In residential contracting, we use the term “inducement” to refer to the giving of something of value — cash, a coupon, a free gift — to a prospective customer. In exchange, we're 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, based on what the inducement cost you. In Maryland, for example, a contractor can't give the consumer an inducement that cost the contractor more than $25.

When closing a sale, contractors often use an inducement known as a “button up,” the most “ common form of which is the “referral fee.” As an incentive for the buyer to “button up” the sale, the contractor promises a fee for referring other customers to the contractor.

For example, the salesperson might say, “If you buy windows from us today, we'll give you $100 for every additional customer you send our way who buys windows from us.”

Because the sale is contingent on the referral aspect, most states prohibit referral fees 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 isn't used as an inducement to close, 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.

Also, know the rules that apply in the specific state where the sale takes place. —D.S. Berenson is the Washington, D.C. managing partner of Johanson Berenson LLP (www.johnansonberenson.com) a national law firm specializing in the representation of contractors and the home improvement industry. He may be contacted at 703.759.1055 or info@johanson berenson.com.

This article is for informational purposes only and should not be construed as legal advice.