A business receiving referrals can be an effective way to grow and expand its customer base. Therefore, most Australian companies use referral advertisements in order to promote their goods or services. Companies can advertise through many forms of media, including television, social media, radio, and print media. However, the business must comply with the Australian Consumer Law (ACL). The ACL is a part of the Competition and Consumer Act 2010 (Cth) and it is a national law that governs fair trading by businesses that are conducted in Australia.
If you are considering introducing a referral program into your business, keep reading this Legal Kitz blog to ensure that the referral program is not considered referral selling within the ACL.
What is considered referral selling?
Referral selling occurs when a business persuades customers to purchase its goods or services with an underlying promise that the customer will receive either:
- rebates;
- benefits once they introduce another customer; or
- commission.
It is common (and legal) for businesses to seek to convince customers to purchase goods or services by explaining the benefits if they help the business supply goods to more potential customers. Such as:
- for providing names of potential customers; or
- when the customer helps to supply goods.
However, this is compared with referral selling (which is illegal under the ACL), when the initial customer benefit is dependent on other customers acquiring the business’ goods or services. Here, the customer will also pay an increased price for the goods and services, even though there is no assurance that the referral customer sales will eventuate. There is also no guarantee that the customers will end up receiving the discussed reward that they expected. For referral selling to be illegal, it does not need to be the main or only reason the customer buys the goods or services – it only needs to be significant.
What are some unfair Australian sales practices?
This is not an extensive list of all unfair sales practices. If you would like to see all unfair sales practices, they are covered under the ACL. The main unfair sales practices include:
- Referral selling;
- Pyramid schemes;
- Contract terms that are unfair;
- Unconscionable conduct; and
- A business accepting payment from a customer without the intention to supply the goods or services.
Why is it illegal?
Referral selling is illegal because of the lack of assurance that the referral customer will purchase the goods or services. Therefore, the fact that the customer has purchased the goods or services because of the promised benefits by the business, it is possible that the customer will never receive the benefit.
It is legal for a business to boost its customer sales, by paying people referral fees and spotters fees. The business must be transparent with its customers or obtain informed consent for the referral. If you are considering whether or not to disclose a referral fee arrangement with your customer, it is important to consider the below:
- the businesses relationship with the customer; and
- the Australian laws for referral fees.
What are the penalties for referral selling?
- Businesses can be fined up to $1.1 million; and
- Individuals can be fined up to $220 000.
With these serious penalties, it is essential that all referral arrangements your business may have are legitimate and comply with Australian laws. It is recommended that you consult with a legal practitioner if you are wanting a referral program, for example: if your business wishes to offer new customers a benefit with all contact details provided.
Legal advice
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