Last updated June 6, 2024
What is a Referral Agreement?
A Referral Agreement establishes the terms and conditions when an individual or business provides business leads for another company. In other words, it outlines how one party, the broker, is compensated for referring customers, contacts, or service providers to a business.
Referral Agreements are part of a marketing strategy for companies seeking to expand their business. These agreements outline essential details such as fees, payment methods, and the contract length.
A Referral Agreement is also known as a:
- Referral partnership agreement
- Referral fee agreement
- Affiliate referral agreement
- Business referral agreement
- Client referral agreement
- Finders fee agreement
- Broker agreement
If you’re looking to create a temporary partnership with another business to achieve mutual sales goals and rewards, use LawDepot’s Joint Venture Agreement instead.
Who are the parties in a Referral Agreement?
There are two parties in a Referral Agreement:
- The broker is the individual or company that refers businesses, customers, or service providers to the client in exchange for compensation. They’re also known as the referrer or referral party. A broker is considered an independent contractor and may require a license to operate within certain industries.
- The client is the freelancer or business that receives referrals and contacts to increase sales, clientele, contracts, and more. They’re also known as the service provider, referee, or seller.
When to use a Referral Agreement
Whenever a broker generates business leads for a client, using a Referral Agreement is essential. Businesses of any size can benefit from creating these documents. Referrals can generate various leads for clients, including:
- New customers needing the client’s services
- Service providers clients may need for day-to-day operations
- Product distributors for clients to stock their business’ merchandise
Referral Agreements can be beneficial in a variety of industries, including the following:
Insurance industry
A business with connections to people who may require insurance coverage can enter a Referral Agreement with an insurance company. For example, a vehicle dealership may refer customers to a particular insurance provider or agent. A Referral Agreement would outline how the insurance provider compensates the dealership in return.
Each state has specific requirements for referral arrangements with insurance providers. For example, Washington has set guidelines for fees and commissions under the Revised Code of Washington § 48 - 17- 490. This code states that an insurance agent, company, or producer cannot pay a commission, fee, or other monetary compensation to an unlicensed individual soliciting services. Unlicensed individuals and companies can make referrals, but there are several restrictions, including how and when compensation is provided.
Real estate industry
Referral Agreements can be beneficial in the real estate industry when a person or business has contacts needing services in the industry. The most common example is a broker referring clients to a real estate agent. Another example is a home improvement contractor referring contacts to a real estate agency.
Some real estate industry personnel must follow federal regulations when entering a Referral Agreement. For example, section 8 of the Real Estate Settlement Procedures Act (RESPA) stipulates that real estate agents cannot be compensated for referring clients to mortgage providers or title companies. A real estate agent, however, can refer a client to another licensed real estate agent for a fee.
Additionally, some states have laws that govern how brokers provide referrals in the real estate industry. For example, Florida Statutes § 475.011 restricts property management firms from paying fees to an unlicensed broker. Exceptions to this rule include certified accountants and attorneys.
Finance industry
Businesses with access to contacts needing financial services may wish to enter a Referral Agreement with a financial company. An accountant referring their clients to a financial advisor is an example of a broker-client relationship. The two parties can enter a Referral Agreement to outline the terms and compensation of the arrangement.
Clients in the finance industry must consider regulations, such as the Investment Advisors Act of 1940, when making referral payments. This law restricts who can receive compensation for referrals. Additionally, the act requires set disclosures when an advisor is being endorsed. This includes disclosing any conflicts of interest.
Automotive industry
Referral Agreements can be beneficial in the automotive industry when one party has access to clients who may need automotive services. For example, an independent hotel could refer guests to a car rental service. The hotel and rental service could use a Referral Agreement to outline how the hotel will be compensated.
State laws may restrict when an automotive company can pay for referrals. For example, in California, under Penal Code Section 551 PC, it is unlawful for automotive repair dealers to compensate insurance agents for referrals when a policy already covers repairs.
Other industries
Besides those listed above, other industries and professions can benefit from using Referral Agreements, including:
In regards to SaaS companies, a broker can enter an agreement with the client to help direct referrals to their website through affiliate links and grow their client’s customer base.
Why should I create a Referral Agreement?
A Referral Agreement is a mutually beneficial contract allowing the client to receive new sources of business while the broker receives compensation for their services.
Though verbal contracts can be legally binding, written agreements are stronger and hold both parties accountable. Some industry regulations may even require a written agreement between a broker and a client.
An agreement creates transparency in the broker-client relationship while outlining the compensation and terms of the relationship. Most importantly, an agreement can be used as evidence if there are any disputes regarding the contract or services.
How to write a Referral Agreement
LawDepot’s user-friendly Referral Agreement questionnaire allows you to customize your contract. Simply choose the client’s industry and location, then continue by completing the following steps:
1. Provide service details and the term
List the services the broker will be providing to the client. These will vary depending on the client’s industry. Services can include:
- Collecting new contact information for potential business
- Providing brochures to contacts detailing the client’s business
- Using an existing customer database to refer to the client’s services
- Advertising client services (e.g., social media posts, website banners)
- Providing affiliate links for the client’s services on the broker’s website
Then, specify if the broker will be involved in negotiations between the client and a referred contact. Additionally, state if this will be an exclusive contract between the broker and the client.
A contract can be created for a limited time or indefinitely until one or both parties terminate it in writing.
2. Provide party details
Next, provide the broker's and client's names and contact details. Parties in a Referral Agreement can be individuals or companies.
3. Describe the payment details
Provide details on how the broker will be compensated for their services. This includes:
- Pay structure (e.g., flat fee, sales commission, fee per signed contract, pay per click, etc.)
- Any sales tax
- Invoicing periods and payment deadlines
- Late payment interest
Depending on the client’s industry, state, and federal requirements, payment limits and commission rates may apply.
4. Outline the termination details and expenses
Specify how many days' notice each party must provide to terminate the contract if it isn’t a fixed-term agreement. Terminating the contract can be done using a document like a Termination Agreement.
Also, include any work-related expenses the client may provide the broker. Examples of costs can include fees for software or promotional materials.
5. Add a confidentiality clause
Continue by adding a confidentiality clause. This clause is optional for Referral Agreements based on the information the client must share with the broker.
LawDepot’s template allows additional clauses if the agreement or the client’s industry requires them.
6. Include signing details
Finally, include the signing date or add it later if it’s unknown. If a witness will be present during the contract’s signing, a witness signature can also be included.
Do you need a confidentiality clause in a Referral Agreement?
A confidentiality clause is optional for a Referral Agreement. Though companies handling personal data are already obligated to follow privacy laws like the Privacy Act of 1974, they may need to collect additional private information from their client.
For example, a broker may need to know a client’s Business Plan to understand how to promote the company best. Therefore, creating a confidentiality clause can protect Business Plans, trade secrets, intellectual property, and employee and client information in certain situations. This clause can give clients further peace of mind that their confidential materials are secure in the broker’s hands.
Do you need a witness when signing a Referral Agreement?
Although a witness is not a legal requirement for signing a Referral Agreement, it’s good practice to help protect the broker and client.
A witness can assist in validating signatures if there are any future disputes or misunderstandings about the agreement. Should there be any questions regarding the contract’s enforceability, a witness can also support that no forgery, coercion, or undue influence was involved while signing.
