Law Firm Paycuts Everywhere & The Key Question: "Do We Have Too Many Lawyers?"

Law firms are increasingly cutting salaries to get their way through what one law publication terms the ‘coronapocalypse’. The largest law firms in the world are chopping pay, bonuses and leave with the trend continuing even as many are seeing light at the end of the dark Corona tunnel.

But some key questions about how firms will look when they emerge from the coronavirus crisis are also being asked – including the uestion of whether there are too many lawyers?

Cuts are occurring across multiple jurisdictions on not ony both sides of the Atlantic but also in firm offices globally and in Asia, Australia and New Zealand.

US pay cuts at law firms have been aggressive, with cuts of up to 25 per cent according to a report in the Financial Times.

The newspaper reports that the differing financial years has lead to differences in the way the cuts have occurred. US firms such as Cadwalader, Wickersham & Taft and Reed Smith have come under greater financial pressure than UK law firms like Allen & Overy and DLA Piper.

US firms with a December year-end paid out profits to partners at the start of the year and have less cash on their balance sheets to weather the impending storm, the FT reports. “Many US firms are faced with this crisis at a bad point in their annual cycle,” said Robert Weekes, London managing partner of Crowell & Moring.

US Law Firm Salary Cutbacks

Littler, the largest employment firm in the world, has now slashed salaries on a wholesale basis. The firm was 66th in the 2020 AmLaw rankings with revenues approaching USD600,000.000 for 2019.

AbovetheLaw reports that equity partnersand management will suffer a 20 per cent cut from May while the nonequity partners and senior management employees will take a 15 per cent hit.

Baker McKenzie lawyers in the US and otherstaffers earning more than $100,000 are taking a cut of 15 per cent from May. Baker McKenzie, whose equity partners took home on average $1.5m last year, said it would rather “adopt temporary reductions” in pay than “lay off our people”.

Cadwalader has cut lawyer and senior administrative staff pay by 25 per cent “for the length of the crisis” reports indicate, while Pittsburgh-based Reed Smith, which turned over $1.2bn last year, announced a 15 per cent temporary cut to associate pay and a 10 per cent cut for other roles known as counsel.

A raft of other US law firms have also announced pay cuts including Crowell & Moring, Orricks, Bryan Cave Leighton Paisner.

Most US firms have also cut partner payouts with reports that there will be many more still to come, including layoffs.

UK Law Firm Cutbacks

“Scrapping fresh flowers in the reception area doesn’t get you very far in the struggle to survive, let alone restore partner profits.”
David Morley, Allan & Overy

UK law firm cutbacks are also increasing, although a former head of Allen & Overy writing for LegalBusiness sees wholesale partner and staff reductions as somethig that is now also on the horizon.

David Morley, senior partner at A&O between 2008 and 2016 and who now runs a strategy consulting firm, says the partner and staff culling move has not been something contemplated even during the GFC, but it was now a real possibility.

“No business can be contemplating the future right now without seriously considering headcount. And law firms are no exception. Once partner drawings are cut, staff furloughed, salaries slashed and credit lines increased, options to preserve liquidity are subject to the laws of diminishing returns.

“Scrapping fresh flowers in the reception area doesn’t get you very far in the struggle to survive, let alone restore partner profits. When furloughs and sabbaticals end, the clock still ticks inexorably towards the next salary payment day, whether revenue is reviving or not.”

Too Many Lawyers?

Morley asks the key question: ‘Do we have too many lawyers?’

He says that any business leader worth their salt has to be looking at how to ensure their business is “match-fit” for the economic restart. This means looking at what the business needs, the skills that will be in demand, where the surplus capcity is and what shapre they are to compete for what may be scrarce profitable work.

“For law firms, where almost the entire cost base is driven by the number of fee earners, it would be a dereliction of duty for leaders not to be considering how the business needs to be configured for an uncertain future. In plain words, do we have too many lawyers?”