Contingency Fees: a Practical Guide for Law Firms
November 25, 2022
Most law firms using legal billing software have per hour billing policies for their legal services, in which case a case management software like Smokeball that has automatic attorney time tracking software can help increase the amount of time captured. But there are some circumstances where using a contingency fee agreement may work better for the client and the lawyer. Let’s take a closer look at how some law firms work on a contingency fee basis.
Contingency Fee Basics
What is a contingency fee agreement? A contingency fee agreement is an arrangement between a lawyer and a client that allows the client to defer payment until the end of the case. The client is not responsible for the fees or costs of their legal action until the case is resolved. For clients without significant resources, contingency fee arrangements are helpful; they provide these clients with a path to justice without having to pay out of pocket.
Contingency fee arrangements base the payment of the lawyer’s fees upon the result of the case. If the contingency fee lawyer wins the case for their client, they will receive payment. If they are not successful, the client pays nothing. Typically, the attorney’s fee is calculated by taking the dollar amount recovered by the attorney and multiplying it by a specific, predetermined percentage. If that amount is zero, the total due is zero.
In essence, a contingency fee agreement is when a lawyer only gets paid when or if they win the legal case for the client. When a lawyer is working on a contingency fee basis, they will have an agreement that states how much they will be paid if the case is won. That contingency fee lawyer will usually take about 33% of any settlement or award that the client receives. However, when working with a contingency attorney, a client may still need to pay for certain expenses in addition to the contingency fee, such as:
- Court and filing fees;
- Discovery costs;
- Expert witnesses;
- Fees related to securing medical or public records;
- Costs associated with copying and postage.
Altogether, these additional costs could add up to hundreds of dollars or more. Contingency lawyers should make it clear to their clients that contingency agreements may also require the deduction of certain expenses in addition to the attorney’s contingency fee. It’s also important for contingency lawyers to understand how much time and work they actually put into their cases, which is where Smokeball’s law firm insights dashboards can help law firms understand more about their business.
What Is the Average Contingency Fee?
While many attorneys who work on a contingency fee basis do so for a third of the settlement or award, that fee may increase or decrease depending on the complexity of the case and the costs of bringing litigation. If a case is very complex, the contingency fee might be closer to 45% while a simple case may only demand a small contingency fee of 25%. Also, the contingency lawyer will deduct the cost of litigation from the settlement or award amount before they take their cut. This could mean that any award or settlement could decrease significantly. But the positive side of this arrangement is that the client doesn’t have to absorb the risk of losing all the money they invested in a lawyer if they don’t win the case. It’s the contingency fee attorney who absorbs all of the risks.
Complexity and Risk
Complexity and risk can play significant roles in setting a contingency fee or deciding whether to take a case in the first place. Generally speaking, the more complex and risky a case, the more it will likely cost to take on. Hence, it is common to see lawyers increase their percentages when cases are or turn risky, such as when a case goes to trial.
- Court filing fees: Various court costs are associated with claims and lawsuits, such as service of process fees and fees associated with submitting claims.
- Discovery costs: Costs to conduct depositions, interrogatories, and other discovery actions can be significant.
- Expert witnesses: Expert witnesses command hundreds of dollars per hour.
- Fees related to securing medical or public records: Various processing and administrative costs are associated with gathering medical records and police or other official reports.
- Costs associated with copying and postage: Even in the digital age, claims, and lawsuits require hard-copy documents, often in duplicate and triplicate; postage costs also are involved.
In Which Cases Are Contingency Fees Used?
Contingency fee arrangements are commonly used in cases where a client is seeking a payout from an insurance company or a defendant. Because there are no upfront costs for their clients, attorneys who work under a contingency fee agreement not only forgo payment until the end of the case but also front the costs. These lawyers tend to avoid risky cases, such as those in which liability is unclear or cannot be reasonably established.
As you may know, contingency fee arrangements are common with personal injury cases. But they are also used in other areas of law, such as workers’ compensation, sexual harassment, hostile work environment, and other employment-related cases, among others.
When Are Contingency Fee Agreements Not Allowed?
Although contingency fee arrangements help clients with few resources, they are not considered ethically appropriate for all cases, and they are even illegal in certain situations. For example, most state bar associations forbid attorneys from using contingency fee arrangements in divorce and other family law cases. The use of contingency fees in criminal cases is also prohibited.
In addition to violating state bar association provisions, contingency fees for domestic relations cases and criminal law cases are also prohibited by the American Bar Association’s Model Rules of Professional Conduct.
Many believe that allowing contingency fees in personal injury claims leads to frivolous lawsuits. However, without them, countless victims would lose access to the justice they deserve. Additionally, lawyers are under the obligation to avoid filing frivolous lawsuits and must refuse clients interested in doing so.
Pros of Contingency Fees
Overall, contingency arrangements can be advantageous for law firms and clients. The key is using them in the right contexts and only when they don’t expose firms to unreasonable risks.
Some of the many advantages of using them appropriately include:
- Zero initial payment: More clients are able to seek compensation due to no upfront payments, while law firms increase their client bases.
- Nopayment for losses: Clients receive full legal representation for their cases and pay nothing if their attorney is unsuccessful.
- Attorney incentive: Attorneys working on a contingency fee basis have the incentive to be as successful with their cases as possible; their fee is directly tied to their results.
Contingency fee agreements also streamline the payment process, doing away with the need for billing systems and other problems like late payments and collections.
Cons of Contingency Fees
Contingency fees appear to be the ideal situation for the right cases. However, there are some disadvantages to using them for both attorneys and law firms.
Some of the negative aspects of using contingency fees include:
- Overworking: An attorney may ultimately put in far more hours of work than is covered by their contingency payment.
- Lost investment: Perhaps the greatest risk to an attorney using a contingency fee model is the failure to recover compensation, which means no fee payment and payment for costs.
- Unrepresented clients: Clients with complex cases may find it difficult to find an attorney to take their case — the contingency payoff may not be worth the hours of work needed to be successful.
- High contingency percentage: Clients in some cases may be required to pay a contingency fee of up to 40%, which means the attorney must fight hard to get a substantial award for compensation to cover their fees.
Additionally, some clients get frustrated at the final billing due to not fully understanding or agreeing with the overall arrangement.
Different Types of Contingency Fee Agreements
Lawyers have the option of varying their contingency fee arrangements principally in order to mitigate the risks. Two main types of variations are commonly used: the contingency hourly arrangement and the mixed hourly-contingent arrangement. Both types make use of hourly wage payments but in different ways.
As with a pure contingency fee arrangement, a contingency hourly arrangement sees the attorney receive payment upon successfully recovering compensation. However, instead of a percentage, the attorney will be paid based on an hourly rate. For example, if the attorney did 100 hours of work at $300 per hour, they would receive $30,000, regardless of the compensation value.
With a mixed hourly-contingent arrangement in place, the client also pays a particular hourly fee but must begin payment immediately. However, they will only pay a portion of the agreed-upon hourly rate throughout the claim and pay the rest if the attorney is successful. In some cases, the attorney may also take a percentage of the compensation (smaller than with pure contingency fee agreements) in addition to their payment for work by the hour.
When deciding which type of contingency fee arrangement is best, it is important for attorneys and law firms to understand the needs, strengths, and limits of their practice. Doing so will help avoid exposure to risk. Crunching the numbers is a great place to start, and law practice management software can help.
The biggest benefit of signing a contingency agreement for the client is that they don’t have to pay for their legal fees upfront, and if they don’t win their case they won’t be on the hook for paying lawyer expenses. However, if the client does win a large settlement or award in their case, they will be required to hand over a large share of that award to the contingency fee attorney. If an attorney understands their chances of winning the case, signing a contingency fee agreement could deliver a jackpot of cash if they win the case. In some ways, working on a contingency fee basis is a gamble for the lawyer but it’s a gamble that could pay off big.
However, it’s important that contingency fee attorneys crunch their numbers with the help of law practice management software. If they’re not careful, they could win the contingency fee case and still end up in the financial hole. Contingency fee lawyers must think about how much time they can invest in a contingency fee case and still come out in the black when they win the case. If the numbers don’t add up to a profit, it may be best to pass on doing the case on contingency.
Facts Everyone Should Know about Contingency Agreements
Before signing a contingency fee agreement, here are a few facts everyone should know:
Percentages are not established by law. There are no rules or laws governing exactly how much an attorney can charge when they’re working on a contingency fee basis. In some cases, depending on the settlement or award, the client working with a contingency attorney may end up paying more than the attorney’s hourly rate. The only requirement is that the attorney charges a reasonable fee.
Oral agreements don’t count. All contingency fee agreements must be in writing to be enforceable. Clients can still switch lawyers. If a client signs a contingency fee agreement and decides at a later date to switch attorneys, they are entitled to do so. If the other lawyer wins the case, the contingency fee will be split with the first attorney.
Clients on the hook for taxes. Clients considering a contingency fee agreement should consider the tax implications. If a contingency fee attorney takes 33% or more of the client’s settlement or award, the IRS will obligate the client to pay taxes on the full settlement or award amount. However, the client may be able to deduct some of the lawyer fees as an itemized deduction on their tax returns.
Charging Reasonable Fees: Best Practices
Professional responsibility and ethical conduct guidelines mandate that lawyers charge reasonable fees. Determining just whether a fee is reasonable can be accomplished by consulting the rules and guidelines that govern the profession.
Check Your State Rules
The state in which you practice will have a thorough set of rules that control what percentages you may charge and when. It is important to not only know these rules but to also stay abreast of changes.
Check Reasonability with ABA Rules
The American Bar Association (ABA) lists eight factors attorneys must consider when they establish fees for their services:
- How much time and work is required, along with the complexity of the case;
- Preclusion of other employment for the lawyer if they accept the client’s case;
- The standard fee charged by other attorneys in similar cases;
- The dollar amount at stake and the final results of the case;
- The existence of time limits, whether imposed by the client or other circumstances;
- The nature and length of the attorney-client relationship;
- The professional experience and reputation of the attorney;
- The type of fee, whether fixed or contingent.
Consulting this list when considering fees will help keep you within the rules.
Get Informed Consent for Contingency Fees
Getting informed consent from the clients regarding contingency fees helps protect lawyers from clients who don’t want to pay a previously agreed-upon percentage. It also helps ensure that clients truly understand how much they must pay at the end, which means no surprises.
If a contingency lawyer wants to avoid conflicts with clients, it’s important that they charge reasonable contingency fees. Since there is no law laying out what specific percentage a contingency lawyer can charge, determining if a fee is reasonable can be difficult at first. The best course of action is to talk to attorneys who have been working with contingency fee agreements for a long time. These contingency attorneys can provide a good idea of what percentage is fair for certain types of cases. Attorneys should also review the state’s rules so they are in compliance with the spirit of the law. It’s important to carefully explain the requirements of the case so that the client understands the time, energy, and expertise investment being made into their case at no upfront cost.
They should also be made to understand how they are avoiding all risks associated with paying legal fees upfront. Giving them an estimate of how much the case would cost if they paid the lawyer’s costs upfront is often helpful in avoiding conflicts once the attorney takes their percentage. Working on a contingency fee basis can benefit both the client and the attorney. However, it’s important that all parties understand the risks and rewards associated with a contingency fee agreement. For attorneys considering a contingency fee service, it’s important to remember that not every case lends itself to a contingency fee arrangement. Some cases simply won’t deliver enough compensation to cover the lawyer’s costs and the number of risks they took.
Contingency Fees: the Bottom Line
If you’re an attorney working on a contingency basis, Smokeball’s automatic lawyer time tracking software and law firm profitability insights and visual dashboards make it easy to understand each staff member’s volume of work on an individual matter including attorneys, paralegals, and assistants.
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