What’s the Fascination with Flat Fees?

Flat fees law firmsMany clients complain about the fact that most lawyers bill by the hour. They often do not like billable hours because it results in the cost of their case is variable.

In other areas of life, most clients are used to knowing what something is going to cost on the front-end. For example, if they are having some work down on their house or their car, they are used to getting a quote for the total price. Similarly, many clients want the same price structure for lawyers and the law firm where they know exactly what it is going to cost to get the case done.

To gain what they view as a competitive advantage in the marketplace, some lawyers are shifting to flat fees for legal work. In fact, many so-called business gurus really push the idea of flat fees on lawyers and law firms. The topic can be found in numerous articles, webpages, and blogs. It is also a regular topic at many continuing legal education seminars on practice management. The reality is that flat fee billing is becoming popular in many legal circles.

There is no question that flat fees would simplify life for lawyers and law firms. Who likes having to record their time for every task they complete? Most lawyers do not enjoy doing this one bit. Most lawyers also do not like it when clients complain that they are recording all of their time. Further, for anybody who runs or manages a law firm, they can attest to the fact that employees complain incessantly about billable hours.

At the same time, what most so-called business gurus do not understand is that most state bars and ethical bodies do not look fondly upon flat fees at present. In other words, even if a lawyer is charging flat fees to gain a competitive advantage in the marketplace, most state bars and ethical bodies still want lawyers to log all their time (even on a flat fee case).

Lawyers and law firms also cannot bypass the requirement that they have to first put the money received from a flat fee payment in their trust account. Instead, ethical rules require that money only be moved to the operating account from the trust account when it is earned. The money is earned based on the time spent on the case by the lawyer and the law firm. Time is a keyword there because the lawyer’s and staff’s time must be recorded to be earned.

Additional problems with flat fees are that if a lawyer charge fairly high flat fees, they may risk a finding that the fee they charged as being unreasonable. For example, let’s say a lawyer charges a flat fee in the four or five-figure range, but they only end up doing a few hours of work on a particular case to conclude the matter. Most state bars and ethical bodies would frown upon this kind of price structure if not much work was done. Instead, the lawyer or law firm would likely have to issue a refund for the part of the flat fee that was not earned.

Practically, this puts lawyers who want to charge flat fees in the box of having to charge low flat fees (or face risks that they are charging an “unreasonable fee” in the eyes of ethical bodies if they charge higher flat fees). However, if they charge low flat fees, it is hard to be profitable if a lot of work becomes necessary to finish a matter.

It is also true that when a client has paid a low flat fee, the lawyer still has a duty to communicate and be diligent. Thus, if a client is calling or emailing regularly, the lawyer still has to respond promptly. The lawyer just ends up responding to these phone calls and emails essentially for free. In litigation, one also has to ask what incentive the client has to settle their case if they paid a flat fee up-front for the representation (and a trial does not cost them any more money)?

In sum, while many so-called business gurus love the idea of flat fees from the perspective that recording time is a hassle, and many clients and employees do not like hourly billing, flat fees are still riddled with problems under the ethical rules as referenced above. This is where lawyers are still smart to simply bill by the hour unless or until ethical rules regarding flat fees are substantially loosened.

There are just too many examples of lawyers getting disciplined for charging flat fees. At the same time, there are few examples of lawyers getting in trouble for billing their clients on an hourly basis.

If you have any thoughts, feel free to share them below.

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