#165 Commission Payments & Referral Fees - Can you use them in your creative business?
In my legal practice, I act for creatives, coaches and consultants by helping to set up their documents and the structures in their businesses to protect them moving forward. One topic that has been coming up a lot lately with my interior design clients in particular is commission payments and referral fees. If you are considering a referral arrangement or perhaps you already have an affiliate relationship in place, this is an important episode for you because there are certain considerations you need to keep in mind.
Commission Payments vs. Referral Fees
Commission payments and referral fees are often used interchangeably, but they hold distinct meanings and implications. Commission payments are typically tied to a specific sale or transaction, involving a percentage based on the revenue generated. On the other hand, referral fees are compensation for leads provided, not directly linked to sales revenue. Understanding these differences is crucial for setting clear expectations and agreements in creative business relationships.
A Two-Pronged Analysis:
If you’re contemplating entering into a commission or referral payment arrangement, you need to analyse what’s best from a legal perspective and a business perspective. While it may be lawful to engage in these types of agreements, it's essential to assess whether they align with the goals and ethos of your business. Some of my clients enter into affiliate and referral agreements and others are a hard no. There is no right or wrong, but you do need to understand your legal obligations and assess whether this is the right move for your specific business.
Full Transparency:
Some industries have legislation that dictates business owners must disclose commission and referral relationships in their documentation to clients. For creatives, there is no such legislation, however, my guidance is that it’s always best practice to disclose any commission, referral payment or affiliate agreement.
Under the competition and consumer legislation, consumers are protected from business owners engaging in anti-competitive conduct or deceptive conduct. What you don’t want is for there to ever be a suggestion that your recommendations to clients were misleading or made in bad faith. Full transparency will not only build trust with your clients but help you avoid unnecessary legal disputes.
Documentation Requirements:
In my experience, misaligned communications and expectations can cause business relationships to sour very quickly, but that can be avoided by having the right documentation in place. Properly tailored client service agreements can serve as a platform for transparent communication regarding payment structures and relationships with referral partners. Additionally, having written agreements in place for affiliate or referral arrangements helps clarify roles, expectations, payment terms, and intellectual property protection. Never rely on a handshake agreement. Get everything documented and clearly outlined so there’s no cause for dispute.
The decision to accept commission payments and referral fees in a creative business is not a one-size-fits-all scenario. It requires a thoughtful analysis of your business landscape, alignment with your core values, and an understanding of what is legal in your specific industry. Whether you’re considering entering into these types of arrangements or refining existing partnerships, clarity, transparency, and legal compliance are key pillars for building strong and sustainable business relationships.
Full Transcript:
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[00:00:00] Tracey: Hello, everyone. Welcome back to another episode of the rise up in business podcast. I'm getting really specific in today's episode because this topic is coming up a lot for my interior designer and my interior stylist clients. So I want to dive in and answer it because I know that so many of you listening will resonate with this. As you know, because you're listening to this podcast and you've probably been following me on other platforms, I act for coaches, creatives, and consultants to help them set up their documents in their structures to protect them moving forward. to set them up for long term sustainable success and to minimize roadblocks, to minimize Risk and to help prevent issues arising with clients.
[00:01:08] All of that is setting a business up for long term sustainable success and that's what we all want in business and no doubt, that's what you want too, because you're a business owner listening along to this podcast. The topic of commission payments and referral fees is coming up a lot for my interior designer and stylist clients and I'm going to address this episode with a focus on that industry. That said, what I'm about to share with you applies across a range of industries, and this will be just as applicable for coaches, creatives, and consultants but I'm going to give some examples and some context here, which do relate to my interior design clients.
[00:01:50] First of all, I want to start with saying I'm focusing this episode on B2B referral payments and commission payments. I'm not talking about other scenarios because the phrases commission payment and referral fee can apply to a whole range of relationships and they can mean different things to different people depending on the scenario.
[00:02:12] This episode is focused on B2B. I just want to make that really clear. So there's no confusion. Now, when we're talking commission payments and referral fees, B2B, the terms are often used interchangeably. They both mean different things, but what I'm finding is that my creative clients are coming to me and they're saying, Oh, I've got this arrangement where I'm getting a commission, when actually, when we take the time to dive in, which I always do with my clients, it's a referral fee that they're talking about. So I just want to take a moment here to just draw the distinction between the commission payment and the referral fee or the referral payment. When we talk commission payments, those payments are typically tied directly to a sale or a particular transaction.
[00:02:58] And we usually talk percentages based on the revenue that's been generated by a business. if you refer me someone, or if you secure my sale, and if I make this much in revenue, I'll give you X percent. The idea behind those commission payments, and they're often used for team members or contractors that you get into support your sales team, for example, but the intention, usually in the context of businesses is that you are incentivizing people to work really hard to convert prospects into paying clients, therefore turning them into sales to increase your revenue. So there's a direct correlation between the payment that you will make and the revenue that you receive from a particular client.
[00:03:46] When we're talking referral fees, however, it's usually very different. Referral fees are generally compensation paid for a lead. So a referral, it's not tied to a sale. It's not tied to revenue and it's not usually a percentage of revenue received. A referral fee is usually if you refer me quality leads or a lead that converts, then I will pay you X dollars. And a great example of a referral fee arrangement is affiliate fees.
[00:04:22] So I've all heard the term affiliate marketing, no doubt, where you say to someone, Hey, I'm running this course, or I'm offering this service. If you refer people to me from your network, I'll give you 600, for example, for every lead that converts into a paying customer. Other examples are, I'll give you 100 for every lead that comes through my funnel. So there's lots of different ways to do it, but you can see the difference here between the commission being incentivizing someone to sell for you and you give them a percentage of the fees that you actually generate. So the revenue you actually receive versus a referral fee or an affiliate fee, which is a good example where you pay someone for leads and you don't rely on revenue having been received before you have to pay them.
[00:05:08] It's usually upon successful conversion or upon them coming into my funnel, you'll get this much. they're the differences and so you can see how easy it is to be confused. So the first thing I say here when we're talking this topic, if this is something that you do in your business, either by arranging partners to come into your business to sell for you or to send leads your way, or if you're a business that receives the payment, be crystal clear on what it is you're agreeing to and which umbrella you fall under, because that will filter down to the documentation that we need, which I talk about shortly. So that's the first thing. Now, the question that's coming up, which has prompted this episode is, can I enter into this payment arrangement?
[00:05:54] And should I? Love that. Can I, and should I? Two completely different things. With most questions that we need to ask ourselves in business as business owners, there's always two prongs to the analysis. So there's two prongs to the consideration of the question. One is a legal prong and one is a business prong.
[00:06:16] So just because something's lawful doesn't mean it's good for business. And just because something would be good for business doesn't mean it's lawful. It doesn't necessarily follow hand in hand that just because it's lawful means it's good. So we always need to make that assessment for ourselves in business as to whether or not something is actually good for the business, aligned with the business and serves the business.
[00:06:39] And then is it lawful? How do we do it? What are the ramifications? What are the legal implications? So the short answer here to can you is, yes you can enter into a commission or a referral payment arrangement, but on certain conditions, there's rules, there's rules that apply and some of those rules are a little different for different industries and I'm about to explain what that is, but when we're talking creative businesses, the answer is yes, you can do this, but you need to be really clear and transparent about the relationship.
[00:07:17] So let's dive into transparency. This is the first of the conditions that I've just mentioned. So let's say you've decided for your business, it's actually a good thing for you to either bring in referral partners because you want extra sales, you want extra leads, or you have decided that it's a good revenue stream for your business to be affiliated with another business and be a referral partner for them so that you're receiving that referral payment. I'm going to focus now on referral payments because that is the bulk of what I'm dealing with, with my interior designer and stylist clients and other creatives. It really is a referral fee that we're talking about. It's not commission based. It's not a commission so I'm now going to hone in a little more on the referral fees.
[00:07:58] A good example of that is I've got some great relationships with some really good suppliers and I'm going to refer my clients to those particular suppliers, for example, or tilers, or service providers. So a particular architect or a particular draftsman. I've got some good relationships and I'm going to refer my clients to them because they need this service, they need this support to move forward with their project on their property and I'm going to receive a referral payment in return for sending this work on.
[00:08:29] Now, if that's the case, you need to make sure you are disclosing this to your client for several reasons. One is it's good business to make sure that you're transparent about these things, because if it comes out later and your client becomes aware of this relationship later, and this payment, You can see the conundrum the client could be in and why that could potentially undermine your integrity. So we want to make sure that we're doing it for that reason.
[00:08:56] The second reason is that consumers need to be made aware of these types of arrangements you have in place so that there can be no suggestion that you've engaged in misleading or deceptive conduct. For example, gosh, the client might think, do I really need this particular service? Or is this business only providing me with this recommendation or this referral because they're getting a payment in return? So we want If you're transparent and you disclose this upfront, bearing in mind that I've already addressed the business aspect, you've already addressed in your mind, you've assessed this in your business, whether this is a good business decision for you. You've decided that yes, it is.
[00:09:34] Now I'm going to pause here because sometimes people decide at this point, it is not. They decide this is not aligned for my business and I don't want to do it. That's perfectly okay. I personally don't do it. I don't do affiliate marketing. There's several reasons why I don't do affiliate marketing and I get asked all the time, but I don't do it and I dive into the reasons why in episode 89 of the podcast. So feel free to jump back and have a listen to that if you are considering this and if you want The benefit of a different perspective. I share my perspective in episode 89.
[00:10:10] Now you've already decided because we're exploring this, we're working on the basis that you've already decided that you're okay with this in your business. You do want this arrangement in your business so we need to be transparent. Now, some industries such as real estate agents and insurance brokers, they have legal requirements where they have to disclose, commission and referral relationships in a particular way in their documentation to their clients. It's legislated. There are other industries where there are fiduciary duties in place, which means the business owner, the business service provider is in a position of trust and therefore any of these types of relationships need to be disclosed really clearly so that the client is aware. Those types of relationships extend to, doctors, for example, accountants and lawyers. That's a fiduciary relationship, which means that service provider, the doctor, the accountant, the lawyer, is in a position of trust and the client's trusting them. So, if there is to be a referral payment made as a result of this referral or recommendation, the client needs to be aware so the client can consider All options. And clients can ask you for several recommendations or referrals, not just the one you're being paid to make. So there's that.
[00:11:24] Now there's no such legislation which governs creatives to say, because of the nature of your relationship, you must disclose. But my guidance here. Is that it's best practice to disclose because I'm now gonna talk about the competition and consumer legislation which says that consumers are protected from business owners engaging in anti-competitive conduct or deceptive conduct.
[00:11:55] Now you don't want there to be ever any suggestion that your recommendations or referrals to your clients were anything that it made in good faith. So you do not wanna leave yourself exposed to an argument later or an allegation later that the referral you made was made in bad faith, and it was misleading.
[00:12:13] So to avoid that, full disclosure up front, transparency about the potential for a payment to be made by some referrals that you make to certain service providers or suppliers. The other reason why disclosure and transparency is important and another important consideration for you to pay attention to when you're considering whether this arrangement's right for your business is that of a potential conflict of interest.
[00:12:41] This goes both ways. So following on from what I've just shared, your client may think you have a conflict because you are receiving a payment as a result of this referral. The client may think, gosh, is this really in my best interests to take this recommendation, given that this business owner or this person is receiving a payment? Now again, that is a factor that you will think about when you're deciding whether this is right for your business.
[00:13:09] Something that I dive into in episode 89 of the podcast if you want to go back and take a listen, potential for a perceived conflict of interest is real. So we need to do everything we can to avoid that to protect your business and disclosure and transparency goes a long way in protecting your business moving forward and preventing any perceived conflicts of interest. Now, on the flip side, of course, when you're thinking about your documentation, which I'm about to get to, when you're thinking about your documentation, entering into these types of arrangements, you need to give consideration to potentials for conflict of interest and close those off in your agreements with your referral partners.
[00:13:51] And I'll talk about that in just a moment. But the conflict of interest, the potential for a conflict of interest is something that needs to be considered on a case by case basis when you're deciding whether or not this particular arrangement is right for your business.
[00:14:02] Now that we've talked about the considerations for deciding whether a commission or a referral payment arrangement is right for your business or an affiliate arrangement is right for your business, we need to think about the documentation here.
[00:14:20] First thing clients ask me is, well, before I get to that, Tracy, how do I disclose it to my clients? And so for you as a creative in business, my answer to that is quite simply, you can disclose this to your clients in a really aligned way in your properly tailored client service agreement. So the agreement that you send out to your clients when they're engaging you, whether it's your design agreement or your design terms and conditions, or your client service terms and conditions, whether you're sending this out with your proposals or whether you're having these agreements signed, either way, you can disclose the potential for these types of payments in there.
[00:14:59] So, You know how focused and committed I am to advocating for properly tailored legals for your business. This is one of the many reasons why, because any particular relationships like this need to be incorporated into those agreements. So that's how you disclose it to your clients, just like that. Now, when we're talking documentation, we now want to talk documentation about, well, if I'm going to bring a referral partner into my business, or if I'm going to become a referral partner for somebody else's business, what documentation do I need? It is critical, if you want to set yourself up for success in these relationships, it is vital that you have proper agreements in place that reflect the arrangement. The most common that I prepare are the affiliate agreements and those agreements need to set out a number of things to make sure both parties are set up for success. We want this to be a long term, successful relationship. misaligned communications or expectations that aren't met can cause these types of relationships to sour very quickly, in my experience, but that can be avoided. And it should be avoided by having the right documentation in place.
[00:16:08] So the types of things that you need to have in your agreements for affiliate arrangements or referral fee arrangements The nature of the agreement. What's the intention? What's the objective here? What are the roles of the parties? What's the referral partner supposed to be doing? And then we need to give consideration to whether that arrangement or that relationship is to be exclusive.
[00:16:31] So touching on the conflict of interest, it's not uncommon for parties to have relationships with multiple businesses in a particular industry. If you don't want. Someone you're bringing into your business to be a referral partner. If you don't want them to have a similar arrangement with your competitor, concept of exclusivity needs to be dealt with in the agreement.
[00:16:51] Then we need to consider what the referral process involves, what constitutes a lead? What constitutes a successful lead under what circumstances does a payment obligation arise? So when do they get paid? Do they get paid when someone comes into the top of the funnel? Do they get paid when someone signs up to a course?
[00:17:10] Do they get paid when somebody engages a trade or a supplier to provide a service or to provide a product? Do they get paid once the deposit's paid? At what point do they get paid? It's really important to have absolute clarity around this, so there can be no confusion, so that both the business and the referral partner know what needs to be done in order for a payment obligation to arise, and then in the agreement, when will that payment be made?
[00:17:37] Have those payment terms really clearly outlined. We need to consider how long is this arrangement going to be on foot. Is this a fixed term contract or is this an open ended contract or agreement? it remains live until someone terminates. Then we need to consider the exit strategy. How do the parties bring the arrangement to an end if they want to?
[00:17:59] We need to make sure, of course, like all things in business, that our intellectual property is protected and there are confidentiality provisions in those agreements. So you can see that there's a lot in these. These are not simple. Oh, hey, why don't you send people my way and I'll flick your referral fee?
[00:18:15] Yeah, sure. Sounds great. We're mates and I believe in your course. I think it's great. Or I believe in your, the way you do your joinery. I think you're, you're great. No. It's a hard no from me to have such flippant and casual relationships like that. It's a red flag and I hate to say it, but it's not a matter of if something's going to go wrong here. It's a matter of when, because despite best intentions, misaligned expectations arise. Confusion, lack of clarity and communication. It happens. We know that. So this agreement in place Whether your business is entering into referral relationships with others, or whether you're becoming a referral partner for somebody else's business, what I'm saying to you is you must not take that any further without written documentation. Doesn't need to be a 42 page legal document. If you've worked with me, or if you're working with me, you would hear me say it all the time. No one needs a 42 page legal lawyer written document, which means nothing to anyone and it's awful. No one needs that ever. What we need is something written in plain English, succinct to the point on brand for the business issuing it. A reflection of the business aligned using language that's aligned for the business so that both parties are really comfortable and confident entering into this referral or affiliate relationship or commission arrangement, if that's the case, and they know what's expected, what's going to happen and where to from here. That documentation is really important.
[00:19:46] So to recap, can you accept commission payments and referral fees in your business? Yes, you can, but on certain conditions, things to keep in mind is transparency all the way throughout the arrangement, but particularly with your clients, if you're the referral partner, and you're going to be referring your clients to suppliers or trades or service providers, you you need to make sure you're being transparent with your clients.
[00:20:12] You need to be clear on timing. You need to be clear that you're not in a conflict of interest situation. And you need to make sure that you're not breaching any of the provisions of the competition and consumer act. So the biggest ones here are anti competitive conduct and misleading and deceptive conduct.
[00:20:27] So provided you're in the clear with all of those things, yes, you can. Should you do it? That's personal. My friend, that's personal. It's a matter for you and you need to conduct a careful analysis of your business, your business ethos, and whether or not the particular relationship is aligned for your business and the services that you're providing to your clients as a creative business.
[00:20:51] Like I've mentioned a couple of times, I have talked about my personal view on affiliate marketing, so referral fees, in episode 89 of the podcast. So feel free to go and have a listen to that if you are in the throes of deciding whether this is right for you. I have clients who say yes to this. I have clients who take the position of a hard no, there's no right and wrong provided it's aligned.
[00:21:17] And these are the tricky things that we need to consider that I've shared with you in this episode, and I've shared them with you in the hope that you're now enlightened and empowered to know what the legal implications are, what your responsibilities are, and what your duties are when you are bringing people on as a referral partner in your business, or when you are going to enter into a referral relationship to receive payments from other businesses.
[00:21:41] I really hope this has been helpful and that it's given you some food for thought and consideration in your business. As always, if you have questions about this, if there's something you'd like to dive into a little bit more, if there's something that you're wondering and you want to ask me, please don't hesitate to reach out.
[00:21:58] I'm so happy to answer questions. You can send me an email. You can jump onto the website. TM and send me a message through there. You can send me a message through DMs and Instagram. I'm always happy to answer those or you can book in for a free chat via the website as well. Thanks so much for joining me.
[00:22:17] I'll catch you next week.
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