Spotter’s fees, which is another term for referral fees, are payments that service providers pay to third parties as a reward for recommending the business or services that result in customers. Spotter’s fees are not illegal and are even are some businesses’ main business models. Spotter’s fees are an important feature to many businesses and are crucial to their marketing and lead-generation activities. There is often confusion between spotter’s fees and referral selling, which is illegal. This Legal Kitz blog is going to discuss and outline the differences between referral fees and referral selling. If this difference isn’t clearly understood, it can damage your business. This blog is also going to clarify when you should disclose your referral fees to consumers to ensure there is no confusion or frustration on their behalf.
What’s the difference between referral fees and referral selling?
In Australia, referral selling is illegal. Referral selling is when someone wrongly advertises to another that if they purchase a product or service, they will automatically receive some sort of benefit or discount. It is illegal because that would not be correct, as they would only receive benefits or a discount after they refer a second customer and after that customer purchases the product. So essentially, they mislead the customer with an incentive even though there is no assurance that the second customer is guaranteed to purchase the product, which may be the initial reason the customer would purchase the product to begin with. Referral selling falls under section 49 of the Australian Consumer Law, which you can view here.
However, it is perfectly legal to pay people referral fees or spotter’s fees to boost your leads or sales. All that is required to ensure that this is acceptable is transparency with your customers and to obtain their informed consent at the time of referral. If you’re still deciding whether or not to disclose your referral fee arrangement with your customers. Consider these things first:
- Your relationship with your consumer, would it damage or improve your relationship?
- What are the Australian laws regarding referral fees?
What is your relationship with your consumer?
When considering your relationship with a consumer or potential consumer, you must contemplate whether it is a fiduciary relationship.
A fiduciary relationship is when one party has responsibility, trust or confidence. If this happens to be the case, then it is the party’s primary duty to act in the best interests of the other party.
Examples of fiduciary relationships include:
- Doctor and patient
- Director and shareholder
- Lawyer and client
- Company director and shareholders
- Employer to employee
If the relationship is assumed to be fiduciary, the consumer should be aware of any commercial relationships that the seller has with third parties. This will then allow the consumer to:
- Make an informed and educated decision; and
- Be aware of any conflicts or interests that might arise.
What are the Australian laws surrounding referral fees?
Fiduciary duties are set out in Australian law. Failure to comply and acknowledge these duties may result in serious implications.
Each industry has its own set of laws and regulations, such as real estate agents in NSW being required to follow strict rules regarding the disclosure of commissions and kickbacks. The agent is required to disclose any referral relationship to a consumer at the time of referral and this must include the price of any referral fee that they may receive in the future.
The agent is also required to disclose to any additional third parties that may also be eligible to receive fees upon the agreement of the sale of the property. This consumer must then sign, in writing, that they acknowledge and agree to these fees.
Whether the law refers to these requirements, they still apply to most fiduciaries.
Legal advice
Whilst spotter’s fees or referral fees are legal, referral selling is not. If you believe you may be a victim of or liable for referral selling you may want to seek legal advice. Legal Kitz is here to help. We offer FREE 30-minute consultations to assist you with any queries or concerns. Book here now for your free consultation.