During our recent videoconference discussion about fees, members raised a few questions about the disclosure and legal risks of referral fees.
For KBDi members, these fees are generally associated with partnerships between designers and cabinetmakers. That is, when a designer successfully connects a client and cabinetmaker, the cabinetmaker may pay the designer a referral fee.
We approached our legal partners, Sprintlaw, with these questions, and they offered the following advice.
This information is intended by Sprintlaw to provide general information and may not be comprehensive or cover all potential areas of legal risk for your business. It is not to be interpreted or relied on as professional legal advice, and we encourage you to contact Sprintlaw and seek professional advice if these matters are relevant to you.
In short, it is generally acceptable for members to have referral partnerships. I.e. where designers refer work to cabinetmakers and, in return, receive a referral fee.
There are a few legal risks to be aware of with referral partnerships:
- If the partner (e.g. cabinetmaker) provides poor service to the client, the designer could be liable for making a negligent referral.
- If the referral fee is not disclosed to the client, this could be argued to be misleading and deceptive conduct under Australian Consumer Law.
- The partner may not pay the referral fees or not accurately disclose or track the referrals that are payable.
To reduce these risks, best practice is to follow these steps (again using the designer/cabinetmaker example):
- The designer should have a Referral Agreement in place with the cabinetmaker, stating that the cabinetmaker will protect the designer from any liability resulting from poor service by the cabinetmaker and be obliged to track and pay the referral fees accurately.
- The designer should include a simple disclosure statement to the client (e.g. over email) when making the referral, informing them of the referral partnership and commission and stating that the designer will receive a commission or benefit.
- The designer should include a referral disclaimer clause in the client contract terms and conditions, stating they will not be liable for any issues with referred services.
Sprintlaw have written a couple of short articles on Referral Agreements here
. They are, of course, happy to assist KBDi members in setting this documentation up where required. If you’d like an introduction, email firstname.lastname@example.org
What about Referral Selling?
Referral Selling is a practice where, for example, a client is told they will only get a discount on their product or service if they refer people and those people also buy that product or service. For example, if a designer said to a client:
“I’ll refund 25% of your fees if you refer me to three friends who buy my services.”
This is where you are inducing a client to buy your services at a ‘discount’ which is dependent on something outside their control. This practice is unlawful under the Australian Consumer Laws and can result in fines.
There are some clear examples of referral selling and other unlawful selling techniques which you can read about here
In a continuation of our informal conversations series, we’ve invited Alex Solo, co-founder of Sprintlaw, to join us for a legal Q and A. Alex will expand upon the above, and while we’ve got him on the clock, he’ll do his best to answer any pre-submitted business-related questions you have. Submit your question in the registration form below, and if you’re in the Zoom Room on Tuesday afternoon, we’ll see if we can line up an answer. Places are limited and reserved for KBDi financial members and partners only. Register here to secure your spot.