Why use Retainers?
As an attorney, you deserve to be paid for your knowledge, time, and reputation. The best way to ensure a great attorney-client relationship is to collect retainers at the beginning of any engagement that involves court appearances or ongoing work. Many businesses are not run this way, but the legal field is an exception. High-end, quality work involving research and court appearances merits this kind of up-front payment system.
Often clients are reluctant to part with their money once a case is complete, leaving the attorney without proper compensation for their services. Retainer fees solve that problem by allowing the attorney to hold onto all of the funds he or she will be earning, and collecting payments as they earn them. Then when the work is done, any leftover funds can be returned to the client, and everybody wins.
The Two Types of Retainers
Retainer fees can be referring to a fee that a business or individual might pay to reserve an attorney’s time on an ongoing basis. These clients know that they will be needing an attorney from time to time, and so they pay a monthly fee to a trusted attorney in order to be sure that need is always met by someone familiar with their individual case.
The other retainer fee is just an up-front payment before an attorney begins work on a trial. Not all attorneys need to use retainers, but trials are instances when a retainer is best for everyone. The attorney is guaranteeing that she will be available to serve the client, not take on any extra work, and dedicate her time and expertise to the benefit of the client. The client is guaranteeing the attorney that she will be properly paid, on time, in full, as her work gets done. Both parties are satisfied, especially because both of them know what to expect.
Once in a while an attorney will even require a non-refundable retainer, just for the privilege of hiring her. She is highly sought after, and she may not be able to serve a client unless they make it extra worthwhile. In such instances, clients are happy to pay an additional amount in order to work with their attorney of choice. This is not a frequent occurrence, but it is legal and a great idea for those who wish to retain a particular attorney that they have heard great things about.
Handling the Retainer
- The client and attorney meet and go over the expected costs of the case. The attorney will need to put her retainer fee into a contract with specific wording on how the funds will be handled. Once both parties approve, they can sign the contract.
- The client writes a check to the attorney for the full amount of the retainer.
- The attorney places the funds into a special bank account and records the deposit on the books. This part of the process is where many attorneys may do things incorrectly, and mix the retainer with her own income or expenses. You need to know how to properly record retainers so that the funds are always used correctly and tracked correctly.
- Once the attorney has done some work, she can invoice the client for her earned revenue, and pay herself by moving funds from the retainer account to her business account.
- At the conclusion of the relationship, any remaining funds in the retainer account will be returned to the client, along with a detailed financial record of the transfers and deposits.
Recording the Retainer, Earned Income, and Refunds
The bookkeeping process for retainers can be tricky, so it is important to be sure your bookkeeper is following these steps.
The retainer is not income yet. It needs to be recorded in the books as a liability. The funds need to be placed in a special bank account that can earn interest for the client (or if it is a smaller amount, earn interest for the IOLTA program). The money should never be used for law office purchases or deposited into the law offices’ bank account, at least not until it is properly earned.
Once some work has been done, an invoice can be created and sent to the client. At that point, the money must be physically withdrawn from the trust account and deposited to the attorney account. The transaction can then be properly recorded on the books as a deposit to the attorney’s bank, and an income on the income statement. The liability account will also be adjusted to show the funds that were used.
Once the case is completed, the remaining funds can be withdrawn from the trust account and returned to the client. The bookkeeper will need to zero out that liability account, and record the refund. She will also create a report that showed the entire activity of the retainer while it was under the law office’s care.
Benefits of Retainers
As long as everyone follows the proper procedures, retainer fees and contracts can be carried out smoothly, making a much neater accounting process that does not involve late fees, notices, scrambling to work out payment methods, or arguments about work completed vs. work billed.
