Referral Agreements: Paying and Receiving Finder Fees Legally

A referral agreement sets out what one party pays another for introducing a customer or deal. Written terms prevent arguments about what counts as a referral and when payment is due.

Terms to include

• What qualifies as a referral and how it is tracked.
• The fee or commission and when it is earned and paid.
• How long the arrangement lasts and how to end it.
• Whether the referrer may represent or speak for the business.
• Confidentiality and non-solicitation terms.

Restrictions

Some industries limit or ban paid referrals, such as legal, real estate settlement services, health care and financial products. Rules on disclosure to customers also apply, including advertising endorsement guidelines. Check your industry rules before paying or accepting fees.

Avoiding disputes

1. Define the trigger for payment clearly.
2. Keep records of who referred whom and when.
3. State what happens on repeat business.
4. Use a written agreement even for friends.

Tax and records

• Referral income is generally taxable.
• Keep invoices and payment records.
• Ask a tax professional about reporting.

Types of referral arrangements

• One-time finder's fee for introducing a specific deal.
• Ongoing referral commission for customers generated over time.
• Reciprocal referral agreements between businesses.
• Affiliate programs run by online platforms, which have their own terms.
• Professional referral fees, which are heavily regulated.

Legal limits to check first

Some professions prohibit or restrict paying for referrals, including lawyers, health care providers, real estate settlement service providers and some financial professionals. Federal and state laws also apply to kickbacks in certain industries. Consumer protection laws require honest advertising and clear disclosure of paid endorsements. A fee that is perfectly fine in one industry can be unlawful in another.

Clauses that prevent disputes

1. A definition of a qualified referral, such as a lead who signs a contract.
2. How referrals are tracked, for example by name or code.
3. When the fee is earned and when it is paid.
4. Whether the fee applies to repeat sales.
5. A time limit on commission rights after the agreement ends.
6. Records and audit rights.
7. Confidentiality and non-circumvention terms.

Disclosures and ethics

• Tell customers when you are paid for a recommendation.
• Do not misrepresent the product or service.
• Make sure the referred person consents to being contacted.
• Follow privacy laws on sharing contact information.
• Keep records.

Taxes and independent contractor issues

Referral income is generally taxable, and payers may need to report payments. If a person promotes the business regularly, check whether they are an independent contractor or employee. See our guide to independent contractor agreements.

Terms to know

• Referrer: the person who sends business.
• Qualified lead: a referral meeting stated criteria.
• Commission: payment for a successful referral.
• Tail period: time after termination when fees are still owed.
• Non-circumvention: a promise not to bypass the referrer.
• Kickback: an unlawful payment for referrals in some industries.

Scenarios

1. A consultant refers a client to a software company for a 10 percent first-year commission. The agreement defines when the client counts as referred.
2. A real estate agent is offered a fee by a mortgage broker. Federal settlement rules may prohibit this arrangement.
3. A blogger recommends a product and earns commission. Disclosure of the relationship is required.

Frequently asked questions