What are Referral Agreements?
Referral Agreements define what a referral is and what will happen when an appropriate referral is made. They are particularly useful when one party (usually a referral source who has previously made referrals to another and who wants to create some record of the arrangement) wants to formalize that relationship. For example, a financial advisor may be approached by a referral source, such as a Certified Public Accountant. The CPA says that he intends to refer clients to the financial advisor, and would like the advisor to make a referral to an insurance agent so that the two can work together. If the financial advisor agrees , then a Referral Agreement can be created which will spell out exactly what is expected of each.
Referral Agreements generally contain language indicating that the referring person/organization will provide general contact information for the referral, and that the recipient of the referral will follow up and advise the referring person/organization of the outcome of the referral. Some Referral Agreements have additional language indicating that the recipient of the referral will use its best efforts to provide the referred person with a service or product.
If the Referral Agreement provides for any type of compensation, like in some Real Estate transactions, compensation issues should be considered.
Referral Agreements are not uncommon, and several states have adopted statutory language for them.
Referral Agreement Essentials
The essential components of a referral agreement include the following, depending on the circumstances:
Parties to the Agreement – An agreement must identify the parties to the agreement, and those parties must have the legal authority to enter into the agreement.
Scope of Services – This includes making referrals, monitoring of the progress of the referrals, and allowing access to the other party’s facilities, in order to make the referral relationship work (or temporary access to medical records for the care of a specific patient). The agreement should provide that the referral is not a condition of doing business with the one making the referral.
Compensation – Compensation under a referral agreement should be fair market value, based on the services provided between the parties. For a physician referral agreement, this means compensation is for current professional services only. In the case of a hospital, compensation must be for current (or future) services, or a per-click arrangement outside of the safe harbor exception, as described below.
Confidentiality – Both parties should agree that use or disclosure of referral source information, except as authorized by law, is prohibited. Investment in a business relationship may be disclosed at a later time (such as a direct investment in a hospital joint venture), but only pre-approval by counsel should be considered, regardless of the specific circumstances.
Termination – Provisions for termination should allow a party to terminate the agreement by providing notice to the other party, such as 30 days or six months in advance, and should survive termination (for obligations of confidentiality and payment, for example). Such clauses should also detail the obligations upon termination (that reimbursement for services may be permitted, for example, under the terms in the agreement).
Considerations When Drafting Referral Agreements
When drafting a referral agreement, there are certain legal considerations that should be kept in mind. For example, if kickbacks are paid as a result of the referral, such payments could potentially result in liability under the Anti-Kickback Statute. In addition, there are certain state laws that could come into play, depending on the state in which the referral is being made and where the parties are located. As such, it is important to be sure that your referral agreement complies with all applicable state and federal laws and to clearly define the terms of the agreement, as well as how the relationship will work. The referral agreement should detail each party’s responsibilities. If a referral agreement does not provide adequately for various outcomes of the relationship, one or both of the parties could be at risk of liability. Referral agreements should also include provisions for governing law and dispute resolution, as well as jurisdictional issues and venue. As with any contract, it is always best practice to have an attorney present when negotiating a referral agreement to ensure the agreement complies with state and federal laws and to make sure that the terms of the agreement are fair to both parties, protecting the rights of all those involved.
Benefits of Referral Agreements
Referral agreements provide mutual benefits to both the party that makes the referral (the "referrer") and the business that receives the referral. The person or company that receives the referral (the "business") now has a new lead or client, while the referrer may receive a monetary benefit.
A referral agreement will typically include the process the business wants the referrer to use when making referrals, such as: Referral agreements are popular because they are flexible. Establishing a referral agreement is a cost-effective way to add new business as it does not involve any significant advertising or marketing costs or expenses. In fact, referral agreements will cut out the cost of advertising, marketing and salespeople that a business would otherwise have to spend to bring in its own business . Instead, the business can offer that value to the referrer.
The business also does not need to worry about training the referrer on how to make the referral. The referrer has the capacity to make the referral in a way that complies with all laws, for example, protecting any personal information it provides or uses in making the referral, and complying with the Telephone Consumer Protection Act and the Telemarketing Sales Rule if the referral involves telephone calls.
Moreover, it increases the business’s efficiency: the business now has another source for work that will not involve its personnel or resources. Finally, there may be tax advantages to the business as well.
Common Issues and Solutions
Referral agreements can sometimes fall victim to common challenges that can hinder their success. Miscommunication, non-compliance, and conflicts of interest are all issues that can arise and result in lost opportunities. It is vital to take measures to avoid these problems and ensure that both parties are on the same page.
A common pitfall of referral agreements is the failure to define the parameters of the partnership. In some cases, one party may have a different understanding of the level of commitment required. This can lead to resentment or even the terminating of the agreement altogether. Clear language and regular check-ins can minimize this issue.
When an agreed-upon referral source fails to comply with internal policies, it puts the referring provider at risk for ethical and legal violations. In the case of healthcare providers, failure to comply with the Federal Anti-Kickback Statute and other laws can result in financial and reputational damage. To avoid this, both parties should be well-informed about policies and regulations that govern their industry. Amending the agreement to include strict compliance provisions can also be helpful.
Conflicts of interest can arise when referral partners have a competing relationship. For instance, a referring provider may have a competing contract with another company. In these situations, it is essential to be transparent about all existing relationships. An obligation to disclose such relationships can also be included in the agreement. If a conflict arises that neither party can change, then termination of the agreement should be considered.
Referral agreements can also be misinterpreted when it comes to payment. In some cases, a referral provider may interpret the compensation as kickbacks, resulting in allegations of fraud. It is crucial to waive bonuses and discounts that might otherwise be construed as kickbacks. The healthcare industry is very strict about working only with providers who are of good moral character. As such, it is best to avoid any kind of payment that could be construed as unethical.
To overcome the potential challenges of referral agreements, it is necessary to be vigilant about communication. Regular meetings should be scheduled to discuss any issues that may arise. It is also good to over-communicate when it comes to referrals. For example, a referring provider should let a referral source know if they have referred the source three times already in one month. Too many referrals can become a problem and may even result in terminating the agreement.
Successful referral agreements are contingent on the ability of both parties to manage their relationship. This means that both parties need to be up-front about how they will work with one another. In addition, they need to adhere to best practices to avoid potential miscommunication, non-compliance, and conflicts of interest.
Referral Agreements and Affiliate Programs
While referral agreements and affiliate programs share a similar purpose – to connect businesses with individuals (affiliates) who will refer customers (and provide compensation) – the formal business structures of the two can be very different.
A referral agreement is a much simpler agreement and generally takes the form of a short, simple letter, so it is easy to implement. It may also contain confidentiality provisions, non-circumvention and non-solicitation provisions, or other standard contract covenants that may or may not be applicable or necessary.
A referral agreement might also have a provision that allows each party to terminate the agreement at any time, and elaborates on what happens to pending transactions when an agreement is terminated. For example, a business might agree that for all customers referred prior to the effective termination date , commissions will continue to be paid until all payments are received from those customers.
Affiliate programs, on the other hand, can be more formal and intense. Affiliate programs typically track a user’s activity across multiple sites through the use of cookies on the users’ browsers, and affiliate payments to members can depend on successful sales that can, in some cases, sometimes take months to be satisfied. The members themselves then refer those successful affiliate sales to their own sites and websites.
Affiliate programs may not be appropriate or necessary for every business. But for businesses with higher transaction values and longer customer buy cycles, affiliate programs can be a much more lucrative avenue for partnering with affiliates and boosting sales.