It’s no secret that legal clients are fed up with exorbitant hourly billing rates, but what about flat-rate attorney fees?
It’s often cited as a way to significantly improve the lawyer-client relationship, but flat-rate attorney fees can bring a host of issues for both attorneys and their clients.
For example, if a client pays a large fixed fee upfront, where is that money held?
What happens to that money if the client wants to part ways with the attorney before the engagement is completed? The list goes on …
Fortunately, California has revamped its Rules of Professional Conduct to address the issues that arise with these types of billing arrangements.
In this post, we’ll break down those rules – in particular, Rules 1.15 and 1.5 – so that those of you who are new to the flat fee billing world can understand how to implement this fee structure.
Then, we’ll round out the article by providing you with some strategies for setting appropriate flat fees for your practice.
Understanding Rule 1.15
California Rule of Professional Conduct 1.15 isn’t just about flat fee billing arrangements, but it is the principal guide for how lawyers can ethically handle these arrangements. Here’s a breakdown of its key components:
Safekeeping funds and property
Rule 1.15(a) mandates that “all funds” received or held by a lawyer for a client must be deposited into identifiable bank accounts labeled “Trust Account” or similar. These funds include things like advances for fees, costs, and expenses.
The reason for the rule is obvious from an ethical standpoint – it ensures that client funds are kept separate from the lawyer’s personal or business funds to avoid any commingling (and potential allegations of embezzlement).
Depositing flat fees
Interestingly, however, Rule 1.15(b), states that “flat fees paid in advance for legal services” can be deposited into the lawyer’s or law firm’s operating account. That said, the rule comes with conditions:
- The lawyer must inform the client in writing that they have the right to require the flat fee be deposited into a trust account until it’s earned;
- If the flat fee exceeds $1,000, the client’s agreement to deposit the fee into the operating account must be documented in a signed writing; and
- Clients must be informed that they are entitled to a refund of any unearned portion of the flat fee if the representation is terminated or the services are not completed.
Where does the money go if there’s a dispute?
Of course, with any type of billing arrangement, disputes will sometimes arise. With flat fee billing, disputes often center on whether the lawyer has earned the full fee paid by the client.
When these disputes come up, Rule 1.15(c) instructs that the disputed portion should be kept in a trust account until the dispute is resolved.
Of course, how you resolve that dispute could be the subject of a whole other article…
Understanding Rule 1.5
California Rule of Professional Conduct 1.5 deals with fees generally, but centers on the issue of unconscionable fees.
Generally speaking, Rule 1.5(a) prohibits lawyers from making agreements for, charging, or collecting unconscionable or illegal fees.
Factors determining unconscionability
Rule 1.5(b) outlines the thirteen factors to be considered in determining whether a fee is unconscionable. These factors include things like:
- The amount of the fee in proportion to the value of services performed,
- The relative sophistication of the lawyer and client,
- The novelty and difficulty of the legal questions involved,
- The skill required to perform the services,
- The time and labor required to handle the client’s matter, and, importantly
- Whether the fee was fixed.
Flat-rate attorney fees for specified legal services
Rule 1.5(e) allows lawyers to charge flat fees for specified legal services. According to the rule, a “flat fee is a fixed amount that constitutes complete payment for the performance of described services, regardless of the amount of work ultimately involved.”
The Rule further states that flat fees can be paid in whole or in part in advance of the lawyer providing those services.
Interestingly, however the commentary to Rule 1.5 instructs that when “a lawyer-client relationship terminates, the lawyer must refund the unearned portion of a fee.”
This comment seems to be somewhat at odds with the language of the rule itself, which clearly contemplates the lawyer keeping the entire fixed fee “regardless of the amount of work ultimately involved.” (An issue we’ll return to below.)
Evaluating if flat-rate attorney fees are suitable for your practice
Without a doubt, certain practice areas are not conducive to flat fee billing. Thus, lawyers should evaluate the types of matters they handle to determine if flat fees make sense.
In my humble opinion, flat fees work best for services with predictable workloads, such as drafting basic wills, handling uncontested divorces, or providing simple business formation services.
They’re typically not a good idea for complex litigation or heated business negotiations where your workload can be dictated by your opponent’s appetite for aggression.
Here are some things to consider when you’re making your evaluation:
Benefits and drawbacks of flat fee billing
Flat fee billing offers several benefits, including greater predictability for clients and simpler billing processes for lawyers.
Clients appreciate knowing upfront what their legal costs will be, which can enhance trust and satisfaction.
That said, flat fees can be risky for lawyers if the work required significantly exceeds initial estimates, potentially leading to undercompensation. Trust me when I tell you that this happens a lot.
Flat fees won’t save you from tracking billable hours
One of my least favorite things about practicing law was tracking billable hours. I know I’m not alone in that. Yet, if you think flat fee billing will help you escape that cumbersome task, think again.
The truth is, you have to continue tracking your hours just in case a dispute arises between you and your client (I told you I’d return to this issue). If the client decides to terminate the relationship and argues that your fixed fee hasn’t been earned (thus entitling the client to a refund), you’ll need proof that the amount you’ve been paid should stay in your account.
Unfortunately, meticulous tracking of your time is the best way to do that.
Determining how much to charge
Of course, once you decide that flat fee billing is right for your practice, the fun is just beginning. Now you have to decide what you’re going to charge for your services.
How the heck do you do that? We’re glad you asked.
Here’s what we suggest:
1. Evaluate the scope of services
The first step is to clearly define the scope of the services you will provide. This involves outlining the specific tasks that will be included in the flat fee.
For example, if you are drafting a basic will, consider things like client meetings, document preparation, and the time it takes to make any revisions requested by the client.
2. Assess the complexity and time requirements
Consider the complexity of the legal matter and the time it typically takes to complete similar tasks.
For straightforward tasks like drafting simple contracts, the time required might be predictable. For more complex services, you might need to build in a buffer to account for unforeseen complications.
3. Analyze historical data
When in doubt, you should always return to the data.
Review your historical billing records for similar services. Analyze those matters to determine the average time spent and the fees charged. This data can provide a baseline for setting your flat fees.
4. Consider market rates
Research what other attorneys in your area and practice field charge for similar services. This can help ensure that your fees are competitive. That said, you always want to make sure your fees reflect the quality and value of your services and level of experience.
5. Include administrative costs
Don’t forget to account for overhead and administrative costs. This includes office expenses, legal research tools, and any other costs associated with delivering the service. As you know, those things don’t pay for themselves.
6. Communicate clearly with clients
Transparency is key. Ensure that your clients understand everything the flat fee covers (and what it does not). Clearly outline the services included in the fee and any potential additional charges for work beyond the agreed scope.
7. Regularly review and adjust fees
Periodically review your flat fee structure to ensure it remains appropriate for you and your clients. Adjust fees based on changes in the market, your experience, and any new efficiencies you have developed. Oh, and don’t forget to get feedback from your clients (especially those who stuck with you as you transitioned from hourly fees to flat fees).
So, there you have it. Just about everything you need to know to set up a flat fee billing arrangement for your clients. Remember, just like most things in business, there’s going to be a learning curve.
Do your homework, communicate early and often, and (as always) follow the rules.
Conclusion
Flat-rate attorney fees can significantly improve the lawyer-client relationship by providing predictability and transparency in legal costs. However, it also presents challenges, such as managing upfront payments and handling disputes.
California’s Rules of Professional Conduct, particularly Rules 1.15 and 1.5, offer guidance on ethically implementing flat fees. By understanding these rules and following best practices for setting and managing flat fees, lawyers can ensure fair and effective billing arrangements.
