How a Law Firm Makes Money

How a Law Firm Makes Money

An associate in a law firm can increase his or her value by understanding how a law firm makes money. Most law firms earn fees in one of four ways: (1) contingency fees; (2) hourly fees; (3) flat fees; and (4) retainers.
 
Contingency Fees
 
The most controversial method of earning money is the contingency fee. It is a fee earned by the attorney who represents someone who has been injured or who seeks a benefit. The attorney takes the case, anticipating that he will eventually be paid. The attorney lays out all of the expenses, including the costs of obtaining copies of reports, taking depositions, and paying for experts to examine the client or determine the potential financial loss to the client. If the attorney is successful, the attorney will be paid a percentage of what the client is awarded or the amount of the settlement obtained on the client's behalf. The attorney will also be reimbursed, without interest, for all of the costs incurred. The usual contingency fee for tort cases is 1/3 of the amount awarded. This is increased to 40 percent if the case is appealed.
 
Where a statute is involved, the plaintiff's attorney is limited by the statute. For most workers' compensation claims, the contingency fee is limited to 20 percent of the amount awarded. For social security claims, the amount is usually limited to $4,000 out of the past due benefits, unless there are special circumstances.
 
The controversy over contingency fees is based on the belief, by some, that the amount the attorney earns is out of proportion to the harm to the plaintiff or that it encourages frivolous law suits. There are no statistics as to what amount of frivolous suits is directly related to contingency fees. It should be remembered that the attorney is risking not being paid for the work performed and that often, the plaintiff does not have sufficient resources to pay the attorney prior to the time the case is resolved.
 
Hourly Fees
 
Defense attorneys, meaning those who defend civil litigation claims, are paid on an hourly basis for the work they do. A firm that represents insurance companies in automobile accident cases will bill the insurer for all the hours necessary to defend the case. Billing is usually performed on a monthly basis, with time sheets to back up each item of expense and the amount of time necessary to complete the task. These tasks include answering pleadings and motions, asking and responding to interrogatories, attending depositions, and participating in the trial. Hourly fees are also used in contract disputes, domestic law, real estate problems, and regulatory conflicts.
 
In most hourly fee cases, the client pays a retainer fee that is placed in an escrow account. With each month’s billing, the law firm deducts the amount owed for fees from the escrow account and credits it to law firm income. When the retainer drops below a certain amount, with new charges anticipated, the law firm may request additional retainer or may switch to a monthly billing, based on the number of hours and accumulated expenses.
 
Many law firm use software that will automatically capture real time. It is important that the associate learn and properly use the software adopted by the firm. The software will allow the attorney to capture the time spent drafting documents, talking to clients on the phone, interviewing clients, and even performing research. It may also capture expenses for mailing, copying, or faxing documents.  The software will permit the attorney to input time for out of office activities, such as depositions, hearings, and trials.
 
It should be noted that there is a group of attorneys pushing to eliminate hourly fees and replace them with negotiated fees for specific services. This type of arrangement helps to avoid surprises in the amount of fees charged to represent a client in any given situation.
 
Retainer Fees
 
After representing certain types of businesses over a period of time, a law firm will know approximately how much time it will take to provide representation for that business. Rather than charge an hourly fee for everything done, the law firm may accept instead a monthly retainer. That retainer will cover all of the work the law firm will do for the client each month. Some months the law firm may provide more services, other months, it may provide less, but over time, the amount will average out. The retainer also represents a stand-by fee. The law firm stands ready to represent the client, no matter what arises.
 
Flat Fees
 
Flat fees consist of a set amount of money to perform a specific job for the client. This is often used is criminal cases or simple transaction cases. The law firm may charge a set fee to draft a simple will or to draft articles of incorporation for a small business. An attorney may charge a set fee to represent a client charged with speeding, possession of marijuana, or assault.
 
ABA Model Rule 1.5(a) requires that the amount of any fee be reasonable. This requires that the retainer or flat fee bear some relationship tot the number of hours actually expended by the attorney and the expertise and experience of the attorney.