Nine Rules for Billing Ethically and Getting Paid on Time

Vol. 1, No. 4

Todd C. Scott is VP of Risk Management at Minnesota Lawyers Mutual and specializes in helping lawyers understand legal ethics, risk management techniques, and legal technology systems. Todd blogs at www.attorneysatrisk.com and can be reached at tscott@mlmins.com.

 

  • Verbal flat fee arrangements are as good as the paper they’re written on.
  • Three keys for effective invoicing: detail, detail, detail.
  • When the payment is late, be direct. Clients like direct.

 

Henry Ferro (an Ocala, Florida, attorney) was very frustrated with his client, Ron Butler, for refusing to pay his legal fees from a criminal matter where Ferro represented Butler’s son Nick. But all chances of Ferro recovering the $14,000 he says Butler owes him were probably lost for good when Ferro ran into his client at a Lowe’s checkout line and, according to a complaint filed against him, the attorney began yelling that Butler was “a deadbeat who does not want to pay his debts.”

 

As a result, Ferro became the subject of a harassment complaint by his client Butler, and Butler’s new lawyer argued that not only does his client not owe the fee (because there was no written fee agreement) but also that any amount in excess of the $3,500 Butler already paid to Ferro for his son’s burglary matter would be excessive and unreasonable.

 

Ferro’s personal attempt to recover his unpaid fee at a Lowe’s store were not any more successful than his other attempts, which are also coming back to haunt him. According to the complaint, when Ferro’s phone calls to the client to inquire about the fees were unsuccessful, he attempted to discuss the fee issue with his client’s sister-in-law after phoning her about the matter. Butler’s harassment claim sought a temporary restraining order enjoining the lawyer from having any further contact with Butler or any member of his family about the fee matter.

 

Nothing is more frustrating for a lawyer who has worked diligently on legal matters than the realization that clients do not intend to pay their bills. Complicating matters is the fact that, given current economic difficulties, unpaid legal fees are on the rise, and lawyers are looking for ways to recover lost fees more than ever before.

 

From a malpractice carrier’s point of view, suing your client for unpaid legal fees rarely results in a good outcome. Savvy clients who know that the legal fee is owed will often turn the tables on a lawyer, filing a counterclaim alleging that the fee the lawyer seeks to collect is unreasonable or cannot be justified because the lawyer did substandard work. The client’s counterclaim may be a simple tactic to leverage a bill, but because it is a suit against a lawyer, it must be reported to the lawyer’s malpractice carrier, creating an added headache for a lawyer who just wants to be paid.

 

So what should a lawyer do to recover a legal fee in a matter that he or she is rightfully owed? Most practice management experts agree that the key to successfully recovering the firm’s net receivables is to take certain steps up front, at the start of the attorney-client relationship, that will put the lawyer in control of the matter if the client falls behind in paying. Also, what you do after the first time a client falls behind with a payment can determine whether you will ever recover anything for your legal services.

 

ABA Model Rule 1.5, Fees, is the primary regulatory guideline outlining proper fee arrangements and billing practices. The rule addresses several aspects of fee setting, including contingency fees, prohibited fee arrangements, fee sharing, and whether a fee is reasonable. Many states are now considering changes to Rule 1.5 to reflect some of the changing ways lawyers and clients are contracting for legal services. Changes to the rule include provisions on flat fees, availability fees, nonrefundable fees, and unearned fees. In Minnesota, changes to Model Rule 1.5 were adopted by the Supreme Court in late 2010 and became effective on July, 1, 2011.

 

Throughout Rule 1.5, a few themes are prevalent. Legal fees, whether they are fixed, contingent, or shared with lawyers outside the firm, need to be reasonable. Changes in the rule addressing availability fees and nonrefundable fees are also based on what’s considered to be reasonable billing practices. Although determining whether a bill is reasonable can sometimes be difficult, the rule does provide some factors to be considered when determining the reasonableness of a fee including: the difficulty of the matter, the fee that is customarily charged, whether the work precluded you from working on other legal matters, the results obtained, and the experience of the lawyer performing the service.

 

Another theme throughout Rule 1.5 centers on consumer protection and has to do with putting the fee agreement in writing. Although the rule stops just short of requiring that a fixed fee agreement be in writing, the authors of the rule state that the “preferable” method for communicating a fee arrangement to a client is in writing, and a written fee agreement is required for legal services involving contingent fees, nonrefundable fees, flat fees, and fee sharing.

 

So why do some clients choose to not pay their legal bills? When asked, most clients involved in legal fee disputes will tell you the primary motivator for not paying their lawyer was their sense that the amount they were being billed was unfair. Even one small item that affects the client’s sense of fairness in an otherwise large legal bill can sometimes be enough to delay payment and jeopardize the good will that the lawyer previously established. By closely following the tenants of 1.5, lawyers stand a better chance of having clients who understand the billing process and pay the legal bill on time.

 

The following nine rules for billing and collecting fees from clients that will help you stay on firm ethical grounds, and avoid spending a lot of time on legal work for which you will never be compensated.

 

1. Communicate the fee arrangement before you start the case.

Getting your client to pay your bill starts with making sure he or she fully understands what you will charge for your services. It may not be a requirement in your jurisdiction, but putting the fee agreement in writing is a good idea, and it allows both you and the client to refer to the document if there are ever any misunderstandings about the bill. Any lawyer that works for several hours on a legal matter and then discusses with the client the fee arrangement risks losing the billable time already devoted to the matter. Clients may not like what they are being charged, but if they feel they understand why they have received the charge and it conforms to what they previously agreed to, they are more likely to pay their legal bill in full.

 

2. Your fee better be reasonable.

The factors for determining reasonableness of a legal fee in Rule 1.5 are a good guideline for fee setting, and they should be considered on the whole. For example, your hourly fee may be appropriate for the type of work that you are doing, but if your lack of legal experience requires you to spend an inordinate amount of time performing a routine legal task, the amount you bill might be out of line with what’s considered to be reasonable. It is a good idea to take a close look at the factors for determining whether a legal fee is reasonable because they are likely to be referred to by both the lawyer and the client when parties find themselves arbitrating a legal fee dispute.

 

3. “Nonrefundable” does not mean that you can be paid for doing nothing.

Nonrefundable retainer agreements have caused an increase in attorney-client fee disputes; especially when a lawyer accepts a large retainer fee at the outset of a matter and the matter is soon settled or the lawyer is discharged after having done little or no work. The sense of “reasonableness” that permeates the rules on legal fees extends to nonrefundable fee arrangements, so even if your state has not yet adopted changes prohibiting nonrefundable fee arrangements, you should be ready to refund any unearned portion of your fee unless you can show the amount retained is not disproportionate to the amount of work you committed to the legal matter.

 

4. Verbal flat fee arrangements are as good as the paper they’re written on.

Some states have adopted changes to the professional fee rules to reflect the growing trend towards flat fee arrangements. A flat fee represents a complete payment for specified legal services and is typically paid in full in advance of the lawyer providing the services. Unless both the lawyer and the client have a clear understanding what the client will be receiving in exchange for the fee, flat fee arrangements can be fraught with misunderstandings and disappointed parties. Therefore, make sure your flat fee agreement is in writing, signed by the client, and notifies the client with specificity the nature and scope of the services to be provided, the total amount of the fee and other terms of payment, that the fee will not be held in trust until it is earned, and that the client has the right to terminate the lawyer-client relationship.

 

5. Availability fees are separate and distinct from legal services fee.

An availability fee is a charge that ensures the lawyer may be available to the client during a specified period of time or on a specified matter. Because the fee is only for reserving your time that could be used working on other legal matters, your writing to the client should state the fee is for availability only and that fees for legal services will be charged separately.

 

6. If the fee is shared with someone outside the firm, the client should know exactly where it is going.

It is never a good idea to surprise a client at the end of a legal matter by revealing to them in a remittance statement that an attorney who is not a member of the firm will be sharing in some of the fee. Clients will sometimes assume that if an outside legal expert was involved, then the lawyer they’ve been talking to all along didn’t really do anything to earn the portion of the fee that is going to them. Fee sharing between lawyers of different firms is permitted under Rule 1.5 so long as the division is in proportion to the services performed by each lawyer, the client agrees to the arrangement in writing (including the share each lawyer will receive), and the total fee is reasonable.

 

7. Three keys for effective invoicing: detail, detail, detail.

Clients may not always like getting a legal bill from you, but if they have sufficient information in the invoice about the legal services you performed, they are more likely to consider the bill to be reasonable and compensate you for your work. The description area for each time entry in the invoice is a prime spot to inform the client with specificity what tasks the lawyer or the staff has performed on their behalf. Even if you’ve handled tasks for which you have no intention of charging the client, let the client know about the work, how much time you spent on the task, and the fact they are getting the service for no charge.

 

8. When the payment is late, be direct. Clients like direct.

For individual clients that are on a tight budget, when deciding whether to pay the lawyer’s bill or the bill of the person who may have just completed shingling their garage, they think that the lawyer is sufficiently wealthy and won’t mind accepting a late payment. Maybe you don’t mind, but if you do, contact the client after the first missed payment and be direct about your expectations. Often, if you let them know that it is important, they will pay you on time. They may need to be reminded to adhere to the payment schedule in order to continue receiving legal services.

 

9. Foonberg’s rule: If you’re going to get burned, get burned cheap.

It is much easier to resolve fee problems with clients early on in the legal matter then later when there may be much more at stake. One question lawyers often reflect on when fee disputes arise is, “Why did I let the bill get so high?” If you have to part ways with a client who won’t pay, it is a lot easier to do if they don’t already owe you a lot of money. Jay Foonberg, author of the best selling ABA publication “How to Start and Build a Law Practice,” sums up his advice for lawyers in these situations: if you’re going to get burned, get burned cheap.

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