Easy explainer of referral fees

Recommendations are invaluable in the world of business, as it shows trust and belief in your service. When a third party recommends your service, or directs clients to your business, they may charge a referral fee (sometimes called a ‘spotters fee’) in return. Keep reading this Business Kitz article to find out what referral fees are and how they work!

What are referral fees?

Referral fees, also known as a ‘spotter fee’, are a fee charged by a third party or external person when they recommend your business to potential clients. This is a key marketing strategy implemented by many businesses, as it serves as an avenue for funnelling customers towards your service. We recommend you create a referral fee agreement as a formal contract that thoroughly establishes the amount, conditions and terms between the referring party and your business.

How are referrals beneficial?

Traditional ads can become generic and boring, missing a sense of humanism and trust. Alternatively, a personal recommendation is characterised by trust, personality and relationship. This is the value of word of mouth. It is best to connect with third parties or individuals that have a web of contacts that you would not usually have access to.

What do these referrals look like?

Some businesses may have partnerships implemented with related services to facilitate this transaction of business. This may be in the form of a discount, or some other incentive, provided for the affiliated service. However, it is important to be transparent with your customers and obtain their consent before providing their information to the service being recommended.

How much is charged for a referral?

If referrals are given by a third party business that has a fiduciary relationship with your business, this information should be established in a referral fee agreement. As there is no standard amount charged across the board, the price can be negotiated between parties, or a business may have policies in place that outline their fees. When a deal is reached that the party agrees upon, it should be put in writing and signed by both parties. This figure may be either a percentage of a sale, or a fixed amount.

In what context are referral fees appropriate?

It is important to consider the nature of your relationship with the customer when making recommendations. When referring a service to someone else, your relationship with the customer should be a fiduciary relationship.

What is a fiduciary relationship?

A fiduciary relationship means that there is an established level of trust and responsibility, especially in a professional context. As a result, the customer should be aware of the relationship the seller has with the third party recommender, to ensure the referral is genuine and correct. An example of this in relation to referral fees is the relationship between a solicitor and a client, as outlined by Australian Solicitors Conduct Rules 2012. Solicitors cannot allow their personal interests to conflict with their duty to serve the interests of a client. If a referral fees risks this obligation not being upheld, they should not accept a referral fee.

What are some examples of when a referral fee is charged?

Looking at real estate transactions are a helpful example of referrals at work. The real estate agent is obliged to disclose any referral relationships to the customer when they are referred, and well as the amount of any referral fees they received. This is usually included with information about commission and other details required for the purchase. In return, the seller is also required by law to provide the agent with any relevant fees, accompanied with written confirmation, associated with selling an existing property.

Is it legal to charge referral fees?

These fees are legal if they follow the relevant guidelines and laws. It is essential that there is transparency surrounding the referral, and that consent is always obtained before passing on customer information. Further, these relationships must be fiduciary, and not neglect the duties to upholding the customer’s interest.

Are referral fees taxable income in Australia?

In relation to tax obligations, referral fees are paid to the referee as income, so are taxed in the same way as any other income. If the referral comes from an individual in a fiduciary relationship, an ABN is needed if their income exceeds the usual $75,000 threshold.

Legal advice

Referrals are a great way of gaining business, as well as extending your contact list and website views. As compensation for the referrals made, referral fees may be charged. If you are unsure what is appropriate, or need some extra assistance, our sister company, Legal Kitz, is here to help! You can book a free 30-minute consultation with our experienced and highly qualified team via our website now!