Analysis

Law Firm Pay Cuts, Layoffs Will Likely Multiply

By Aebra Coe
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Law360 (March 31, 2020, 6:59 PM EDT) -- As Cadwalader pauses partner distributions and cuts staff pay and Pryor Cashman furloughs associates, a slew of other firms are likely to follow suit as the legal industry goes into crisis mode to weather the economic storm caused by COVID-19.

The news Tuesday that Cadwalader Wickersham & Taft LLP was pausing partner distributions and cutting associate and staff pay and that Pryor Cashman LLP had furloughed some associates, followed announcements Monday that Reed Smith LLP was slowing partner cash distributions and Womble Bond Dickinson was laying off some employees and reducing pay for others.

The reports on cost-cutting measures taken by midsize and large law firms will likely flood in as firms realize the gravity of the economic downturn caused by the COVID-19 pandemic, said Larry Watanabe of legal recruiting firm Watanabe Schwartz.

No law firm wants to be the first to cut staff or hold off on partner draws, but as is common in the industry, once a few major firms make a move, others will likely follow, Watanabe said.

"I think we're beginning to see the tip of the iceberg," he said. "Firms can only be patient for so long, but the forecast is murky and the news is so negative firms have said, 'We're not going to keep waiting because this might not get better for months.'"

Law firm management consultant Patrick McKenna said he is hearing from a number of law firms that have cut partner draws and distributions, including draws for retired partners.

"A typical reduction is in the range of 30%. I will be surprised if at least 80% of the top 200 firms in the U.S. have not made such a move by April 15th," McKenna said.

A number of the firms that have implemented changes have aimed to be creative in how they approach cost-cutting in an effort to share the burden across the firm and keep the team together.

Leaders at Cadwalader told staff and attorneys that the pay cuts are a proactive measure meant to stave off the possibility of layoffs. And another law firm, Marshall Dennehey Warner Coleman & Goggin, said Tuesday it was suspending its employer match to employee 401(k) contributions in an effort to cut costs.

And, unlike in 2008 when the last major recession hit, partner pay is suffering alongside that of staff and associates at many firms.

That is probably wise on the part of law firm management, especially at firms where profits per partner are high, according to Kenneth Young, a legal recruiter at Young Mayden Legal Search.

"[I] guess you could call it a 'we are all in this together' team approach, and everyone is participating in what are hopefully temporary compensation adjustments," Young said.

Jill Huse, co-founder of law firm consulting firm Society 54, said partners should "absolutely" take on some of the sacrifice and not repeat what happened in 2008 and 2009, when partner compensation at many firms rose even as attorneys and staff were laid off.

"Morale is something that cannot be understated. If firms are willing to delay or cut partner distributions as a first measure, that sends a clear signal to the employees and associates of the firm, which is they are valued and appreciated," Huse said. "If the first thing that is done is layoffs, that sends a completely different message and leads to panic and uncertainty."

Pausing, delaying or cutting partner compensation is also one of the quickest ways to affect the availability of cash to a law firm, according to law firm management consultant Jaap Bosman, who published a blog post last week on the topic.

Typically, between 35% and 50% of all law firm revenue is allocated to partners, Bosman noted.

"Reducing that number would have more impact on the available cash position than any other measure," Bosman wrote.

But others, like LegalShift CEO Dan Safran, say measures that stop short of layoffs — like pay cuts and delayed partner cash distributions — may not be robust enough to stop the bleeding.

"While we recognize the nobility of law firms to try to keep as many people on payroll as they can, it is not a sustainable strategy," Safran said. "A free-market economy practice would be to cut quickly and deeply, compensate the high producers that remain at or above market, provide full benefits and focus on retention."

--Editing by Kelly Duncan and Alanna Weissman.

Is your law firm making compensation or personnel changes because of the coronavirus pandemic? Contact reporter Aebra Coe with tips at aebra.coe@law360.com.

For a reprint of this article, please contact reprints@law360.com.

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