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ConfusedCalgarian

Disconnect between billable hour rates and reported salaries

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I have been trying to understand this my entire time in law school, because the numbers don't add up. Where I live, the average billable hours are between 3-500 for a lawyer. Yet, the average lawyer makes under 100k. Now I understand government jobs and retired/part timers may account for some of this, but it just doesn't seem to add up when everyone talks about lawyers working so much. Even if we take the conservative 300/hour rate, and then say 100 of that goes to the firm (or expenses if you're solo), that leaves 200. Now I know if you work 2000 hours a year, that doesn't compute to 2000 billable hours, however I imagine it would be around 1500 billable hours. Or for easier math, if you had 2000 billable hours, that would be about 26-2700 actual hours. So if someone took 200x2000, that's 400k, several times larger than the average reported lawyer salary. It is hard for me to find a way to reconcile the numbers. I mean if billable hours were 2:1, and the firm took 70%, that would roughly result in around 90k annually, for a 2000 hour work year. Yet everyone says lawyers work more than this, I don't believe firms take that much, and I don't believe billable hours are 2:1.

 

Any thoughts? I'm sorry for asking such a basic question, but I can't seem to find the answer anywhere, and I'm too afraid to ask a real lawyer in person. Thanks!

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9 minutes ago, ConfusedCalgarian said:

I have been trying to understand this my entire time in law school, because the numbers don't add up. Where I live, the average billable hours are between 3-500 for a lawyer. Yet, the average lawyer makes under 100k. Now I understand government jobs and retired/part timers may account for some of this, but it just doesn't seem to add up when everyone talks about lawyers working so much. Even if we take the conservative 300/hour rate, and then say 100 of that goes to the firm (or expenses if you're solo), that leaves 200. Now I know if you work 2000 hours a year, that doesn't compute to 2000 billable hours, however I imagine it would be around 1500 billable hours. Or for easier math, if you had 2000 billable hours, that would be about 26-2700 actual hours. So if someone took 200x2000, that's 400k, several times larger than the average reported lawyer salary. It is hard for me to find a way to reconcile the numbers. I mean if billable hours were 2:1, and the firm took 70%, that would roughly result in around 90k annually, for a 2000 hour work year. Yet everyone says lawyers work more than this, I don't believe firms take that much, and I don't believe billable hours are 2:1.

 

Any thoughts? I'm sorry for asking such a basic question, but I can't seem to find the answer anywhere, and I'm too afraid to ask a real lawyer in person. Thanks!

My insight comes from having hired numerous lawyers for multiple purposes in the past, also having a few friends who are currently practicing lawyers, but may not be accurate. 

A significant amount of lawyers work on retainer agreements, contingencies, and/or contract. That means sometimes regardless of hours worked they are paid a flat fee, % of settlement, or a monthly amount.

For medium/large firms with the ability to pay associates guaranteed salaries I would assume the required billable quota has padding added to it to ensure the company is making a profit (usually 3X - 5X the cost or more - this may not be the case for law firms but is usually the minimum a business marks up to ensure profits). Why do you not believe that a firm would take 2:1? They bring in the business, they pay for the insurance, they pay the rent, they pay for accountants, they pay for travel expenses, they pay for your benefits, and in some cases they pay for your education in the hopes that eventually when they can bill out 3X - 5X more than what you are costing the business they can re-coop the initial investment.

I would also assume that most lawyers working at large firms with large billable targets are paid significant bonuses, that may or may not be factored into the salary reported on surveys.

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26 minutes ago, ConfusedCalgarian said:

I have been trying to understand this my entire time in law school, because the numbers don't add up. Where I live, the average billable hours are between 3-500 for a lawyer. Yet, the average lawyer makes under 100k. Now I understand government jobs and retired/part timers may account for some of this, but it just doesn't seem to add up when everyone talks about lawyers working so much. Even if we take the conservative 300/hour rate, and then say 100 of that goes to the firm (or expenses if you're solo), that leaves 200. Now I know if you work 2000 hours a year, that doesn't compute to 2000 billable hours, however I imagine it would be around 1500 billable hours. Or for easier math, if you had 2000 billable hours, that would be about 26-2700 actual hours. So if someone took 200x2000, that's 400k, several times larger than the average reported lawyer salary. It is hard for me to find a way to reconcile the numbers. I mean if billable hours were 2:1, and the firm took 70%, that would roughly result in around 90k annually, for a 2000 hour work year. Yet everyone says lawyers work more than this, I don't believe firms take that much, and I don't believe billable hours are 2:1.

 

Any thoughts? I'm sorry for asking such a basic question, but I can't seem to find the answer anywhere, and I'm too afraid to ask a real lawyer in person. Thanks!

Agree with above poster on all of the above; my research supports the assumption in the third paragraph.

 

Also, if you’re solo, way more than 100 of that 300 would go to expenses. Very likely closer to 200 or probably even more, at least initially. Also obviously varies depending on practice area.

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6 minutes ago, hopefulcanadianlawyr said:

Agree with above poster on all of the above; my research supports the assumption in the third paragraph.

 

Also, if you’re solo, way more than 100 of that 300 would go to expenses. Very likely closer to 200 or probably even more, at least initially. Also obviously varies depending on practice area.

 

13 minutes ago, Lawby said:

My insight comes from having hired numerous lawyers for multiple purposes in the past, also having a few friends who are currently practicing lawyers, but may not be accurate. 

A significant amount of lawyers work on retainer agreements, contingencies, and/or contract. That means sometimes regardless of hours worked they are paid a flat fee, % of settlement, or a monthly amount.

For medium/large firms with the ability to pay associates guaranteed salaries I would assume the required billable quota has padding added to it to ensure the company is making a profit (usually 3X - 5X the cost or more - this may not be the case for law firms but is usually the minimum a business marks up to ensure profits). Why do you not believe that a firm would take 2:1? They bring in the business, they pay for the insurance, they pay the rent, they pay for accountants, they pay for travel expenses, they pay for your benefits, and in some cases they pay for your education in the hopes that eventually when they can bill out 3X - 5X more than what you are costing the business they can re-coop the initial investment.

I would also assume that most lawyers working at large firms with large billable targets are paid significant bonuses, that may or may not be factored into the salary reported on surveys.

 

Sorry, I was assuming that this person was a partner in a firm, not an associate. 2:1 seems reasonable for an associate, but I imagine it would be more 1:2 for a partner? It sounds like from what I'm reading, that I am completely underestimating the costs of running a firm. Do you have any information as to what percent of the revenue an associate and a partner would typically get in a small or mid sized firm? Thanks for taking the time to write out a very helpful reply.

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LCouple of observations - I suspect in huge areas of the profession, you don’t see lawyers charging $300-500 an hour - in Ontario legal aid rates for the most complex files (and most senior lawyers) are something like $160 an hour.  How many people could pay $500 for a family lawyer?  And they’re not billing 2000 hours.  

But let’s focus on biglaw, which I think is what you’re thinking about (and which is a smaller chunk of the profession)

First, that $300 an hour doesn’t translate into $300 of revenue.  Time gets written off, clients stiff you, good clients get discounts.  So, maybe they’re collecting $270 an hour on the $300 list price. (That’s probably high, good clients might get a 10% discount, and a 90-95 realization rate on what is billed might be reasonable.

Overhead is enormous.  I’m trying to think back to the economics of my old shop, but my recollection is something like 50-60% of every dollar brought in disappeared into overhead - rent (bay street offices aren’t cheap), staff salaries, IT, insurance, subscriptions, marketing, travel, etc. Let’s call it 55% And that’s just overhead, the partners haven’t taken their cut.  

So, from our original $300 an hour, we’re down to say, $121 to pay lawyers AND Partners.  So let’s say you’re an associate making $100k and billing 1800 hours (which would be a biglaw target), toss in payroll taxes and benefits, let’s call it $110k cost to the firm, or $61 for every hour you bill.  Leaving $60 as profit for the partner. 

These numbers are made up, so don’t quote them, but they’re the right size/order of magnitude.  In fact, this probably understates the costs.  Overhead might be 50% of all revenue, but of course the associate doesn’t generate a proportionate amount of revenue - maybe it’s 200 an hour, (2/3rds of the associates rate of $300, but 1/3rd of the partner’s rate of $600 - on average its 50% assuming 1-1 leverage).  In that case, the partner’s barely making anything off his associate. Trying to figure out marginal costs for legal services (which is what you need to figure out break even pricing) is brutally complicated, because it’s hard to allocate costs between different lawyers.  

 

Edited by maximumbob
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24 minutes ago, ConfusedCalgarian said:

 

 

Sorry, I was assuming that this person was a partner in a firm, not an associate. 2:1 seems reasonable for an associate, but I imagine it would be more 1:2 for a partner? It sounds like from what I'm reading, that I am completely underestimating the costs of running a firm. Do you have any information as to what percent of the revenue an associate and a partner would typically get in a small or mid sized firm? Thanks for taking the time to write out a very helpful reply.

Well, the difficulty with answering a lot of these questions is that the answers vary tremendously depending on the practice area, location, individual firm agreement with the partner/associate, etc., to my knowledge. So I’m not sure providing numbers myself will be much help here.

 

In your original post I thought 2:1 was referring to hours worked:hours billed but now I’m confused.

 

Can confirm that you seem to be completely underestimating the costs of running a firm. Wish you weren’t. 

 

Edit: Bob’s post is really helpful. Surprise he didn’t mention the massive cost of tax.

Edited by ToLawAndLetLaw

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1 minute ago, maximumbob said:

LCouple of observations - I suspect in huge areas of the profession, you don’t see lawyers charging $300-500 an hour - in Ontario legal aid rates for the most complex files (and most senior lawyers) are something like $160 an hour.  How many people could pay $500 for a family lawyer?  And they’re not billing 2000 hours.  

But let’s focus on biglaw, which I think is what you’re thinking about (and which is a smaller chunk of the profession)

First, that $300 an hour doesn’t translate into $300 of revenue.  Time gets written off, clients stiff you, good clients get discounts.  So, maybe they’re collecting $270 an hour on the $300 list price. (That’s probably high, good clients might get a 10% discount, and a 90-95 realization rate on what is billed might be reasonable.

Overhead is enormous.  I’m trying to think back to the economics of my old shop, but my recollection is something like 50-60% of every dollar brought in disappeared into overhead - rent (bay street offices aren’t cheap), staff salaries, IT, insurance, subscriptions, marketing, travel, etc. Let’s call it 55% And that’s just overhead, the partners haven’t taken their cut.  

So, from our original $300 an hour, we’re down to say, $121 to pay lawyers AND Partners.  So let’s say you’re an associate making $100k and billing 1800 hours (which would be a biglaw target), toss in payroll taxes and benefits, let’s call it $110k cost to the firm, or $61 for every hour you bill.  Leaving $60 as profit for the partner. 

These numbers are made up, so don’t quote them, but they’re the right size/order of magnitude.  

 

Okay, that's really helpful, thanks. So lets say 2-300 per hour for a small-mid sized firm, in a large city, for an associate with 5 years experience. Is that reasonable? I figured legal aid rates would be the lowest, but I may be wrong. With your calculations, that would be around $80-120 for profit to the firm, of which the associate gets about half? So as an associate in this situation you would generally get $40-60 per hour for billable hours? That seems to aid up fairly well actually, thanks. 

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2 minutes ago, hopefulcanadianlawyr said:

Well, the difficulty with answering a lot of these questions is that the answers vary tremendously depending on the practice area, location, individual firm agreement with the partner/associate, etc., to my knowledge. So I’m not sure providing numbers myself will be much help here.

 

In your original post I thought 2:1 was referring to hours worked:hours billed but now I’m confused.

 

Can confirm that you seem to be completely underestimating the costs of running a firm. Wish you weren’t. 

Sorry, I think I have got it figured out, thanks. You're right, I am barely making since, I apologize. Thanks for all of your help!

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24 minutes ago, hopefulcanadianlawyr said:

 Edit: Bob’s post is really helpful. Surprise he didn’t mention the massive cost of tax.

At least from a firm perspective, tax isn’t much of an issue - tax is paid by the partners on their partnership allocations, but its not something that the firm really worries about (other than things like payroll taxes).  Firm economics are all pre-tax.  

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1 minute ago, maximumbob said:

At least from a firm perspective, tax isn’t much of an issue - tax is paid by the partners on their partnership allocations, but its not something that the firm really worries about (other than things like payroll taxes).  Firm economics are all pre-tax.  

I may be wrong here, but is it not still a relatively significant cost for smaller to medium sized firms?

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Just now, hopefulcanadianlawyr said:

I may be wrong here, but is it not still a relatively significant cost for smaller to medium sized firms?

Tax is a cost to partners - but partnerships don’t pay taxes, their partners do.  Most firms are structured as partnerships.  

In any event, taxes are what they are, but the numbers being thrown around are pre-tax numbers (e.g., no survey talks about  after-tax income). 

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16 minutes ago, maximumbob said:

Tax is a cost to partners - but partnerships don’t pay taxes, their partners do.  Most firms are structured as partnerships.  

In any event, taxes are what they are, but the numbers being thrown around are pre-tax numbers (e.g., no survey talks about  after-tax income). 

Oh, I didn’t know that, interesting. I think we may be talking about different things. I am talking about the costs of running of a firm - mentioned tax as one of the costs that’s going to reduce that 300 used in the original example above. It certainly does.

 

edit: am I getting into a tax argument with a tax lawyer as a 0L? Can I Uriel /escape this

Edited by ToLawAndLetLaw

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We charge our clients tax and then hold on to it and pay that to the G, so it’s accounted for. I personally put aside funds for my personal income tax every time I get paid on a file. 

What I bill is not what I make - we have to pay salaries, rent, insurance, licensing etc. out of that. 

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23 minutes ago, hopefulcanadianlawyr said:

Oh, I didn’t know that, interesting. I think we may be talking about different things. I am talking about the costs of running of a firm - mentioned tax as one of the costs that’s going to reduce that 300 used in the original example above. It certainly does.

 

edit: am I getting into a tax argument with a tax lawyer as a 0L? Can I Uriel /escape this

Well, no, tax really isn’t a material cost.  Firms recover most  GST/HST they pay through inout tax credits  - I suppose in BC, Man or Sask they may have unrecoverable PST.  As Providence’s points out, any tax charged to clients is on top of the fee - but that’s not revenue for the firm.  

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