In the remodeling business, we generally use the term “inducement” to refer to the giving of something of value — cash, a coupon, a free gift — to a prospective customer and, in exchange, we are able to demonstrate the product, conduct a sales presentation, or close the sale.
But you can't give away just anything; most states place dollar limits on the value an inducement can have, which is normally based on what the inducement cost you, the contractor. In Maryland, for example, a contractor can not give the consumer an inducement that cost the contractor more than $25.
When closing a sale, remodelers often use an inducement known as a “button up,” the most common form of which is the “referral fee.” Watch out though: These are usually illegal in most states.
It works this way: As an incentive for the buyer to “button up” the sale, the contractor promises a fee to the buyer for referring other customers to the contractor. The referral fee can be in the form of cash, a free dinner, or some other form of compensation.
For example: “If you buy windows from us today, we will give you $100 for every additional customer you send our way who buys windows from us.”
Because the sale itself is contingent on the referral aspect, most states prohibit using referral fees as inducements under a home improvement or door-to-door sale statute or sometimes under consumer protection or unfair and deceptive acts and practices (UDAP) statutes.
If the referral fee is not used as an inducement to close the sale, however, it will usually be legal. For example: “Thank you for buying your windows from us. As appreciation for your patronage, we would like to give you $100 for every additional customer you send our way who buys windows from us.”
When you use referral fees after a sale has closed, make sure you have the buyer sign something so you can prove that the referral fee is being given after the sale has been made and not as a button up.
As always, however, it is important to understand the rules of the specific state in which the sale takes place. In Rhode Island, for example, a buyer being promised a referral fee must also be provided with specific disclosures, including a chart showing the actual experience of other buyers under the referral fee structure for the prior three years. — D.S. Berenson is the Washington, D.C., managing partner of Johanson Berenson LLP (www.johansonberenson.com), a national law firm specializing in the home improvement industry. Contact him at 703.759.1055 or email@example.com. This article is for informational purposes only and should not be construed as legal advice.