The Best of the Legal Hotline: The Ins and Outs of Referral Fees


 Tracy Rucka  |    October 09, 2014
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The topic of referral fees is a frequent subject of conversation on the WRA‚Äôs Legal Hotline. Some questions relate to when a REALTOR¬ģ can pay a referral, and other questions ask when and how to legally receive a referral fee.

Paying out referral fees

The statute outlining the law regarding paying referral fees is Wis. Stat. ¬ß452.19: ‚ÄúWis. Stat. ¬ß 452.19: Fee-splitting. No licensed broker may pay a fee or a commission or any part thereof for performing any act specified in this chapter or as compensation for a referral or as a finder's fee to any person who is not licensed or registered under this chapter or who is not regularly and lawfully engaged in the real estate brokerage business in another state, a territory or possession of the United States or a foreign country. Under s. 452.03 an agreement to pay a real estate brokerage commission to a person not licensed as a broker is void at its inception ...‚ÄĚ

Before entering into an agreement to pay a referral, how can a broker ensure that the referral recipient is properly credentialed?

Wisconsin licensees can use the Wisconsin Department of Safety and Professional Services (DSPS) Wisconsin Credential/License Search tool online at app.wi.gov/licensesearch. Search results will show the status of the individual’s license as well as whether they are eligible to practice. If searching for a real estate salesperson, search results may reveal an inactive credential and ineligibility to practice. This scenario is possible when a licensee has received a broker’s license. Two searches may be necessary because once a broker credential is issued, the inactive sales credential remains in the DSPS system. 

Remember to repeat the search before making the referral payment. The Real Estate Examining Board (REEB) requires the recipient of the referral fee to have an active credential when (1) the contract to pay the referral is entered into, and (2) at the time of the payment of the referral fee. When entering into a referral fee agreement, the terms of the referral should include a condition requiring the recipient of the referral to renew their license if the payment will be after the next biennium renewal period. 

Can a broker pay a referral fee to a licensee from another state? 

Yes, so long as the broker receiving the referral is regularly and lawfully engaged in real estate brokerage. The broker paying the referral should request written confirmation from the out-of-state licensee (OSL) that documents the OSL’s regular and lawful engagement in real estate brokerage in their state. See Legal Update 02.01 regarding referral fees agreements at www.wra.org/LU0201 as well as the checklist for referral fee agreements on page 15 of Legal Update 02.12 at www.wra.org/LU0212.

Is it possible to pay a referral fee directly to a salesperson with an employing broker?

No. Pursuant to Wis. Stat. ¬ß 452.14(3)(f), any referral fee received by an employed salesperson ‚ÄĒ whether licensed as a broker or a salesperson ‚ÄĒ in connection with a real estate transaction may be received by the salesperson only from the salesperson's employing broker. The referral fee will be then paid by the employing broker subject to the independent contractor agreement with the salesperson.¬†

An agent has an active salesperson's license but is thinking about leaving the employing broker. Can the agent still practice real estate, provide any services or get paid a referral? What happens to the REALTOR¬ģ membership?

The REEB/DSPS issues real estate credentials and determines who can engage in real estate brokerage. According to license law, a person with a real estate salesperson's license may engage in any real estate brokerage services only when the licensee has their license held with an employing broker. A salesperson may not practice real estate, and cannot engage in any showings, negotiations or drafting of offers without an employing broker. 

Once the agent leaves the broker, a non-employed salesperson may make and receive referrals and be paid referral fees directly. The agent must have a valid, current license. The agent must complete CE requirements and pay the renewal fee at the biennium to keep the salesperson's license current. 

The license status with the DSPS ‚ÄĒ not REALTOR¬ģ membership ‚ÄĒ determines an agent's ability to legally receive a referral fee. REALTOR¬ģ membership is not a prerequisite to payment of a referral. If the agent chooses to renew the license and leave the employing broker, the agent may not maintain REALTOR¬ģ membership. An individual with a salesperson license may not be a REALTOR¬ģ without a REALTOR¬ģ broker. An individual with a broker's license may retain and renew REALTOR¬ģ membership as an individual.¬†

An agent is thinking about retiring. The agent has not yet taken any CE courses for the 2013-14 biennium, and the December 14 biennium deadline is near. What happens with the transactions and offers that will close after December 15? Can the agent finish out the transactions and be paid/receive commission if she no longer has her license?

A person must have a valid active license to engage in real estate practice. If a person chooses not to renew a license by December 14, 2014, which is the end of the current biennium, the person cannot participate in any real estate transactions until the license is renewed. Until such time as the person completes CE requirements, submits a renewal application to the DSPS and pays the license fee ‚ÄĒ or late fee if after the deadline, the person cannot legitimately provide brokerage services after December 14 or during the next biennium.

If an agent is retiring, the agent also should notify the DSPS of the retirement within 10 days of terminating the current brokerage relationship. To notify the DSPS of the termination, Form 766 may be used. Form 766 is available on the DSPS’ website at dsps.wi.gov/Documents/Credentialing%20Forms/Business%20Application%20Forms/fm766.pdf.

Regarding pending commissions paid after December 14, the REEB recently indicated that in order for a broker to pay an individual a referral fee or commission, that recipient must have a current real estate license. Therefore, based upon the REEB's strict reading of the statutes and rules, it would appear that the REEB would also disallow the payment of a commission to an individual if that individual does not have a valid license. An attorney may need to review the current independent contractor agreement to see if the agent is legally due amounts under the agreement, prior to their termination date, and to address the timing and payments, if any.

Incoming referrals

The agent negotiated a referral agreement with a friend and the check was made out in the agent’s name. Can the agent receive the referral directly? 

No. The payment of the referral fee must be made to the employing broker. The agent cannot in essence cut out the broker both contractually and statutorily. According to Wis. Stat. § 452.14(3)(f), a licensee may accept compensation only from his employing broker if the compensation relates to the licensee’s performance of any act in connection with a real estate transaction. In addition, the independent contractor agreement determines the agent’s expectation of payment of compensation, commission and referrals. 

Does a broker-to-broker referral fee need to be in writing? 

Technically the answer is no; practically, though, the answer is yes to assure that both brokers have a meeting of the minds and an enforceable agreement. There is no standardized referral agreement form, so the broker may consider working with legal counsel to develop an agreement format that is appropriate to the company’s marketplace, policies and transactions.

A comprehensive referral agreement will contain these elements:

  • The referred party by name and possibly contact information.¬†
  • The identity of the brokers/firms and the agents, if any.
  • Confirmation of proper licensure.
  • The requirement(s) to earn the referral; this is the standard of performance.
  • Amount of the referral, when the referral will be paid, and who will pay the referral.
  • Time limits on the payment of the referral.¬†

A more detailed checklist is available in the August 2005 Wisconsin Real Estate Magazine article, ‚ÄúProtecting Your Referral Fees‚ÄĚ at www.wra.org/WREM/Aug05/ReferralFees.

The agent has a friend who has a business providing painting, handy work and some light landscaping. Can the agent refer the seller to the business and get paid a referral? 

When the referral is made in the context of a transaction, the broker must follow Wis. Admin Code § REEB 24 rule and disclose in writing that he will receive a fee from the painter. If the broker is not acting as an agent and the referral occurs outside of a transaction, then it is not subject to license law. It may be prudent, however, to disclose the referral fee in all cases to avoid any possibility that a transaction may later occur with the party. This disclosure need not be in writing, but an email or other writing would be recommended if the referral were to a party in a transaction. 

What about referral fees between settlement service providers like lenders or title companies?

RESPA Section 8 prohibits referral fees and kickbacks between settlement service providers. RESPA basics, affiliated business arrangements, RESPA enforcement and more information is included in the WRA July 2014 Legal Update, ‚ÄúRESPA Enforcement.‚ÄĚ This Update is dedicated to RESPA and is available online at www.wra.org/1407.¬†

A broker believes that he should give three names when making referrals to contractors or inspectors. What is the risk if only one name is given? 

The risk is based on the concept of negligent hiring and/or negligent supervision due to endorsing or recommending one service provider. To minimize risk, the broker may prepare a list of professional inspectors and contractors. The list may include applicable certifications, credentials and references from past customers. On the list, the broker should include a disclaimer stating that the list is not an endorsement or guarantee of performance of the services. Giving the consumer several choices minimizes broker risk. More information about avoiding liability when making referrals is included in the May 2004 Legal Update, ‚ÄúAvoiding Liability When Signing and Making Referrals‚ÄĚ at www.wra.org/LU0405.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.

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