Law Firms Look for Right Mix of Layoffs, Pay Cuts to Survive

The global coronavirus pandemic and its effects on the economy have pushed many law firms to make tough decisions about their futures that have increasingly included cuts in pay, layoffs, and furloughs.

Arent Fox, Baker Donelson, Cadwalader Wickersham & Taft, Goldberg Segalla, Reed Smith, and Womble Bond Dickinson announced this week cost-cutting measures to pull back on expenses as law firms face an uncertain future.

There will likely be more measures to come as firms look for ways to survive potential revenue loss in a changed market.

But the road map to survival isn’t as simple as just slashing personnel and payments. Industry experts say law firms need to share financial burdens of cuts equitably among attorneys and staff and plan ahead if they want to make it through an exceptionally difficult time.

“No one alive has been through anything like this,” said Bruce MacEwen, president of legal consulting firm Adam Smith Esq said of the current crisis.

‘Every Sane Measure’

Law firm leaders already have had to make difficult decisions and deliver unpleasant news to their workforce.

In a memorandum to attorneys and staff announcing the pay cuts on Tuesday, Cadwalader chairman Patrick Quinn said it was clear that the firm’s revenues and billable hours would likely be reduced during the coronavirus crisis.

“The longer we wait to take action in response to the virus, the more difficult it will be for us to avoid much more drastic measures later on,” Quinn wrote to firm, announcing a reduction in legal and senior administrative staff pay by 10% to 25% and a freeze on distribution of partner payouts in an effort to avoid layoffs.

“As a result, we must take a number of necessary steps at this time for the collective good and to ensure that we come out the other side on very sound footing,” he added.

Kent Zimmermann, a legal strategy consultant at the Zeughauser Group, said there’s variation among law firm leaders he’s talked to in how they view the potential length of the crisis and its possible effects on revenue. But those worried about the possibility of a dramatic revenue drop, he said, are also the ones thinking ahead and reducing expenses sooner.

“The sooner you pull the trigger on the reductions, the sooner you see the benefit,” Zimmermann said.

The question of how to respond to trouble in the markets is complicated by the fact that law firms have fewer levers they can pull in times of crisis than companies do.

Bruce MacEwen and Janet Stanton of legal consulting firm Adam Smith Esq. said firms don’t have assets they can sell in a crunch nor do they have retained earnings.

And once they run out of cash, it’s all over.

“If I were leading a law firm, the first thing I would do would be to take every sane measure you can to save cash,” MacEwen said.

There are long term cash savings options, like cutting real estate costs, but to address an immediate crisis like this one, Stanton said saving cash through personnel is firms’ only real short term choice.

Arent Fox cut equity partner distributions by 60% and said it would cut salaries 30% for nonequity partners and counsel and to plans to cut associate and staff pay by 25%. Baker Donelson has reduced shareholder draws and salaries, and, in the coming weeks, it will implement a firm-wide salary cut for its lawyers and staff and make some furloughs.

Some firms are cutting partner draws so they don’t need to immediately look at reducing headcount among attorneys and staff, Zimmermann said. Others are looking to do both.

He said another option firms have discussed is deferring capital expenditures, deferring payment of 2019 distributions that remain unpaid, and even deferring bonuses, including last year’s bonuses, as well as looking at flexibility in their real estate obligations.

Some are looking to mandatory reduced work weeks or mandatory leaves of absences for certain lawyers and staff. Those law firms with pension and other long-term obligations are looking at their options as well, Zimmermann said.

Sticking Together

Many of the law firm leaders struggling with how to handle the current market headwinds will remember the Great Recession as something of a cautionary tale.

As the global economy collapsed in 2008, law firms resorted to many of the same cost-cutting measures to weather the storm, that they’ve used so far in 2020.

But as the 2008 crisis accelerated, firms responded by primarily slashing staff and associates, which in some cases came back to bite them later, Stanton said.

Many law firms made cuts to staff and lawyer ranks and delayed hiring new talent, which left some without the workforce they needed once the market started rebounding.

In the wake of the coronavirus epidemic and looming economic challenges some firms will overact and do too much damage, according to Stanton.

She and MacEwen recommended firms make certain cutbacks, see what happens and, if needed, escalate measures, but to also plan for what their business needs will be after the crisis ends.

MacEwen cautioned law firms against making layoffs if avoidable. And Stanton said compensation cuts should be equitable, with the more senior professionals at the firm taking a bigger cut to correspond with their higher pay.

“In 2008 crisis the firms that acted as a firm and we’re all in this together tended to do better,” she said.