When hiring a lawyer, one of the important factors that consumers of legal services need to know are the types of fees that lawyers charge their clients, and how those fees are calculated.
Generally, there are 3 most common types of fee structures that lawyers may choose, to get compensated for their legal work:
- Hourly rate
- Flat fee
- Contingency fee
Below we’ll cover in more detail each type of fee structure.
The hourly fee is the most common fee structure in the legal services industry. It involves the lawyer charging for the amount of time they spend on their client’s case. Lawyers generally track their time in 6-minute increments, and would calculate the fee owed, based on the hourly rate.
For example, consider a lawyer spending 2 hours reviewing an employment contract for their client. If a lawyer charges $250/hr, the client would have to pay $500 for that service.
It’s not uncommon for more experienced lawyers to charge $500/hr, even $750/hr, for their services. However, not all work is completed by lawyers. Often, lawyers would delegate work to their associates - paralegals, law clerks, and articling students - charging a reduced rate per hour to complete certain parts of legal assignment.
In that case, the client would get an invoice, broken down into several line items, indicating the time it took to complete each sub-task, and the rate per hour of a person that was involved.
Fixed fee agreements have been gaining popularity in the past decade, or so. In order to alleviate any concerns regarding how legal fees are calculated, lawyers have responded by providing a flat fee estimate for some of the services they provide.
A flat fee structure works well for standardized common procedures. Examples include incorporating a company, reviewing an employment contract, or submitting an immigration application, or preparing a will.
If a lawyer quotes $500 to review a work permit application, and to provide a carefully-drafted explanation letter, a client only would owe $500, regardless of the time it would take a lawyer to complete this legal request.
In most cases, lawyers are able to accurately estimate the amount of time it would take to complete such tasks, because there is little variation on a case-by-case basis.
However, more complex cases, especially those where it’s much harder to estimate the amount of time required, may not be possible to handle using upfront pricing, and would be better suited under the hourly-fee arrangement.
Contingency fee, also known as a percentage fee, is a fee that is calculated based on the outcome of the legal case.
Under this arrangement, a client and a lawyer would agree on the portion of the financial reward that would go towards covering legal fees, after the case is won by the lawyer. Typically, a lawyer would forgo any fixed fee or an hourly fee, in favour of a contingency fee, if the lawyer is hired to represent a client in court, and when the lawyer believes that the settlement can be reached in the client's favour.
For example, if a high-profile executive sues their former employer for wrongful dismissal and wins $1,000,000 in a settlement, and the lawyer is entitled to 10% of that amount, the lawyer's contingency fee would be $100,000 for representing a client.
The downside to a lawyer is the risk involved in not winning the case. If this occurs, a lawyer will not be paid for any of the work completed, while representing a client.