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Why Do Lawyers Charge a Retainer Fee?

Why Do Lawyers Charge a Retainer Fee

How lawyers are paid may be confusing to people with new legal needs. Some lawyers are paid a flat fee for providing legal services. Others are paid by a retainer fee held in a trust account.  In the latter case, why do lawyers charge a retainer fee?

Lawyers charge a retainer fee to ensure the client has the funds to pay for costly legal services. Retainer fees are usually required in cases with variable numbers of hours needed to complete. If the task is larger than expected, the lawyer will require the client to add more funds. If the task is smaller than expected, the lawyers will refund the excess.

What Is A Retainer Fee?

A retainer fee is money paid by a client to perform legal services for the client. The money is held in a special bank account. When the attorney bills the client for services and costs, the attorney will be paid from the bank account instead of directly from the client.

The special bank account is called a trust account. In some situations, it is called an IOLTA (Interest on Lawyer’s Trust Account) account. These accounts earn interest that is then donated to organizations providing financial help for legal services.

Retainer fees are usually required when the lawyer bills for their time on an hourly basis. The attorney tracks time down to six-minute increments. Most billing software requires the attorney to clearly note the client, list the tasks in detail, and the date of the work. Before the attorney withdraws from the retainer fee bank account, they will send the client a report with these details.

Retainer Fees, Hourly Billing Rates, Flat Fees

The way attorneys are paid is often confusing. Sometimes attorneys work on a flat fee. This is an upfront, fixed fee agreed upon when the lawyer is hired. Flat fees are usually charged for relatively simple legal issues.

Lawyers charge an hourly billing rate when legal issues are more complex, so the time involved could take longer than expected. Hourly billing rates range from $100 to $900 or more. Typically, lawyers will send the client a monthly billing statement showing how many hours have been worked and what work was performed.

Retainer fees are not really payment like a flat fee or hourly billing rate. Retainer fees essentially put money into an account. When the monthly billing statement is approved by the client, the bill will be paid from that account instead of directly from the client.

How Much Is The Retainer Fee?

How Much are Retainer Fees?

The amount an attorney requires for the retainer fee varies based on the attorney’s experience, the services to be provided, and market rates. Experienced attorneys can estimate approximately how much time your legal issue will take to resolve. The attorney also has a standard hourly billing rate for your legal needs. The retainer would ideally cover the expected time multiplied by the hourly billing rate.

Usually, lawyers operate on a monthly basis. So the retainer fee would need to cover at least a month of hours the lawyer expects to work on the case. If the work takes longer than a month, you may be asked to add more funds to the account. For particularly complex cases that are most likely to last many months, the lawyer may expect the retainer fee to cover several months of work.

There are dozens of different categories that may be used to classify the time needed to complete your task and the hourly billing rate. As a result, actual dollar values are hard to provide. Retainer fees may be as little as $500 to draft a demand letter or in excess of $10,000 for complex litigation.

Rules Lawyers Must Follow For Retainer Fees

Rule 1.5 of the American Bar Association’s Model Rules of Professional conduct provides recommendations to states on how attorneys should handle fees. Most states have adopted this rule officially. It has a lot of requirements.

First, the fee has to be reasonable. The reasonableness of the fee depends on eight factors. They range from the difficulty of the legal service to be provided and typical rates charged for the service to how long the attorney has had the client.

The fee should be negotiated in writing and clearly explained. It cannot be shared with lawyers from another law firm unless it meets strict standards. Contingency fees are only allowed in certain circumstances. Note, however, that a retainer fee is opposite from a contingency fee because it is paid in advance whereas a contingency fee comes from proceeds arising from the legal service, such as a large verdict.

It is important the funds are held in that special account. This is because attorneys may not “commingle” retainer fees with personal funds, operating funds for law firm expenses, etc. This protects the client’s funds from mismanagement.

Mismanagement of funds is the most common reason attorneys get in trouble. There are so many rules and they are complex that it is easy to make a mistake. Retainer fees, in particular, are complex because it requires so many steps for the attorney to be paid, including estimating the initial retainer fee, tracking hours worked, sending the monthly billing statement, and then paying the bill out of the retainer fee account.

Excess or Shortages in Retainer Fees

Ideally, the attorney will accurately estimate how much money is needed for the retainer fee. Sometimes, an unexpected complication may increase the amount needed for providing the legal service. When this happens, a new estimate is provided and the client is expected to provide new funds.

Other times, the legal service does not require as much time as the attorney predicted. In this situation, the attorney is required to refund the excess money leftover to the client. This is important because it means the retainer fee will not result in lost money.

How To Negotiate Retainer Fees

How to Negotiate Retainer Fees

Attorney’s fees are negotiable. Just like when buying a car, it is in your best interests to have a conversation with the attorneys you are considering hiring to negotiate how much you will pay. You can implement a lot of the same strategies as buying a car.

First, do your homework. Before the meeting, understand the attorney’s expertise, type of law firm, and complexity of your issues. More experienced, specialized attorneys at higher-end law firms will cost more.

Consult with two to three attorneys before picking one. Pick attorneys with different experiences and from different types of law firms to have options. You may not be allowed to reveal exactly how much the other attorneys charge, but having that knowledge will strengthen your negotiation.

When discussing the fee with an attorney, ask a lot of questions about what affects the amount of the retainer fee. Ask what is included in the fee. Ask who all will be working on your issue. Paralegals and junior attorneys often bill at lower rates.

By taking all of these steps, you should feel confident that your retainer fee is reasonable and fair.

Retainer Fee Agreements

When an attorney is hired, they usually provide a written retainer fee agreement. The agreement should explain exactly who will work on the case, the work involved, and details about payment.

Details about the retainer fee should include the amount of the retainer fee, when the client will fund the retainer fee, when and how the attorney will bill for the retainer fee, and how much are the hourly billing rates for everyone who will work on the case.

After the retainer fee agreement is signed, be sure to retain a copy. Disagreements about retainer fees sometimes arise. Having the agreement available will help clear up confusion. If the disagreement requires additional steps, the retainer fee agreement will be essential.

Final Thoughts: Why Do Lawyers Charge Retainer Fees?

This article explains why lawyers charge retainer fees. It explains the definition of a retainer fee and how it differs from an hourly billing rate. It also details how the amount of the retainer fee is determined.

There are a lot of rules surrounding how lawyers must manage the retainer fee. Retainer fees have to be held in special accounts and not mixed up with the law firm’s operating or attorney’s personal bank accounts. If any of the retainer fee is left over after the case, that amount must be returned to the client.

Retainer fees are negotiable. When negotiating, consider the lawyer’s experience and the complexity of the case. Consider consulting attorneys with different experiences to have options on how much the retainer fee will cost.

It is very important to have a written agreement about the retainer fee. This should include details about both the retainer fee and hourly billing rates for everyone working on the case.

Costs associated with legal issues are very important to clients. Understanding why lawyers charge retainer fees makes hiring a lawyer less confusing and less frustrating. This article should provide you with enough information to confidently hire a lawyer charging a retainer fee.

References:

  • https://www.investopedia.com/terms/r/retainer-fee.asp
  • https://www.linkedin.com/pulse/how-negotiate-retainer-fee-new-client-dan-lok/
  • https://www.lawpay.com/about/blog/avoid-commingling-funds/
  • https://www.wikihow.com/Negotiate-Attorney-Fees

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