Kickbacks and Shady Business
May 15, 2007 11:37 PM
I own with my partner a transcription service for film and TV production companies in Ontario. Recently, a company asked us to do something I consider slightly shady, and I'd like some opinions about what to do.
Apples Inc. contacted us and requested us to do some transcription of tapes for Oranges Ltd., for whom they'd produced a series of documentaries. But, they informed us that they did not realize Oranges Ltd. would want their transcriptionist to bill them directly. Oranges Ltd., the larger company, has all work that is done on their behalf billed directly to them for some kind of tax purposes. Apples Inc. was given by Oranges Ltd. a larger budget for transcription than was needed, because my company would do it for cheaper. When Apples Inc. contacted us, they told us that we should bill Oranges Ltd. the full amount, and then they would in turn bill us the difference, so that they could use the extra funds in areas where the project needed the money. As i understand it, because we are billing Oranges Ltd. for the full amount, they are our rightful employers, despite the fact that Apples Inc. contacted us. If Apples Inc. wants us to give them money that Oranges Ltd. is paying us, it is in fact a "kickback" and it's illegal.
Because Apples Inc. is not directly employing us, it's not "marking up", it's just shifting money around to their advantage, and we will have to pay taxes on the amount that the larger company, Oranges Ltd. pays us, so this is bad for us. And possibly illegal.
I want to keep this job because it's lucrative, but I need to figure out a course of action that is legal and smart. I'm fine with Apples Inc. getting their money, but I don't want to be feeding them an illegal kickback, and I don't want us to be participating in any kind of fraud. I am not comfortable invoicing a company for one amount when it's not actually an accurate reflection of the budget. What do you think we should do?
Apples Inc. contacted us and requested us to do some transcription of tapes for Oranges Ltd., for whom they'd produced a series of documentaries. But, they informed us that they did not realize Oranges Ltd. would want their transcriptionist to bill them directly. Oranges Ltd., the larger company, has all work that is done on their behalf billed directly to them for some kind of tax purposes. Apples Inc. was given by Oranges Ltd. a larger budget for transcription than was needed, because my company would do it for cheaper. When Apples Inc. contacted us, they told us that we should bill Oranges Ltd. the full amount, and then they would in turn bill us the difference, so that they could use the extra funds in areas where the project needed the money. As i understand it, because we are billing Oranges Ltd. for the full amount, they are our rightful employers, despite the fact that Apples Inc. contacted us. If Apples Inc. wants us to give them money that Oranges Ltd. is paying us, it is in fact a "kickback" and it's illegal.
Because Apples Inc. is not directly employing us, it's not "marking up", it's just shifting money around to their advantage, and we will have to pay taxes on the amount that the larger company, Oranges Ltd. pays us, so this is bad for us. And possibly illegal.
I want to keep this job because it's lucrative, but I need to figure out a course of action that is legal and smart. I'm fine with Apples Inc. getting their money, but I don't want to be feeding them an illegal kickback, and I don't want us to be participating in any kind of fraud. I am not comfortable invoicing a company for one amount when it's not actually an accurate reflection of the budget. What do you think we should do?
IANAL. On the tax portion of it, you just write off whatever amount you pay to the Oranges people as an expense. Consider it a headhunter fee, general contractor's cut, or something you would pay for a salesperson to secure you a contract (I completely forget the term for this). Then again, I'm not in Canada, either.
posted by IronLizard at 11:56 PM on May 15, 2007
posted by IronLizard at 11:56 PM on May 15, 2007
Oh, and you knew 90% of the answers would be telling you to call a lawyer, right? Well, you should.
posted by IronLizard at 11:56 PM on May 15, 2007
posted by IronLizard at 11:56 PM on May 15, 2007
I can think of no good reason why Oranges can't bill Apples and then Apples pay you. Apples bills Oranges for the transcription, whether or not they actually do it. They then subcontract the job to you, like any kind of subcontracting deal. Comes out of Oranges' line item exactly the same way. Only difference is that Apples is paying the tax, not you. So, a reason, but not a good one.
Seems to me that Apples is trying to shift the tax burden from them to you. If that's worth it to you, take the job. Otherwise, don't.
IANAL, but what Apples is proposing doesn't sound illegal. If you were a writer, Apples was an agent, and Oranges was a publisher, Oranges might pay you and then you might pay your agent. This is less common than Oranges paying your agent and then your agent paying you, but not wholly unusual.
posted by solid-one-love at 12:22 AM on May 16, 2007
Seems to me that Apples is trying to shift the tax burden from them to you. If that's worth it to you, take the job. Otherwise, don't.
IANAL, but what Apples is proposing doesn't sound illegal. If you were a writer, Apples was an agent, and Oranges was a publisher, Oranges might pay you and then you might pay your agent. This is less common than Oranges paying your agent and then your agent paying you, but not wholly unusual.
posted by solid-one-love at 12:22 AM on May 16, 2007
Whether or not this is shady depends on the overall shadiness level of the industry. There are some industries where this would be an unheard-of kickback, and others where it'd be a finder's fee and nobody would bat an eye. The likelihood of negative consequences depends not just on how legal this is, but also on how clean Oranges's own house is, and how well-connected all three of you are. So don't just get a lawyer, also get an accountant who's familiar with the industry.
posted by equalpants at 12:27 AM on May 16, 2007
posted by equalpants at 12:27 AM on May 16, 2007
IANAL but I don't see how this transaction qualifies as an illegal kickback. Kickbacks are wrong when a person influences a contract in exchange for remuneration. In government kickbacks are illegal, in the private sector they are unethical but not usually illegal because there is no legal requirement to select the lowest qualified bidder, a private company can give work to who it wants at any cost it agrees to.
In this case, Apple has apparently received a fixed-price contract and decided to subcontract the work to you, which is perfectly reasonable and legal. Oranges won't actually pay you what you billed them unless they are OK with this direct-billing arrangement at that price, so I would have no problem billing them and *after* they paid you I would have no problem giving Apples a referral fee (which is of course deductible to you as a business expense).
posted by aguy at 12:49 AM on May 16, 2007
In this case, Apple has apparently received a fixed-price contract and decided to subcontract the work to you, which is perfectly reasonable and legal. Oranges won't actually pay you what you billed them unless they are OK with this direct-billing arrangement at that price, so I would have no problem billing them and *after* they paid you I would have no problem giving Apples a referral fee (which is of course deductible to you as a business expense).
posted by aguy at 12:49 AM on May 16, 2007
It sounds dodgy to me. It sounds like Apples is trying to inflate the price so that they can take a cut.
You should charge Oranges the actual price of the work you have done for them.
If Apples believes Oranges has allocated too much for your job and too little for other areas of the project, then those budge issues need to be sorted out directly between Apples and Oranges.
Don't let yourself get caught up in it. If there is something dodgy (not necessarily illegal, but dodgy) going on, then that will damage your company's reputation. If Oranges feels they got screwed over, you will lose their business in future. If, however, they feel like they've got a good deal, then they'll recommend you to others.
posted by robcorr at 1:18 AM on May 16, 2007
You should charge Oranges the actual price of the work you have done for them.
If Apples believes Oranges has allocated too much for your job and too little for other areas of the project, then those budge issues need to be sorted out directly between Apples and Oranges.
Don't let yourself get caught up in it. If there is something dodgy (not necessarily illegal, but dodgy) going on, then that will damage your company's reputation. If Oranges feels they got screwed over, you will lose their business in future. If, however, they feel like they've got a good deal, then they'll recommend you to others.
posted by robcorr at 1:18 AM on May 16, 2007
Assuming this kind of arrangement isn't illegal, why not just be completely aboveboard about your arrangement with Apples in your dealing with Oranges? Mention the fee you'll be paying to Apples in your contract/statement-of-work with Oranges and include the fee to Apples on the invoices you provide to Oranges.
posted by RichardP at 3:52 AM on May 16, 2007
posted by RichardP at 3:52 AM on May 16, 2007
Boiling it down, Oranges wants to be billed directly to avoid paying more for it than it actually costs. Apples was planning to add a mark-up to the actual costs to pad their bottom line.
Is it illegal? Probably not. This sort of thing would be legal in most industries in the US (sorry, I know nothing about Canadian law) unless they were regulated specially. Call a lawyer.
Is it shady or unethical? I don't really think that it is, but it's not my decision to make. If you think it's shady or unethical, don't do it.
Will there be other repurcussions? Maybe. As equalpants said, it depends on the industry. Also realize that not doing it could cost you contracts in the future with Apples.
So... step 1... call a lawyer.
posted by toomuchpete at 5:06 AM on May 16, 2007
Is it illegal? Probably not. This sort of thing would be legal in most industries in the US (sorry, I know nothing about Canadian law) unless they were regulated specially. Call a lawyer.
Is it shady or unethical? I don't really think that it is, but it's not my decision to make. If you think it's shady or unethical, don't do it.
Will there be other repurcussions? Maybe. As equalpants said, it depends on the industry. Also realize that not doing it could cost you contracts in the future with Apples.
So... step 1... call a lawyer.
posted by toomuchpete at 5:06 AM on May 16, 2007
Oranges has the right to know what they get for their money. The easiest way is to add the 'costs' of the involvement of Apples as 'negotiation costs' to the contract. Apples cannot object to this, and next time Oranges will contact you directly. Good luck!
posted by Psychnic at 5:27 AM on May 16, 2007
posted by Psychnic at 5:27 AM on May 16, 2007
I worked in reality TV in the US and we were the Apples commissioned to produce a program for Oranges. We had a lot of transcribing going on, but we did it all in house. Only rarely did we outsource it (for the really important jobs that were presented to the network). When we did the billing, the transcribing company would bill us directly. We would never dream of inconveniencing them to help pad our budget else where. If that were the case we- as the Apples- wouldn't have to let the Oranges know we were under budget on one sector and needed to use the money elsewhere, we would just do it. Usually the Oranges give you x amount and you dole it out as you see fit. You only go to them if you are over budget and have run out of money. Not sure what the deal with your company is- but that is my experience. It sounds like they are putting your company in an awkward position. A well run production would never ask you to do that. If that is the case, I'm not so sure you want to work with them now or in the future. You could get stiffed when Oranges comes back and says- No, you bill Apples- and Apples says No, bill Oranges.... and the back & forth goes on and on and you are the monkey in the middle.
posted by MayNicholas at 6:29 AM on May 16, 2007
posted by MayNicholas at 6:29 AM on May 16, 2007
Good god, this just got a whole lot more complicated. Now, to follow up, all you kindly, intelligent folks, if I were to take the course of action suggested by Apples Inc., the production company, do you think writing off the bill they will be invoicing us with as a "headhunter's fee" is legal, when in fact they are not in business as a headhunting service?
Thank you for your advice, and also, yes, I probably should have looked up my name in a German dictionary before choosing it. Oh, well. Ich bin ein Midwesterner.
posted by Lieber Frau at 6:31 AM on May 16, 2007
Thank you for your advice, and also, yes, I probably should have looked up my name in a German dictionary before choosing it. Oh, well. Ich bin ein Midwesterner.
posted by Lieber Frau at 6:31 AM on May 16, 2007
Absolutely- I wouldn't get involved with them- but that's just me... good luck!
posted by MayNicholas at 7:00 AM on May 16, 2007
posted by MayNicholas at 7:00 AM on May 16, 2007
It sounds like you should charge more for your services whenever the market can bear it. Then this situation would not come up.
posted by mediaddict at 9:23 AM on May 16, 2007
posted by mediaddict at 9:23 AM on May 16, 2007
The Law Society of Upper Canada recommends that lawyers give a free half-hour initial consultation and almost all lawyers in Ontario do.
The Law Society has a referral line that you can call and get a referral to a lawyer with an appropriate speciality. It's a $6.00 900-number call but the lawyer will give you a half-hour free consult.
1-900-565-4LRS (4577)
http://www.lsuc.on.ca/public/a/finding/lrs/
posted by winston at 9:44 AM on May 16, 2007
The Law Society has a referral line that you can call and get a referral to a lawyer with an appropriate speciality. It's a $6.00 900-number call but the lawyer will give you a half-hour free consult.
1-900-565-4LRS (4577)
http://www.lsuc.on.ca/public/a/finding/lrs/
posted by winston at 9:44 AM on May 16, 2007
This is not that uncommon and happens to us all the time. Apples Inc is in it to make money. If they can't do that they will try to find someone else to do the job for them.
We would simply bill Oranges and then send Apple a "commission" for the difference.
You make money , Apples makes money and Oranges is still getting what they wanted at the price they consider reasonable. Doesn't seem like a kickback to me.
posted by Umhlangan at 10:09 AM on May 16, 2007
We would simply bill Oranges and then send Apple a "commission" for the difference.
You make money , Apples makes money and Oranges is still getting what they wanted at the price they consider reasonable. Doesn't seem like a kickback to me.
posted by Umhlangan at 10:09 AM on May 16, 2007
Make it above board, call it a referall fee, and then maybe it would be OK.
posted by alms at 12:58 PM on May 16, 2007
posted by alms at 12:58 PM on May 16, 2007
It's not a kickback, it's a commission just like you would pay a salesman.
Also, the company that hired you is the customer, regardless of who pays you. Your primary obligation is to the customer and they are the ones you should defer to with regard to invoicing processes. If asked, you should not hide the fact that a commission was paid, but you don't have to reveal the amount.
I am not in the US, so there may be legal issues here that I am not aware of - my answer is in the context of ethical business practice.
posted by dg at 6:13 PM on May 16, 2007
Also, the company that hired you is the customer, regardless of who pays you. Your primary obligation is to the customer and they are the ones you should defer to with regard to invoicing processes. If asked, you should not hide the fact that a commission was paid, but you don't have to reveal the amount.
I am not in the US, so there may be legal issues here that I am not aware of - my answer is in the context of ethical business practice.
posted by dg at 6:13 PM on May 16, 2007
Putting you in the middle of this is a real asshole move on Apple's part. Charging a premium for services you contract out is, of course, standard, but if they don't have the balls to negotiate with Orange for what premium they charge, that's their problem, not yours.
Hell, they're probably double-dipping, and are planning on billing them a premium and getting a crypto-kickback through you.
And, trying to snow you over with some kind of "oh, gosh, I don't know why they want to bill directly, must be some crazy hard to understand tax purposes" and an innocent look is pretty insulting to yout intelligence, too. Why do you think they want to see the bill?
Sorry, short answer, IMHO, is no.
posted by blenderfish at 10:03 PM on May 16, 2007
Hell, they're probably double-dipping, and are planning on billing them a premium and getting a crypto-kickback through you.
And, trying to snow you over with some kind of "oh, gosh, I don't know why they want to bill directly, must be some crazy hard to understand tax purposes" and an innocent look is pretty insulting to yout intelligence, too. Why do you think they want to see the bill?
Sorry, short answer, IMHO, is no.
posted by blenderfish at 10:03 PM on May 16, 2007
Asshole for sure, but do you think it may actually be illegal? I can navigate asshole, but if we are implicated somehow in fraud, that makes me want no part of this. If we write this off as a business expense, we won't be taxed on the "fee", and we keep their extremely lucrative business. I will consult a lawyer, but do their actions seem less than legal to you?
posted by Lieber Frau at 5:41 AM on May 17, 2007
posted by Lieber Frau at 5:41 AM on May 17, 2007
IAAL and IANYL and TINLA ... sounds like a commission scheme but rather than Apples taking a cut you are giving them a cut ... you should be able to cut contracts that make it above board ... however if Oranges were not aware of this it is ethically shady (however probably not illegal). I would probably do it.
posted by jannw at 8:45 AM on May 17, 2007
posted by jannw at 8:45 AM on May 17, 2007
This thread is closed to new comments.
Lieber Frau
dont you mean Liebe Frau? lieber is male.
posted by krautland at 11:51 PM on May 15, 2007