future date. Retainer fees do not necessarily guarantee a final product and are used to cover the initial costs of the services being rendered and/or act as a retainment for your services on a certain date (or time period on a certain date) whereby no one else could book your services. Essentially, a client will pay an agreed upon lump-sum amount for your services in advance (usually this is a portion of your total fee for services). The first portion of your service hours should be accounted for in the retainer—such as how long it takes you to book your client, set up questionnaires, communication back and forth, etc.—AND your retainer would account for the amount of work you would potentially lose on that date you secured for your client should they cancel or reschedule.
A deposit is a payment towards the total fee for services. Typically, a deposit is refundable once the service has been completed or it can be applied to the client’s total costs. A deposit is seen as putting down a partial-payment for services rendered with additional payments being made throughout your agreement with a client. The issue is that the legal term “deposit” is mostly seen in landlord-tenant law. We are all very accustomed to paying a “security deposit” in order to secure our rental for potential damages that could occur. Then, you likely have to pay the additional first month’s rent. Its basic knowledge then that the security deposit is refundable to the renter upon checkout and if no damages have occurred and all rent has been paid.
Thus, using the term deposit gets sticky for service providers. If you don’t actually perform the services (e.g. a cancellation or rescheduling happens), then your client could ask for their “deposit” back since it was supposed to go towards the total fee for services that you never performed. Also, deposits can often lead to clients arguing that the deposit should potentially be transferable because the services were never performed and that you could perform them at a later date because they already put down the money.
Why Is Choosing The Correct Term Important?
Using the wrong term in your contract will have different implications if being reviewed in court or by an attorney. Case law precedent for the term “retainer” is rooted in attorney-client law and the term “deposit” is rooted in landlord-tenant law. Unfortunately, there isn’t a lot of case law out there for you to hang your hat on concerning service providers using either term. Thus, you’ll be stuck with the default rules under those cases for whether your retainer/deposit is refundable if your legal issue gets to court (and the case law that is controlling in your state may be different than case law that your friend in another state is basing their contract off… so don’t just take someone’s word that told you to use “x” term in your contract). This is a mistake that can cost you a lot of money if you run into complications with a client.
We Suggest Using the Term ‘Retainer’
The one thing to remember is that whatever term you do choose to use in your contract, keep it consistent throughout (don’t interchange “retainer” and “deposit”). We here at TLP choose to go with the word “retainer” in our contracts because it's easier to describe in a fee section and also doesn’t have near the refundability complications that the term “deposit” does (you could also use the term ‘Reservation Fee’ or ‘Booking Fee’).
Then, just be super clear what that upfront amount is for. The more detailed you are, the better off you’ll be in a legal dispute. Courts will look more towards how the clause language works than the labeling of the term itself. So make sure you explain that it works specifically as a fee for holding the date, that it is non-refundable, and also serves as liquidated damages in the event of client cancellation!
The TLP Golden Rule: Always use the phrase “LIQUIDATED DAMAGES” in your fee clause!
Most importantly, delineate in your fee clause that the ‘Retainer’ payment the client is making at the beginning is anadvanced payment for services which will be deemed “liquidated damages” if a breach or cancellation occurs. Legally speaking, “liquidated damages” is an agreed upon nonrefundable amount that a client pays as a predetermined amount of money that must be paid as damages for failure to perform under a contract. Most service-based contracts will use the term ‘Retainer’ PLUS language surrounding liquidated damages to make it absolutely clear to clients that the retainer amount is only related to the retainment of services on “x” date and that it amounts to liquidated damages should the client decide to cancel the contract or breach the contract in any way.
You may still be thinking “This is ONE little word, why is it so important to say it correctly in my contract?” Well, again, it completely depends on the services you are providing, whether you want there to be a refundability option, and if you clearly lay out why the client is paying a certain amount upfront. You should take time to consider which option is most beneficial for your business and ensure that it is used correctly in EVERY contract you sign. If you need more help on this, do not hesitate to reach out for legal advice!
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.