The referrals that come your way from current and former clients, other lawyers, and your contacts across different industries have a significant impact on your business, both in the short- and long term. A study conducted at the Wharton School and Goethe University found that referred clients “generate higher profit margins, are more loyal, and show a higher customer lifetime value.”
Referrals don’t happen in a vacuum, though, and in some cases, when referrals take place, a referral fee may result. What do referral fees mean for your law firm’s ethical and business practices, though?
When referral fees are okay: lawyers
Lawyers are allowed to pay referral fees to other lawyers.
That said, there are very specific standards that must be met for a lawyer to earn a referral fee. Failing to adhere to these rules can result in an ethics violation.
Referral fee guidelines
State bar associations generally follow Model Rule 1.5:
- Fees must be reasonable under the circumstances
- The client must be informed of the referral fee arrangement
- The client must agree to the referral fee arrangement in writing
- The division of fees must be in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation
Referral cases usually involve contingent fee matters, but the referring lawyer can also be paid a percentage of the hourly rate.
Either way, fees must be “reasonable,” or no more than they would have been if only one lawyer or law firm was working on the case. In other words, the fees can’t go up because of the referral.
It’s also worth mentioning that not all states require that referral fees are in proportion to the services performed by each lawyer. In general, however, if the referring lawyer doesn’t work for the client, they are still jointly responsible for the representation.
Attorneys may handle this guideline differently. Some may add a disclaimer to the referral arrangement. Others may take a more active role by reviewing documents or staying in contact with the referred client. Whatever the approach, though, both attorneys can be held liable if malpractice claims arise in the case.
When referral fees to other lawyers aren’t a good idea
Referrals need to be well-considered. The referring lawyer can be liable for misconduct or negligence by the lawyer working on the case.
Because of this risk, referring lawyers should always take steps to vet the lawyer they’re recommending.
In most cases, lawyers will be more comfortable referring clients to a lawyer that they or someone in their firm personally knows. (This is where the real value of networking comes in!)
If you’re referring a client to another lawyer you don’t know, check with your local professional conduct committee to ensure the lawyer is in good ethical standing. You don’t want to be found negligent for referring a lawyer with a history of ethics violations or who lacks the experience or resources to represent the client.
It’s also important to note that conflicts of interest apply to both the referring and referred lawyer. A lawyer can’t refer a client to another lawyer and earn a fee when they have a conflict of interest that would have prevented them from taking the case themselves.
When referral fees aren’t okay: non-lawyers
Most lawyers already know this, but we want to be sure to address it: lawyers can’t pay referral fees to non-lawyers.
State bar guidelines are very clear on this across the board. As stated in the American Bar Association’s Model Rule 7.2, “A lawyer shall not compensate, give or promise anything of value to a person for recommending the lawyer’s services.”
So no matter how much you appreciate your dentist or your college roommate referring a client to you, referral fees aren’t allowed.
Checklist for law firm referrals
Law firms should create consistent internal policies and practices to manage the risks inherent to the referral fee process.
If a lawyer is collecting a referral fee, they should check that the lawyer they’re referring the client to:
- Doesn’t have any complaints against them
- Hasn’t committed any ethics violations
- Doesn’t have a conflict of interest
- Has at least some experience in handling the type of matter being referred
- Has the resources of time and staff to properly handle the case
- Client is informed of the referral arrangement and has consented to it in writing
- Legal fees must not be higher than they would be without the referral
Referrals can provide a critical source of work for lawyers, but as with any legal arrangement, it’s important to cross your t’s and dot your i’s—and do your research—before agreeing to referral fees. With consistent and careful practice, though, referral fees can be a part of a strong referral network that supports your law firm.