I work for a company where sales people are compensated based upon their production; in other words, straight commission. But entertainment expenses are reimbursed to the salesperson by the company rather than from the salesperson’s own funds. There are times when the level of entertainment seems way beyond what is appropriate. When does entertainment become bribery?

In this case, we must address not only the ethical issue, but also the compliance issue. Depending upon the industry, there may be laws that regulate the level of entertainment allowed; these laws are sometimes referred to as “anti-rebating.” Also, when the customer, or client, is a public entity, there may be specific legal limits on the amount that a vendor may spend on an employee of the entity. Those limits are usually made clear on the website of the entity; and employees are required to share those limits with vendors. In addition, excessive entertainment of a government official can constitute violations of the FCPA, UK Bribery Act of 2010, and other anti-corruption laws.

Where there are no specific legal issues, there may be standards adopted by companies at both ends of the sales process, such as: “Customer entertainment cost may not exceed $X per event without prior approval.” In this case, while there is not a legal restriction, company policy places a constraint upon the employee whether he or she is the spender or the receiver.

But what about when there are no specific legal or policy issues involved? Are there any guidelines that we may use to determine whether an expense is unethical? I would suggest the following:

A generally recognized purpose of customer entertainment is to build a relationship between the salesperson and the customer. By getting to know each other in a casual setting, there will be better understanding and communication between the parties. This might take the form of a round of golf, a meal, or a sporting event. So, handing a customer tickets to a ball game may have a different feel than taking the customer to the ball game.

Some forms of entertainment may have legitimate business purposes and may justify a more expensive format. Bringing a group of clients to a lovely resort for education or focus sessions should not be a problem; and if a round of golf or an afternoon of relaxation on the beach is included, it would probably be appropriate. But a week at a high-end resort without a work-related agenda may be viewed as simply a “payback” for business. At the very least, there should be a tax ramification for the recipient.

The best test of the validity of an entertainment expense is full disclosure and total transparency. If there is any hesitancy to share the details of the event with others in the company, then there is a good chance it is not an appropriate expense. If your company has a “pre-approval” policy, this disclosure would be included. If you do not have such a policy, I recommend that you discuss the expense with the person to whom you report. If it is particularly large expense, it would be a good idea to include a third opinion.

Finally, you mentioned that the expenses are reimbursed to the salesperson by the company. I think this is a good policy since somewhere along the line extra pairs of eyes are viewing it.

A Branch Manager once called me to ask for advice. One of her salespersons was asked by the buyer at a client company if she could arrange some sort of business meeting in Monterey, California so she and her husband could play Pebble Beach Golf Course with the salesperson and her husband. I told the Branch Manager to check the website of the entity for limits on the amount an employee could receive in entertainment; she called me back a few minutes later and said, “Fifty bucks.” Amazingly, the client company was a public entity; some people just don’t get it.

Do you have a question or ethical dilemma you would like the Practical Ethicist to address? Send your questions and dilemmas to practicalethicist@complianceweek.com.

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