Canadian Lawyer, November 20, 2017.
Most individuals looking for legal help in a dispute would love to scrap pre-paid, uncapped time-based billing, and lawyers should be open to that.
Imagine a list of clients’ top 10 pet peeves about law firms. Pre-paid, uncapped time-based billing would rank high. Why do so many firms in niches such as family law, estate litigation and employment law stick with this much-unloved system? How can these firms realistically and profitably move past it?
Risks for personal plight law firms
Distinctive business practices in a sector of the economy can often be traced to specific risks confronting firms in that sector. Pre-paid time-based billing addresses two distinctive risks forfirms in the “personal plight” area. (Personal plight is a sociological term for law practices in which (i) the clients are individuals and (ii) the legal needs arise from disputes.)
First, labour requirement risk reflects the unpredictability of what is required to resolve a certain file. How many hours will it take to get a certain matter settled or adjudicated? How many of those hours can be served by lower-cost juniors and clerks and how many will require higher-cost senior lawyers? The answer depends on factors that are hard to predict at the outset, including the behaviour of the other side or the client. Labour requirement risk is eliminated by a retainer allowing the firm to be paid for every hour that turns out to be necessary.
Second, non-payment risk is the chance that the client will not voluntarily and promptly pay the agreed-upon fee. Collection issues are common in personal plight legal practice. The clients are individuals with shallower pockets than corporate or government clients. The life crises that create these legal needs (e.g. loss of employment or divorce) will also often affect their ability to immediately pay for legal services. Non-payment risk is eliminated by a sufficiently large pre-paid cash retainrier.
What’s wrong with pre-paid time-based billing
The advantages of pre-paid time-based billing come at a heavy price to access to justice, client satisfaction and even firm economics. Clients don’t like not knowing how much services will cost before they agree to purchase them. They don’t like having to take it on faith that time-based dockets are truthful. And they definitely don’t like having to deposit cash retainers for services before they receive them.
Personal plight law firms that find workable alternatives to pre-paid time-based billing find it easier to attract future clients and more pleasant to deal with existing clients. They also spend less time and energy dealing with the client complaints that time-based billing tends to generate.
The problem is easy to state: How can personal plight law firms ditch pre-paid time-based billing — and reap the rewards of doing so — without choking on labour requirement risk and non-payment risk? Three leading alternatives often work more effectively: contingency billing, flatter fees and legal expense insurance.
Contingency billing is a powerful pricing model that preserves accessibility while reducing risk for the personal plight firm. Because the firm can deduct its fee from the client’s settlement or judgment funds, non-payment risk is eliminated even though no up-front retainer is required from the client. The firm must still deal with labour requirement risk, but carrying a portfolio of contingency cases with different characteristics mitigates that.
Most people with personal plight legal needs would much rather pay on a contingency basis than through a pre-paid time-based retainer. Already ubiquitous in personal injury and class action cases, contingency fees could be adopted by more firms in areas such as employment law and estate litigation. Some provincespermit their use in family law cases not involving children.
However, when a personal plight client is seeking a significant non-financial remedy, contingency billing loses most of its appeal. In such cases, there is no “pot of gold” at the end of the litigation rainbow from which the firm can reliably collect its fee. Moreover, the alignment of incentives between client and firm — which is one of the contingency fee’s chief attractions — breaks down if the client needs the firm to pursue non-financial objectives, for which the firm will not be compensated. Thus, for matters such as criminal defence, family cases involving children and contested refugee matters, personal plight firms must seek other alternatives if they wish to move beyond pre-paid time-based billing.
Price certainty through flatter fees
To varying degrees, different fee models can also provide something that all consumers want: price certainty. Completely open-ended time-based retainers provide no price certainty whatsoever. At the other end of the spectrum, completely flat, advertised fees (e.g. “we will handle any Human Rights Tribunal case for $4,000”) offer complete price certainty to clients.
In general, the more price certainty a fee model offers the client, the more labour requirement risk it imposes on the firm. However, in research for my new book, I found firms using innovative models that offer clients significant price certainty without creating intolerable labour requirement risk.
A model that works for many firms is the “milestone fee.” A client will be quoted a flat fee to take a matter to a certain litigation stage, such as discovery or a preliminary hearing. Further stages are quoted and billed if necessary.
An innovative monthly billing plan was described to me by Toronto employment law sole practitioner “YY.” At the outset of a case, YY estimates how many months and how many of his hours would likely be required to take it through adjudication. He divides his projected total fee for the case (based on his hourly rate) by the estimated duration. The result is the amount that the client will pay each month. If and when the matter settles, the client pays nothing further. YY’s clients enjoy reasonable price certainty and deferred payment, and YY limits both labour requirement and non-payment risk.
Legal expense insurance
Best of all would be a personal plight fee model that offers certainty and deferred payment to the client, while freeing the firm of labour requirement and non-payment risk. The good news is that legal expense insurance is such a fee model; the bad news is that personal plight law firms cannot adopt it unilaterally.
A legal expense insurance, or LEI, policy is paid for by the client or the client’s employer with a price-certain monthly premium. If a personal plight legal need arises, the insurer will reliably pay the bill, so the firm experiences very little risk. The Unifor Legal Services Plan may be Canada’s most comprehensive legal expense insurance plan for personal plight legal services.
Unfortunately, few Canadians have access to union- or employer-sponsored benefit plans as generous as Unifor’s. Meanwhile, LEI plans available for individual purchase typically offer little or no coverage for dispute-related legal needs. This leads some to argue that a state entity such as Legal Aid Ontario might have a role to play in scaling up LEI coverage.
Pre-paid and open-ended time-based billing is a natural response by personal plight law firms to the labour requirement risk and non-payment risk that are inherent in their work. However, moving past it can make a law practice more successful as well as more accessible. Canadian personal plight firms have a variety of options, both new and old, for doing so.
Noel Semple is a faculty member at Windsor Law. His new book is entitled Accessibility, Quality And Profitability For Personal Plight Law Firms: Hitting The Sweet Spot. It is available free online from the Canadian Bar Association Futures Initiative.