Lawyers accept payments in a variety of ways, but here we’re going to cover the four basic methods of lawyer compensation: hourly, flat rate, contingency, and blended.
The standard method of paying lawyers is hourly. The lawyer will quote the client an hourly rate, and keep track of their time, usually in one-tenth or one-quarter of an hour increments. This means you pay the lawyer for 6 minutes or 15 minutes every time they perform work on your file.
My concern with hourly billing is that it creates an inherent conflict of interest. It financially incentivizes lawyers to spend more time on a matter, and be less efficient. Why would I do something in 15 minutes when I can do it in 2 hours and get paid 8x as much?
Hourly billing can be good. If you’re giving me a stack of documents and expecting me to tell you what’s-what in the situation, it’s hard to price it any other way. But, for the most part, I prefer to avoid hourly billing unless it’s a method of last resort or if my clients demand it.
The flat rate is my prefered method of charing clients. They work best when there’s a set scope of work that’s easily defined, and we can make a checklist of the work that needs to be done. Sometimes they’re a bit harder because we have to worry about an opposing party throwing a wrench into the calculation. But overall, we can sometimes account for a reasonable amount of negotiation.
Generally, flat rates are paid up front. After discussing the scope of work, I’ll provide a checklist of items that need to be done, costs (sometimes these costs are broken down into clearly defined milestones), and a total price. That total price can be either fully earned, or, in the case of a milestone-based project, can be placed in trust. I’ll remove the funds from my trust account and put them into my operating account as the milestones are reached. If all the milestones aren’t reached, then that fee may be returned.
I love flat rates because, unlikely hourly, it rewards me for efficiency. If you’re paying me the same amount, and I can use technology to complete the work in half the time, them I’m actually incentivized to do so.
Contingency fees work best when the client and the lawyer both expect to recover an amount owed. For example, a “standard” contigency fee for a car accident case is 33%. The lawyer will take 33% of the amount of the settlement. Then, any costs (medical expenses, filing fees, and the like) will be deduced from the remaining amount and reimbursed to the lawyer. Finally, the remainder will be given to the client.
Contingency fees can also escalate as the amount of work increases. For example, if I can settle a case with a simple demand letter, that’s much easier than winning a jury trial. Therefore, if we do handle contingency cases, we often try to have escalating percentages for our fee. It generally starts at around 15% for writing a demand letter and having verbal negotiations, while it may escalate to as high as 45% if the case goes to trial and is appealed.
This type of fee gives the lawyer a higher incentive to do more for the client; however, the lawyer also accepts a larger risk. I know I’m getting paid if I have a retainer and do work hourly. If the case is on a contingency, I may not be as incentivized to work on a case if I learn facts that damage my client’s claim.
A hybrid or blended rate generally involves a combination of the three above compensation methods. These can be tricking to arrange at the beginning, but generally are very effective at meeting everyone’s needs.
Here’s an example of a blended rate. Perhaps your issue requires one distinct action to get things started. I may do that at a flat rate.
After that, there’s some litigation or negotiation that needs to happen. We’re not sure if you, as my client, will ever get paid, so I’m not too incentivized to do the work on a contingency. Why would I want to do work on a contingency if there’s a chance you won’t get paid? So, to incentivize that work, we agree on a lower than normal hourly rate. At least I’m still paid for my time.
Because I’m accepting a lower than normal rate, I’ll want to be compensated for a contingency. The blended contingency rate will be lower than the contingency rate in a pure contingency case.
Never a One-Size Fits all Solution
There’s never a one-size fits all solution, and the 4 methods mentioned above are not the only way to compensate your attorney. Perhaps the attorney receives an equity interest in the company (as a partner in the company) in exchange for work. Maybe the attorney is paid in po-boys and beer. When I was doing work for food trucks, I was paid in tacos. That was fun. Generally, in Louisiana, as long as the compensation is fair compared the work done, there are no restrictions on the method of compensation.