Understanding Referral Fees
What is a Referral Fee?
If Lawyer Smith refers a client to Lawyer Jones, Lawyer Jones may wish to pay a referral fee to Lawyer Smith as a thank you. The fee paid is called a ‘referral fee.’
Why Would One Lawyer Refer Work to Another Lawyer?
The most common and acceptable reason for referring a client to another lawyer has to do with expertise. If a client calls his real estate lawyer after the client’s son has been injured in a car accident, the real estate lawyer will typically refer the client to a lawyer that practices in personal injury.
Are Referral Fees Legal?
Referral fees are absolutely legal and appropriate as long as (1) the client is made aware of the fee being paid and (2) the client is not charged anything extra to offset the referral fee. The fee comes out of the pocket of the lawyer who received the referral, not the client.
Can Clients be ‘Sold’ From One Lawyer to Another for an Upfront Fee?
It is totally inappropriate for the referring lawyer to ‘sell’ a potential case to another lawyer in exchange for an upfront fee. Referral fees are properly made at the conclusion of a successful file at the same time that the receiving lawyer is processing his or her fee.
How are Referral Fees Calculated?
Referral fees are typically calculated as a percentage of the fee charged by the receiving lawyer. For example, if the receiving lawyer generates a fee of $10,000 on a file, he or she might pay be a referral fee of 15% or $1,500 to the lawyer that referred the file. That $1,500 payment comes out of the lawyer’s $10,000 fee. It does NOT come out of the client’s pocket.
The Law Society of Upper Canada has recently introduced some formal rules that will govern how referral fees are to be calculated. As of April 27, 2017, lawyers are allowed to pay a maximum of 15% for the first $50,000 of legal fees and 5% thereafter to a maximum of $25,000.
Why Did the Law Society Make These New Rules?
Unfortunately, there were some law firms who operated as brokerage houses. They advertised heavily to attract personal injury clients for the sole purpose of ‘selling’ their clients to other lawyers in exchange for hefty upfront fees and high referral fees at the conclusion of the case. They could afford to advertise heavily because they were not actually running a law firm – they were simply buying advertising and selling clients.
This was not how referral fees were designed to work. This practice was confusing to the public and unfair to clients who thought they were hiring a particular law firm only to then be ‘sold’ to another firm. Under the new rules, no upfront fees are allowed to be paid and the maximum that can be paid is $25,000. These changes will hopefully break the brokerage house-style business model so that the public can trust the legal advertising it sees and clients can take comfort in knowing that the lawyer they hire is going to be the lawyer who actually works on their case.