Cornering Kickbacks: How to Help Your Managers Avoid Them

Kickbacks can cost both you and your clients, but your managers might not even know when they’re receiving one. Teaching your employees to recognize and sidestep such wrongful transactions can reduce the risks to your bottom line.

Recognizing Kickbacks

Just what type of arrangement qualifies as a kickback?

“It’s generally receiving something of value in exchange for getting a contract or a better deal and pocketing that money or gift,” says Jamie Dokovna, a shareholder in the Florida law firm Becker & Poliakoff who practices employment law and works in the community association arena. In other words, you pat my back, I’ll pat yours.

In the association context, Michael Kim, of counsel with the Chicago law firm Schoenberg Finkel Newman & Rosenberg, LLC, says kickbacks occur when a manager gets a benefit or some type of remuneration that could be considered a potential disadvantage to either the association client or an individual owner.

“Mutual referrals based on merit — for example, referring a board to an attorney or plumber you’ve had a good relationship with — that’s probably okay,” he says. “But you can’t recommend a vendor because you expect something in return.”

Vendors aren’t the only source of kickbacks, though. “It can come in the owner context, as well,” Dokovna says.

“I’ve seen where particular employees are on an owner’s dole. They do almost everything for an owner, like running up packages or turning on their car for them, and they’ll do it before they do anything for anyone else or even the association. Every owner should be getting the same level of treatment and services.”

Not every Thanksgiving leftover, fresh-baked cookie, or tip is necessarily a kickback — the giver’s intent matters.

“Unit owners who want a favorable relationship might give a manager a generous holiday bonus,” Kim says. “Is it bribery or just generosity?

“What would really be a problem, for example, is if an owner doesn’t have all of the necessary paperwork for a remodeling project and gives the manager $100 to just call it a ‘repair’ so the owner can avoid the architectural review committee.

“Or maybe there’s a rules violation because an owner’s teenager made a ruckus. The owner might try to influence the manager to downgrade the charge or talk to the board to downplay the situation because he doesn’t want his kid summoned before the board or embarrassed.” These are the types of transactions to be avoided, for multiple reasons.

The High Cost of Vendor Kickbacks

“A kickback can violate the law,” Dokovna says. Even if it doesn’t, though, a kickback can have negative repercussions for both managers and their clients.

“Usually, there’s an individual benefit, as opposed to a benefit to the community as a whole,” Dokovna says. “The manager gets extra cash, but the association might not be getting the best landscaper.”

Then there’s the matter of how an unscrupulous vendor will cover the kickback. You can be sure that vendor isn’t going to eat the cost.

“The problem with kickbacks, apart from its moral repugnance, is that the victim usually is paying more than they should for what they’re buying,” Kim says. “The vendor paying the kickback is probably going charge more for the service to make up for the kickback it paid.

“Another approach could be that the vendor takes less profit, but then there’s an incentive to provide less service. The vendor might not be as attentive or use the best supplies because he wants to make up his eroding profit margin.”

And that vendor’s poor performance can reflect back on the management firm that recommended or hired it, hurting your reputation — and your client recruitment and retention along with it.

How to Cut the Risk

Both Dokovna and Kim endorse establishing formal policies to reduce the risk of employees accepting kickbacks, whether from vendors or owners.

“Some management companies say employees can’t accept any meals, gratuities, or presents at the holidays worth more than $25 in value,” Kim says. “That’s generally a small enough amount that no one will be unduly influenced.”

It’s probably wise to have two policies, one for vendors and another for owners.

“Management companies should have an anti-kickback policy regarding vendors that’s explained to every employee when they come in the door,” Dokovna says. “You need to educate employees on what is a kickback and how they might come up — for example, you might be approached by a vendor who wants to do business with the association.

“You also need to educate them on what can happen to them if they accept a kickback. They may lose their job.”

When it comes to owners, management companies and associations have some options. “Some management companies have no-tipping or no-gift policies to avoid situations with owners,” Dokovna says. “If there are going to be holiday bonuses, the association will handle it instead of the individual owners.”

Such zero tolerance policies, however, can put in employees in an awkward position when an owner offers, say, a cup of coffee or a plate of brownies.

“The other extreme,” Dokovna says, “is to say gifts or tips are permissible but reserve the right to basically force an employee to return money or a gift that exceeds a certain threshold and to discipline them if they do it again.”

You also can prohibit certain types of gifts, such as cash or travel, or require employees to obtain approval from a supervisor for gifts over a certain value. Some employers require employees to report any gift, regardless of value.

Whatever approach you opt for with your policies, don’t be shy about sharing them. It’s not enough to educate your employees — make sure your vendors and owners also are aware. Finally, as with any policy, your kickback policies will prove meaningless if they aren’t consistently and uniformly enforced.