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(This article appeared in Journal 6,2, June 2001)

The issue of prepaid fees and where those fees should be deposited seems to generate universal confusion amongst attorneys. The “Ethics Telephone Hot Line” receives numerous calls from attorneys wanting to “do the right thing.” Their confusion about fees is echoed in questions like this: “If I call it a true flat advanced prepaid retainer fee for the reservation of services, does it go in the trust account or the operating account?” What the inquiring attorney usually wants to know is when he can treat the fee as his own, and therefore place it in the operating account.

The answer to that question depends not upon what you call a particular fee. Rather, the account into which a prepaid fee should be deposited—trust or operating—depends upon how the money will be used and whether the client agrees. Attorney’s fees charged and collected at the beginning of a representation can be categorized into three types: (1) a true general retainer, (2) an advanced or prepaid fee, and (3) a flat fee.

1. True General Retainer - This is a fee that is paid merely to reserve the attorney’s services. In return for this payment, the attorney has foregone the opportunity to represent other clients in unrelated matters and other parties in the client’s case. This fee, while it must be reasonable, need not bear any relationship in value to the services yet to be rendered. If the client agrees, the true retainer can be treated as earned immediately and placed in the operating account. RPC 50.

Suppose you want to charge against the retainer fee for legal services or credit the client for a certain number of hours of work based upon your hourly fee. If so, the fee is no longer a true general retainer. Instead, it becomes an advance fee, notwithstanding what it was called in the fee agreement, and it must be placed in the trust account from the outset.

2. Advance or Prepaid Fee - This fee is paid in advance for services yet to be rendered and must always go in the trust account. Ordinarily, the attorney keeps a record of his time and charges against the fee at an hourly rate. As time is expended and the money is earned, the fee is transferred to the operating account. The advance fee ordinarily corresponds to time expended rather than specific tasks or services performed. The total amount of the fee generally is unknown in advance of the representation.

3. Flat Fee - A flat fee is a set price for specific services. For example, an attorney may charge a lump sum for obtaining a divorce, or for filing a complaint and completing discovery. Unlike the advance fee, a flat fee is a set or fixed amount agreed to in advance of the representation. This fee either may be deposited in the trust account until earned or, upon full disclosure and client consent, may be treated as earned immediately and deposited in the operating account. The flat fee provides both benefit and risk. The attorney has the benefit of treating the money as his own immediately, but runs the risk that a given case may become more complicated and involve more time than originally anticipated. 97 FEO 4.

Keep in mind that even though flat and true retainer fees may be treated as earned immediately, if any particular fee is clearly excessive under the circumstances, the portion of the fee that is excessive must be refunded. RPC 158; 97 FEO 4; 2000 FEO 5. Many attorneys, for their own protection, use the term “nonrefundable” to refer to retainers in their fee agreements. The Ethics Committee recently opined that to refer to any fee as nonrefundable is misleading, since there is always the possibility that some portion may have to be refunded. See 2000 FEO 5. Let me suggest alternative language that communicates the same idea to the client without running afoul of the Rules: “The retainer is earned immediately and not subject to refund unless required by the Revised Rules of Professional Conduct.”

Finally, you may charge a fee that is a combination of any or all of the above categories. If the client pays you the entire fee in one lump sum, be sure to make clear which part is the retainer, which part is the flat fee, and which part is the advance fee. That way, everyone will know “whose fee it is anyway.”

Deanna S. Brocker is the ethics counsel for the North Carolina State Bar.

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