We lawyers tend to call any fee paid in advance by a client a “retainer.” This language is regularly used in discussions with clients and, for many firms, it’s even in the engagement agreement. Under the California Rules of Professional Conduct (CRPC), what is usually being discussed or referred to in the engagement agreement is an “advanced fee” not a true retainer fee.
What’s the difference and why does it matter? It’s important to understand the difference between the two because it determines whether you must deposit the fee into your client trust account (CTA) or not. Getting it wrong can land you in hot water with the State Bar.
True Retainer Fee
A true retainer fee is not very common. The key difference between a true retainer and advanced fee is what it’s buying. A true retainer buys your availability as a lawyer but not your services. For example, let’s assume a wealthy couple is preparing to divorce. One party decides that he/she wants to make sure the other can’t hire that well-known divorce lawyer in town. The way to do that is by paying the attorney a retainer—a fee that buys that attorney’s availability. The party isn’t hiring the attorney to do any work but to keep that attorney from being available to work for any other party. The attorney doesn’t have to do any work to earn the money….she can just sit at her desk scrolling through Instagram all day. Because a true retainer fee is earned on receipt, it can be deposited straight into an operating account. It should not be deposited into a CTA.
Advanced Fee
Generally, when lawyers talk about retainers, they’re really talking about advanced fees. For example, an engagement agreement might call for a $5,000 retainer as a deposit that the lawyer will bill against as he/she works on the client’s matter. Even though it may be called a “retainer,” it’s really an advanced fee. More importantly, the $5,000 is not earned on receipt. The money belongs to the client and must to be held in a CTA pursuant to CRPC 1.15 until it is earned. Once fees are earned, the money needs to be timely dispersed from the CTA.
Flat Fee
A flat fee is an advanced fee. Under Rule 1.15, a flat fee generally should go into your CTA. It can be deposited into the firm’s operating account but only if the lawyer or law firm discloses that the client: (1) can ask for the fee to be deposited into the CTA, and (2) is entitled to a refund of any unearned fees if the representation is terminated. If the flat fee is over $1,000, the disclosure must be in writing and signed by the client.
With the State Bar increasing its focus on how lawyers manage CTAs, you need to know what fees must be deposited into your CTA versus what may be deposited into an operating account. It’s a simple but important distinction. Understanding it can keep you out of trouble with the State Bar.
If you have questions about what fees need to be deposited into what accounts, you can schedule a consultation here.
