Contingency Fees and Law Firms

//Contingency Fees and Law Firms

Contingency Fees and Law FirmsMost 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 Definition

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 out 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 of 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.

Contingency Fee Percentage

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 risk.

Pros and Cons of a Contingency Agreement

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 charge 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 fee as an itemized deduction on their tax returns.

Charging Reasonable Fees

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 risk 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.

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.

Not using Smokeball yet? Request your free demo and see the Smokeball difference!

By | August 15th, 2018|

About the Author:

For years, Josh has helped lawyers become more organized, productive, and profitable. A trained litigator, Josh came to Smokeball from a large east-coast law firm where his practice focused on franchise, insurance, marine, and general litigation. His work with Smokeball, and his continued passion for what he does each day, is driven by a desire to help lawyers and their staff do better in every way. Knowing well the stress and strain put on today’s legal professional, he regularly focuses on improving work and life in the law. He has traveled the country working with and learning from lawyers and their staff. Josh speaks regularly to bar associations about successful law firm practices and other legal topics. Recent notable engagements have been with the Chicago Bar Association, the Illinois State Bar Association, and the Missouri Bar’s Solo and Small Firm Conference. In addition to his work at Smokeball, Josh serves on the Writing Resource Center staff at The John Marshall Law School. Besides legal technology, his research interests include judicial decision-making, jury decision-making and psychology, and legal writing. He has written and overseen research exploring causal effects of sex/gender on federal appellate court decision-making, and assisted with research for a forthcoming textbook on judicial decision-making. Additionally, Josh sits on the Board of Chicago Fringe Opera Company. Josh holds his J.D., cum laude, from Washington University in St. Louis, where he served as a Senior Editor of the Wash. U. Law Review, held the prestigious Thompson Coburn Research Fellowship, served as Research Assistant to then-Vice-Dean (now Chancellor) Andrew D. Martin, and clerked at the U.S. District Court for the Eastern District of Missouri. He holds a B.A. in Political Science and a B.M. in Music Performance with Honors Scholar distinction from the University of Connecticut, making him a Huskies basketball fan through and through. Follow Josh’s activity on LinkedIn, and keep up with new articles on the Smokeball Blog.

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