Referral Rewards That Stay Within the FTC's Rules

“Can I pay customers for referrals?” A thank-you for sending you a new customer is not the same thing as paying for a review, and the federal rules treat them differently. Three sets of rules shape how you do it: the FTC's rules on reviews, which a referral reward must never drift into; the FTC's Endorsement Guides, which apply when a customer you reward recommends you in public; and a few state laws aimed at referral promises used to close a sale.

A referral is not a review

Keep the two apart, always. The FTC's consumer review rule makes it a violation for a business to provide compensation or other incentives in exchange for, or conditioned on, reviews expressing a particular sentiment, positive or negative (16 CFR 465.4). Google goes further: its Maps content policy bars offering incentives, such as payment, discounts, free goods or services, in exchange for posting any review. A referral program that says “leave us a review and refer a friend for $50 off” mixes the two and breaks Google's policy on the review half. Asking for Google Reviews Without Breaking Google's or the FTC's Rules covers the review side in full.

A referral reward pays for a result: a new customer who hires you. It should never depend on anything the referrer writes online, and the referral card should not mention reviews at all.

When a customer posts about you, the reward must show

A referral passed along in conversation is one thing. A recommendation posted in a neighborhood group or on social media by a customer in your program is where the FTC's Guides Concerning the Use of Endorsements and Testimonials in Advertising (16 CFR Part 255) come in. An endorsement is any advertising, marketing or promotional message that consumers are likely to believe reflects the opinions or experience of someone other than the advertiser, and the Guides note that tags in social media posts can be endorsements (§255.0(b)).

The key rule is in §255.5(a): when a connection between the endorser and the seller might materially affect the weight or credibility of the endorsement, and the audience would not reasonably expect it, the connection must be disclosed clearly and conspicuously. The Guides say material connections can include monetary payment, free or discounted products, and “the possibility of being paid, of winning a prize.” One of the Guides' own examples is a program that awards points each time a participant posts about an advertiser's products, redeemable for prizes; those incentives, it says, should be clearly and conspicuously disclosed, and the advertiser should take steps to make sure they are.

So when a customer posts “Use this roofer, here's my code” and earns $100 when a neighbor signs, her post should say she gets a reward. How small can the reward be before it stops mattering? The FTC's question-and-answer page says the answer depends on whether knowing about the incentive would affect the weight or credibility readers give the recommendation, and that it is always safer to disclose.

“Clearly and conspicuously” has a definition: difficult to miss and easily understandable by ordinary consumers, and on social media or the internet the disclosure should be unavoidable (§255.0(f)). The FTC's Q&A page adds that a “thank you” to the company is not enough, because it does not necessarily tell readers the endorser got anything. Plain words work. As an example: “They pay me $100 if you hire them through my link.”

The business answers for it too

You cannot leave the disclosure entirely to your customers. The Guides say advertisers are subject to liability for failing to disclose unexpected material connections with their endorsers, and that an advertiser may be liable for a deceptive endorsement even when the endorser is not. They say advertisers should give their endorsers guidance on disclosing, monitor compliance, and act to fix non-compliance (§255.1(d)). The FTC's Q&A page puts it as advertisers needing “reasonable programs in place to train and monitor members of their network.”

For a small contractor, a reasonable program can be small: print the disclosure line on the referral card and in any referral email, and when you see a post that tags you and mentions your program without saying so, ask the customer to add it. One more line from the Guides matters here: in procuring or publishing consumer reviews, advertisers should not take actions that have the effect of distorting or otherwise misrepresenting what consumers think of their products (§255.2(d)). Rewarding only the customers who post glowing public praise would risk exactly that kind of distortion.

The state laws on referral promises

Federal rules are not the only ones. Some states restrict promising a buyer money for steering others to you as part of getting that buyer to sign. Three examples:

• California. “As a part of or in connection with the inducement to enter into any home improvement contract,” no person may promise or offer to pay, credit or allow an owner compensation or reward for placing home improvement business with others (Cal. Bus. & Prof. Code §7157(a)). A promotional gift is allowed only if it is not conditioned on getting a contract, is worth no more than $5, and is one per transaction (§7157(b)). A violation is a misdemeanor and grounds for discipline.
• Texas. The Deceptive Trade Practices Act lists a “chain referral sales plan” among its deceptive practices: in connection with the sale of goods, merchandise or anything of value, promising the buyer compensation for giving the seller the names of other prospective buyers, where the payment depends on an event after the purchase (Tex. Bus. & Com. Code §17.46(b)(19)).
• Florida, insurance work. A contractor may not offer, deliver, receive or accept any compensation, inducement or reward for the referral of any services for which property insurance proceeds are payable (Fla. Stat. §489.147(2)(c)), with fines of up to $10,000 per violation (§489.147(3)). Roofers and Insurance Claims covers the rest of that statute.

The pattern the California and Texas laws describe is the referral promise used as a sales tool on the person signing. A thank-you offered to a customer whose job is already finished and paid is a different situation, but neither law says so in those terms, so a contractor in either state should put the exact program to the state's contractor board, its attorney general's consumer office or a lawyer before launching it. These are examples, not a survey: check your own state's consumer protection law and contractor law for a similar rule.

A simple referral card

Built from the rules above, a referral reward that keeps its distance from trouble looks like this:

• Offered after the job, to customers whose work is done and paid, never in the sales pitch or the contract.
• Paid on a completed, paid job by the new customer, not on a name, a lead or an estimate.
• The same for everyone, and never tied to a review, a rating or a post.
• Disclosure printed on it, so anyone who shares it publicly has the words ready.
• Not for insurance-paid work where your state restricts referral payments on it.

As an example of the wording, for a state where the program has been checked:

“Thanks for choosing us. If a friend or neighbor hires us and their job is completed and paid, we'll send you a $50 gift card as a thank-you, and they'll get $50 off their job. No reviews or posts required. If you share this online, please mention that you get a reward if they hire us.”

Then track it like any other lead source: who referred whom, which jobs closed, and what the rewards cost against the work they brought in. Tracking Where Leads Come From shows a simple monthly table that turns that into cost per won job.

The short version

• Reward referrals, never reviews (16 CFR 465.4; Google's policy)
• A public recommendation from someone you reward must say so, clearly (16 CFR 255.5)
• Give customers the words and keep an eye on posts that tag you (16 CFR 255.1(d))
• Keep the referral promise out of the sales pitch; check state law first, especially in California and Texas
• No referral payments on insurance-paid work in Florida

General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.