Kickbacks and Referral Fees
Here’s an issue we run across frequently: Kickbacks and Referral Fees
What’s the difference between the two?
First off, we can define a kickback as a payment to someone solely for making something happen for the benefit of the payer, generally related to business. The word kickback is often used in the same breath right before or after the words corruption and scandal.
It’s often corrupt and scandalous because the payer got a job or a contract by an unethical shortcut, such as knowing the right person in power who’s willing to corrupt themselves and take money rather than finding the most qualified person for a job, and causing an end-user to pay more down the line.
Wasted money going to a potentially ineffectual service provider.
Thus, the powerbroker comes out ahead, the payer comes out ahead, and the client gets the shaft – even if the job comes out great, they still payed more.
How about a referral fee? That might be exactly the same as a kickback but could also be a legitimate way to develop business a lot cheaper and more focused than advertising or attraction marketing via social media, or simply marketing on Facebook (are they still around?).
Are they illegal – or unethical?
If a property manager or a building architect consistently refers a friend to consult to their own clients, and the friend pays the manager or architect a referral fee of say, 5% of their revenues on a referred job, and the fee is disclosed to the client, and the friend doesn’t upcharge the client for that 5% loss of revenues, then there should be nothing wrong with it.
Everyone comes out ahead, even the friend, because their increased workload outweighs the 5% loss.
Those are a lot of ifs, and that’s why it might be illegal to give a referral fee in some industries or locations. I don’t offer legal advice here. If you want to stay out of trouble, ask your attorney.
An even cleaner way to handle a business-development fee like this is to pay a management fee, where the friend contracts directly to the manager/architect, the manager/architect earns that fee by doing more for the client than simply referring the friend to the job, such as managing the friend’s role on the team.
It might be prudent to disclose the fee to the client, and definitely don’t add any costs to the client to cover the management fee. That friend is already getting a job they might not have. They don't need to jack up their fees - that's just greedy.
Should you know about them?
There are a lot of ways to cheat in business, and sometimes unethical things happen with the most innocent of intentions. Better to inform ourselves wherever we can.
Generally speaking, if you're a professional and you want to avoid even the perception of corruption, then consider an open-book policy for all stakeholders. If you’re a consumer, you should ask if there are any hidden fees and whether you’ll be covering them in the end.
And be sure to know the rates you’re paying and what the conventional fees are for all the people working on your job. You can ask around, or find someone who knows the industry but is not on your project and buy them lunch to pick their brain about average costs. Most people will be happy to share, especially for a free lunch. Just be sure to get more than one opinion.
Like I said, I don't offer legal advice. Talk to your attorney, your accountant, and anyone else you trust to help clarify your particular situation.