Why Interior Designers Should Disclose Their Commissions: A Legal Perspective
Interior design is an art that elevates living spaces into functional and aesthetically beautiful environments. When engaging with an interior designer, individuals and businesses place their trust in the expertise and creativity of these professionals to bring their visions to life.
However, there's an aspect of the interior design industry that’s been a bone of contention between clients and the interior designers they hire for decades - undisclosed commissions and markups earned on product sales.
Although some interior designers argue that the financial arrangements with their trade partners don’t need to be divulged to their clients, there is a growing body of law, rules and ethical guidelines that say otherwise.
In this article, we’ll explore the significance of interior designers disclosing their commissions, kickbacks or markups to clients, the benefits of fostering transparency in the creative process, and the potential legal pitfalls of failing to do so.
Breaking down Interior Designer Compensation
Commissions, rebates, markups and other incentive-based compensation is one popular way interior designers structure their compensation. Other popular methods include:
Hourly Rate. Interior designers may charge an hourly rate for their services. The rate typically reflects the designer's experience, expertise, and geographic location. This approach is suitable for smaller projects or when the scope of work is uncertain.
Flat Fee. Some designers charge a flat fee for the entire project, negotiated upfront based on the project's complexity, size, and estimated time required. This method provides cost certainty for the client and allows the designer to focus on delivering the best results without being constrained by hourly billing.
Percentage of Project Cost. A common compensation model is based on a percentage of the total project cost. The designer's fee is a predetermined percentage of the overall budget, covering design, project management, and coordination efforts. This method is often used for larger and more comprehensive projects.
Retainer Fee. For ongoing design services, designers may charge a retainer fee. The client pays a recurring amount at regular intervals, and the designer provides continuous support and services throughout the project's duration.
Performance-Based Compensation. In some cases, designers may negotiate performance-based compensation tied to achieving specific project goals or milestones, providing an additional incentive for exceptional results.
Interior designers typically employ one or a combination of these methods, guided by their business model, project scope, and client preferences. However, it is the cost-plus method that can raises ethical concerns.
Commissions & Markups
With the cost-plus method, the interior designer charges the client for the cost of goods and services purchased on the client's behalf, along with an additional percentage or fixed fee as compensation.
With this method, interior designers can receive compensation from third parties, such as suppliers, manufacturers, or contractors, for recommending or specifying their products or services to clients. These commissions can take the form of monetary payments, discounts, or other incentives.
While commissions can be a legitimate source of income for interior designers, they also raise ethical concerns, as they create a potential conflict of interest as clients wonder whether commissions will tempt designers to prioritize products or services that offer higher incentives rather than those that genuinely better suit the client's needs and preferences.
To avoid such conflicts, the industry has moved towards a practice of transparency and disclosure regarding commissions.
Trend Towards Disclosure
The growing trend in the interior design industry towards disclosing commissions is due to recognition by interior designers and firms of the importance of transparency in their business practices and the positive impact it can have on client relationships. It is also part of a broader legal shift towards accountability and consumer protection.
Specifically, the shift towards transparency in interior design is driven by several factors:
1. AVOIDING LEGAL CLAIMS
Perhaps the most important reason for full disclosure of designer’s fee arrangements with their trade partners is avoidance of legal claims. These claims can come with steep fines and spell disaster for an interior designer’s business and reputation.
The following is a breakdown of the most common types of legal claims clients can raise against interior designers for failing to fully disclose their markups and commissions:
Breach of Contract
Courts have found interior designers liable to their clients for damages where markups were not specifically disclosed. In fact, this is exactly what happened to the interior designer in Tanya M Johnson v. Robert Shields Interiors, Inc., a 2016 case where the the contract for interior design and decorating services, including purchasing furniture, authorized a 10% markup on shipping and related services but did not provide for any other markups, commissions, or fees.
At trial, the client proved that she had been secretly charged an arbitrary markup anywhere from 35% to 100% on furnishings purchased by the designer (including a charge of $4,800.00 for a chaise lounge that only cost $2,481.00, and $11,000.00 for a breakfast table that only cost $5,999.40). The court held that the undisclosed markups on the items procured for the client were a breach of the agreement because they were not expressly authorized.
Violation of State Consumer Protection Laws
The Johnson v Robert Shields Interiors, Inc. court also found that the designer’s act of charging undisclosed markups, as well as having undisclosed rebate and commission arrangements with its vendors, was a violation of that state’s Consumer Protection Act, which prohibits business from “offering goods or services with intent not to sell them at the price or upon the terms offered;” and “using deception, fraud, false pretense, false promise, or misrepresentation in connection with a consumer transaction.”
Violating State Licensing Laws
Failing to disclose compensation arrangements with trades can also be the basis for a claim against an interior designer’s license as states that regulate the practice of interior design, such as California, New York, Florida (and approximately 36 other states within the United States and Canada), impose rules that require disclosure.
For example, Florida Statutes s. 481.2131 provides that interior designers “may offer professional services to the client as a consultant, specifier, or supplier on the basis of a fee, percentage, or markup,” however, each designer is responsible for “fully disclosing to the client the manner in which all compensation is to be paid. Unless the client knows and agrees, the interior designer shall not accept any form of compensation from a supplier of goods and services in cash or in kind.” Many other states have similar regulations.
Breach of fiduciary duty
In the interior design context, fiduciary duty refers to the legal and ethical obligation that interior designers have to act in the best interests of their clients and to prioritize their clients' needs and preferences above their own. This duty arises from the special relationship of trust and confidence that is established between the designer and the client.
An interior designer can breach their fiduciary duty to their client by engaging in actions or omissions that violate the principles of loyalty, honesty, and acting in the client's best interest such as by concealing commissions, prioritizing their own financial gain or personal preferences over the client's best interests, charging excessive fees, or misrepresenting costs.
Fraud
If an interior designer intentionally conceals undisclosed commissions or breaches from their client, then they also may be liable for fraud.
Fraud can also be claimed where a designer creates fake invoices or inflates expenses to overcharge the client and pocket the difference.
Ultimately, by upholding the legal obligation to disclose commissions and thereby complying with consumer protection laws and standards, interior designers will be in a better position to safeguard their reputation and business from legal challenges.
2. COMPLYING WITH INDUSTRY ETHICAL STANDARDS
In addition to established laws and legal claims, many interior designers are bound by certain ethical standards, including rules concerning the disclosure of all fees, imposed by state and national professional associations.
Some examples of such standards include:
National Organization Ethics Codes
In one set of ethical standards, the American Society of Interior Designers (ASID) Code of Ethics Section 3.4 provides that “Members shall fully disclose to a client all compensation that the member shall receive in connection with the project and shall not accept any form of undisclosed compensation from any person or firm with whom the member deals in connection with the project.”
Individual State & International Organization’s Ethics Codes
Several individual state and international organizations also have their own code on this topic. For example, the California Council For Interior Design Certification’s Code of Ethics & Conduct Section 1.4 requires that their members to disclose “any direct or indirect financial interest that he/she may have that could affect his/her impartiality in specifying project-related goods or services” and to “either terminate such interest, or withdraw from such engagement” if the client objects.
Similarly, the Interior Designer’s Institute of British Columbia’s Code of Ethics requires that its members “disclose to his or her client any direct or indirect financial interests which the member may have in the client’s project” and to “divulge to his or her client the complete method by which the compensation the member will receive is determined in connection with a project and the manner by which this compensation will be paid.”
Ultimately, disclosure of commissions and markups can help designers align with the industry’s professional standards of integrity.
Additionally, because many interior design contracts include representations that the designer will provide the services in accordance with “industry standards,” violating these ethical standards could also be considered a breach of contract.
3. IMPROVING CLIENT COMMUNICATIONS
Openly discussing commissions allows for more candid conversations between designers and their clients.
Let’s face it, charging secret markups or failing to disclose commissions can ultimately lead to a poor client experience - which, if repeated, will hurt a designer’s bottom line and their business’ standing. On the other hand, embracing transparency offers designers the ability to build trust and confidence with their client in several ways:
By articulating the designer's compensation rationale as the designer's reasonable revenue source, designers can explain their reasoning, and thereby minimize the perception of a conflict of interest or any impropriety.
It can also lead to clients feeling more comfortable expressing their preferences and concerns when they know their designer is upfront about financial arrangements.
Designers who embrace commission disclosure may use it as a selling point to attract clients who value transparency and ethical practices.
From a legal standpoint, the more comprehensive a designer's disclosures are regarding any markup, rebate, or commission arrangements with trade partners, the less likely claims of misrepresentation or deception will arise or gain credibility.
Conclusion
Transparency is the cornerstone of a successful and fulfilling designer-client relationship. By embracing open communication and disclosing any commissions earned from product sales to their clients, interior designers can reinforce trust, foster fairness, and ensure that their creative process remains free from potential conflicts of interest.
Additionally, engaging in this practice can also determine whether designers end up on the wrong side of a legal dispute. Ultimately, transparency and disclosure elevate the interior design industry, fostering happier clients, successful projects, and a more ethical and transparent creative community.
What are your thoughts? Leave your comments below!
This article is provided for general informational purposes and should not be construed as legal advice nor as a solicitation of, or advertisement for, legal services. Legal advice is specific to each situation and if you have a legal issue, you should consult a qualified attorney licensed to practice in your state. No actual or implied attorney-client relationship is created by virtue of this article or by your purchase of any templates from the ID Law Shop.
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