Profiting from referrals

Recently we’ve been asked the same question by three completely different creatives: should they pay a ‘spotters’ fee?

Third parties – in all three cases it was other creatives – offered to refer them to a client. Problem is, they wanted to be paid a ‘spotters’ fee – a monetary reward for referring the business.

Should they pay the price? The short answer is no. It’s illegal.

Being introduced to a client doesn’t necessitate a ‘spotters’ fee.
And being a secret squirrel middle ‘man’ doesn’t constitute a business model,
at least not a legal business model. Problem is, it’s happening (again).

Here’s a typical scenario

Studio A pays a sum of money to Studio B (referrer) in return for referring (or otherwise influencing or encouraging) a client to acquire goods and/or services from the Studio A.

All fine and dandy if the client is informed the referrer is receiving a benefit for the referral however serious legal issues may arise if not.

In each state of Australia, it is illegal to pay a secret commission.

A secret commission is also potentially misleading and deceptive conduct under section 52 of the Trade Practices Act. Breach of this provision will expose the agent (and potentially the payer of the commission) to an action for damages by an aggrieved party (such as the principal) or the ACCC itself.

HWL Ebsworth Lawyers.

Secret commissions – where the client has no knowledge of the arrangement – are not only unlawful in all six states of Australia, in most states it’s not only the referrer deemed committing an offence, but also to the party providing the benefit.

And it doesn’t matter if you’re a company or an individual (freelancer) profiting from referrals. It’s illegal.

“It is an offence … to aid or abet the contravention of laws against secret commissions and the penalty for doing so is a fine of up to $193,428 for a corporation and a fine of up to $193,428 for an individual and/or up to 10 years imprisonment. The penalty in New South Wales and South Australia is up to 7 years imprisonment with no monetary fine imposed while the remainder of the states are consistent with New South Wales and South Australia but attract additional monetary penalties for corporations.^”

Examples

Profiting from a referral is not new in our industry – indeed the law is not new. This offence comes under the Crimes Act, an act that was written many years ago, in fact in some states it dates from the 1800’s.

The ‘elders’ of our industry would remember hidden commissions peaking around 20 years ago, when some printing companies openly offered a commission for every job they ‘won’. Some were small commissions where printers paid designers a 10% ‘consultancy’ fee after the project was finalised – others were much larger affairs. Because clients were none the wiser it’s deemed a ‘hidden commission’ and it’s illegal.

And it’s still happening … post COVID an established digital studio revised their business model. They decided not to turnaway any project, instead they would ‘cut the cloth to fit’. Projects with limited budgets are now ‘referred’ to smaller creatives with less overheads.

Problem is, they’re knocking on doors requesting a ‘spotters’ fee for each referral. Clients don’t know, making it a secret commission and illegal.

Another example is cited on the Bartier Perry Lawyers website: an agent is engaged by its principal to source products from the available suppliers on its behalf. The principal is entitled to expect that the agent will provide independent and unfettered advice, based purely on the merits of the products and their pricing and value for money. The agent then recommends a particular manufacturer, but unknown to the principal, the agent is receiving a cash payment from that manufacturer. The independence of the agent as an advisor has been compromised. This is also known as a “kick-back” or “cash-for-comment and it’s illegal.

Take away

If you are offered a ‘reward’ for referring a services; or another creative offers to refer your services in return for a ‘spotters fee’, politely refuse and forward this article. I’m happy to chat to them 🙂

What do you think? Got any problems/questions? As always, happy to discuss further, just email.

Carol Mackay

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About Carol Mackay

After 30+ years running a graphic design firm, I pivoted from client-focused projects to consult to the design industry. Now with the Design Business Council I use my experience, and research, as a design mentor and coach. I help designers build robust, sustainable businesses, and help businesses integrate, and profit from, design.

The core of the DBC is the building a design community – over 85% of designers work in businesses with less than 5 employees, many less than 3. That means designers don’t have the same support network of other professionals. The DBC’s solution is supplement paid gigs with research, mentoring breakfast meet-ups, informative UNseminars and practical workshops in Melbourne, Perth and Sydney.

An archive of my previous career is at mbdesign.com.au.
My current work can be viewed at designbusinesscouncil.com and designbusinessschool.com.au.