When it comes to payment, lawyers have a number of options available. You can use:
- Hourly rates based on time spent.
- Flat fees with a fixed cost.
- Success fees are linked to the outcome of the case.
- Withholding Fees Requiring Upfront Payments.
How do you know what’s best for your law firm? It starts with gaining a solid understanding of each legal billing model. In this blog we give a comprehensive insight fee fees– discusses the types available, how they work and the benefits they bring to clients and attorneys alike.
What is a retention fee?
A retention fee is an upfront payment made by a client for future legal services. Lawyers calculate these fees by multiplying their hourly rate by the number of hours they expect to take on a matter. The client pays the fee before the work is completed and the law firm holds the funds in a designated account. When lawyers complete their work, they deduct their fee from the fee.
What types of retention fees are there?
There is no uniform model for fee remuneration. Instead, payments come in a variety of forms and structures, allowing attorneys to tailor them to the unique needs of their clients and firm. Next, we look at some common types of royalties—starting with a look at the difference between earned and unearned royalties.
Earned fee
A lawyer receives a well-deserved fee for the services he renders. These funds are only transferred to a law firm’s operating account after the job is done, which is why they are called “earned” fees.
Unearned fee
Unearned advance fees are advance payments held in a special advance account Before any legal work begins. Solicitors can only access the funds once they have completed the work – the fee simply serves as a deposit ensuring the availability of funds for future assistance. Once the attorney has provided the services, he transfers the funds from a client escrow account to an attorney’s operating account.
Examples of retention fees
Withholding fees work well for a range of legal matters and customer needs. Below we have highlighted a few different examples of attorney fees.
- A classic fee, also known as “General Retainer”, is an advance payment to secure legal services. These fees are not tied to hours or services – they merely guarantee that the attorney will be available for legal services when required.
- A security fee is an advance payment for legal services, where the client owns the funds until the lawyer completes the work. Once the legal work is complete, the lawyer can access the money. This is often used when there are potentially high costs associated with a legal matter.
- An advance fee that is always applicable is an arrangement whereby a client pays a fee into a separate escrow account that an attorney bills after the service is rendered. The fee is replenished once a predetermined minimum balance is reached. This fee structure is popular with clients who need regular legal assistance, such as with family law matters.
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How retention fees work
After an initial consultation with a lawyer, the client makes an upfront payment that covers the agreed down payment for the legal services. As a lawyer works on the matter, he records his time and compares it to this fee.
Let’s say the hourly rate is $250. The deductible could be $2,500 if an attorney estimates the matter will take 10 hours. If you only spend two hours on the matter in the first month, reduce the deductible by $500, leaving the balance as $2,000. Next month the balance would be $750 if the attorney worked five hours. you have the idea
It is important to note that the deposit is just a deposit and may not reflect the final invoice amount. Should an attorney spend less time on the matter than estimated, the excess would be returned to the client. If they spend more time, the customer increases the deductible.
When accepting fees, attorneys must always follow the legal and ethical guidelines in their jurisdiction. Recently, the American Bar Association issued an ethics statement to help attorneys deal with advance payments collected from clients for legal matters. You can find out more about this here.
What is a fee agreement?
As in any industry, payments can be a big problem for lawyers. It is therefore important to have documents that set clear expectations and prevent misunderstandings.
This is where the fee agreement comes into play. This is essentially a written document that sets out the terms of the contract between a client and a lawyer.
Some common elements are:
- Basic Contact Information
- Scope of legal services
- Type of deductible and amount of deductible
- terms of payment
- communication frequency
- termination clause
How should the fees be paid?
Fees can be paid in a variety of ways, depending on a lawyer’s preferences and the clients he serves. This includes:
- prepayments – Fees paid in one full, one-time payment.
- installments – Payments broken down into smaller, predetermined amounts that customers make over a period of time, such as monthly or quarterly. Installment payments help reduce the burden of large payments and increase the affordability of legal services.
- subscription models – These are recurring fees that are replenished at different intervals to maintain access to legal services. Businesses or individuals who require regular legal assistance often resort to subscription models.
Don’t worry if the mere thought of keeping track of payments associated with retention fees seems daunting. Today, legal payment processing solutions make the process as easy as possible.
Take Clio Payments for example. The software enables lawyers to easily accept secure online payments for fee contributions. Automation can take care of many tedious tasks, such as automatically processing recurring payments or sending reminders to customers to top up their deposit. Clio also handles all escrow transactions, including refunds, in accordance with Trust Accounting and IOLTA regulations.
Why lawyers should charge a fee
While not for everyone, retainers can bring a number of great benefits to many clients and attorneys. Here you can see their advantages in more detail.
Increased financial stability
With a fee, law firms can better predict their work and manage their time because of this foresight. They also have the peace of mind that they have a steady and reliable stream of income at their disposal.
Improved customer experience
Withholding fees promote a better customer experience. Because it gives customers the peace of mind that you’re there when you need them. These regular and ongoing interactions can build trust—and ultimately ensure a better understanding of their needs and preferences.
Protection for lawyers and clients alike
Fees protect lawyers and clients. By allowing lawyers to keep funds safe until work is complete, they reduce the likelihood of potential payment problems. Clients can also be sure that their legal concerns will be supported promptly and reliably if required.
What fee structure is the best option for your law firm?
When considering which fee structure is right for your business, several factors come into play. These include:
- The goals of your law firm
- customer preferences
- practice center of gravity
- Geographical location
One thing is certain: Customers want flexibility more than ever. clios 2022 Legal Trends Report found that clients want more billing options from lawyers – and this may even affect their decision to hire a law firm. For example, 67% would like the ability to pay for legal services through a flat fee, but only 37% of law firms offer this.
For this reason, you should consider offering a combination of fee structures—including hourly billing, flat rates, and contingency fees—in addition to fee-based fees.
You may also decide that other alternative fee arrangements are a good fit for your business. Cloud-based practice management solutions like Clio make it easy to offer this range of payment options.
Final notes on the fees
Withholding fees offer law firms a variety of benefits, from fostering stronger client relationships to improving cash flow. Clients also benefit when they gain confidence that an attorney’s time is available for future needs. Legal technology solutions like Clio Payments can do much of the heavy lifting of managing retention fee administration costs, such as through automated payment reminders.
Try Clio for free and learn how you can improve your law firm’s billing processes today!
We published this blog post in August 2023. Last update: .
Categorized in: Accounting
