How Inflation Affects Legal Rates
Inflation and legal practice costs are linked. However, whether they are directly linked is another question. This article explores the effects of inflation on legal practice costs today.
How Is Inflation Affecting the Legal Field?
Around the world, countries, and businesses are struggling with inflation that is rising at the fastest rate in four decades. In the U.S., inflation hit 8.5% in March, exacerbated by skyrocketing food and energy costs around the globe. Industries in the U.S. are struggling to adjust pricing and salaries to keep up with inflation. No one is immune to its effects, and the legal industry is no exception.
The legal industry is in flux, with some firms quick to raise rates while others watch and wait. Economists are searching for signs of inflation peaking, but with the Russian invasion of Ukraine and China’s increase in Covid cases, supply-chain normalization isn’t guaranteed anytime soon.
So what are law firms doing about it?
Are Law Firms Raising Their Rates?
Last year, law firms increased their billing rates fairly aggressively by 3.9%, while the consumer price index climbed to 7%. Meanwhile, Am Law 100 firms increased their rates by 5.6%. U.S. law firms also posted their highest realization rates since the Great Recession in 2008.
Will law firms raise their rates again in 2022?
Perhaps. Their legal rates haven’t all kept up with inflation, although some firms may be waiting for the market to stabilize or the end of the second quarter before making an additional rate increase.
In early 2022, prominent law firms raised the salary scale for their associate lawyers, giving them a reason to consider a second round of aggressive rate increases at some point this year. Currently, wage wars are being fought to win qualified new legal associates amidst the present shortage of legal talent.
But have the increased associate salaries kept pace with inflation?
How Have Legal Salaries Kept Pace with Inflation?
On January 20, 2022, Milbank started a trend of large U.S. law firms offering associates from the Class of 2021 a $215,000 salary scale and upgrading associates from the Class of 2014 to $415,000. Since then, many other big firms have matched the scale, but others have remained mute. More than 90 law firms across the country have matched the $215,000 salary scale.
Last year, Milbank kicked off the previous wage war when they raised entry-level salaries by $10,000 and other associate salaries between $10,000 and $15,000.
Of course, raising entry-level wages from $190,000 to $200,00 is a 5.26% increase, below last year’s inflation of 7%. However, the salary increase over the last two years from $190,000 to $215,000 is a 13.16% increase, higher than inflation for that same time.
While the recent wage hikes are promising for young associates, if you look back a few more years, you will find that associate wages stagnated between 2017 and 2018, when wages grew slower than inflation. The average lawyer’s salary increased by only 1.6%, while the inflation rate was 2.1%.
If we look back further, we can see that the average lawyer’s salary in 1997 was $72,840 and $105,890 in 2002.
According to the U.S. Bureau of Labor Statics’ CPI Inflation Calculator, those salaries would be worth the following in April 2022:
- $72,840 in January 1997 would equal $131,627 in March 2022
- $105,890 in January 2002 would equal $171,902 in March 2022
The average lawyer’s salary in 2021 was $127,990 per year, which is on par with inflation for the 1997 salary but not for the 2002 lawyer’s salary. And while a significant number of big law firms have increased their associate salaries, many lawyers at smaller firms receive much less.
Why have these big law firms suddenly raised their associate salaries?
Demand for Legal Services Rising
The legal sector is experiencing increased demand for legal services. This has factored into driving the wage war for legal associates. Increased demand is occurring at a time when the legal industry is losing staff to the Great Resignation. Associate attrition in Am Law 100 firms had increased from 16% pre-pandemic to 27% in 2021. This leaves law firms little option but to engage in wage wars to win over the most promising legal talent.
Increasing associate salaries will increase law firms’ operational costs. However, these increased costs are nothing compared to the money law firms would leave on the table if they could not meet the increased demand for legal services. In 2021, demand for legal services grew by 6.6%, while lawyers’ rates grew by 6.5%.
Firms Can’t Keep Up with Demand
Many firms, especially those that can’t afford to pay associate salaries of $215,000 per year, will struggle to keep up with the current demand for legal services. But even the big law firms with their big salaries find it challenging to keep up with demand. Many lawyers at big law firms are overworked, and the firms can’t find enough quality talent to hire to keep up with their rising demand.
The 50 largest firms saw demand for legal services spike more than 8%. Keep in mind that many of the associates at these firms were already working long weekly hours before the extra demand kicked in, so there wasn’t much left for the law firms to pull from internally. When legal practice management attempted to rectify the situation, they faced an inconvenient hiring shortage.
In 2021, the headcount at these firms had only grown by 0.7%, so these legal associates were already stretched thin as clients came knocking and projects started to pile up. The stress put upon the associates was significant. These lawyers regularly operate at 60 to 80 hours per week, but when firms demanded more, many walked during the Great Resignation.
To keep up with demand, some of the large law firms resorted to increasing associate wages to attract new blood to their companies.
Are Law Firms Raising Salaries to Correlate With Inflation?
Many law firms have raised salaries over the last two years. However, to say that they raised associate salaries to correlate with inflation directly may be a stretch. Most firms that raised salaries did so because the situation was economically advantageous and not to keep up with inflation directly. It’s unlikely that thoughts of “fair wages” were at the forefront of this decision.
By raising salaries, these law firms make themselves more competitive within the market by hiring more associates and thereby increasing their bandwidth. They can then accept more projects, and their profit margin grows considerably more than the expense of an associate’s annual salary.
You can argue that law firms are not directly raising salaries to correlate with the increased inflation experienced in recent years. However, you can also argue that law firms indirectly raise salaries to correlate with inflation. Whether you see the salary raise as a direct or indirect reaction to inflation, associate salaries have risen dramatically in the big law firms. This has created wage wars in the legal field as law firms vie to woo the most promising incoming associates.
The need for new legal associates is not simply to win more projects, although that is a primary driving factor in the salary raises. Attrition has also become expensive. Big law firms have not been retaining their legal talent at an ideal rate. Over 40% of associates leaving firms left in the first six years of their post-qualification legal career. Associate attrition at these rates costs an average of between $200,000 and $500,000 per lawyer who leaves. To put that in perspective, for every 20 lawyers hired at that rate, 15 would be expected to leave within the first six years. Additionally, by hiring more staff to share the workload, excess stress is taken off of pre-existing associates, making them less likely to leave the firm.
Supporting their new hire associates via desirable wages and attractive total packages can be seen as an investment by the law firm. Perhaps not an investment solely focused on selflessly ensuring associate salaries keep pace with inflation, but an investment nevertheless.
Chance of Litigation for Those Unfairly Compensated
You could ask whether those associates whose salaries fail to keep pace with inflation are unfairly compensated and whether they may be poised to litigate against their employer. However, the truth is that many associate salaries may not have kept up with inflation. The fact that some law firms have kept pace with inflation while others have slipped behind is unlikely to result in a successful lawsuit on its own.
There is one potential area of litigation based on discrimination.
Litigation on the Basis of Discrimination
A successful claim could arise should an associate be able to prove discrimination was at play. To win a discrimination argument, the associate would need to prove that pay or compensation discrimination occurred when employees performing similar work did not receive similar compensation. Pay discrimination can also occur if the pay differential is unlawful, based on protected categories like sex or race. It would be illegal for the employer to discriminate based on the employee’s membership in a protected category.
The 90+ big law firms that enacted salary increases for associates to $215,000 per year had plans that increased wages for all associates evenly across the board. So long as these plans are followed, it is unlikely that a valid discrimination lawsuit can be lodged.
However, if an associate at one of these law firms were passed over for a raise, particularly if they belonged to a protected group, then a discrimination suit could be investigated. For example, one female partner settled an Equal Pay Act claim with her previous firm for gender discrimination. The suit had nothing to do with salaries keeping up with inflation and was instead based on her receiving lower pay than comparable male counterparts.
Assume an associate at another law firm files a suit claiming that associates at Milbank perform similar work but are paid more by their employer. This would not count as discrimination, as it involves two different firms. It would be a challenging, if not impossible, argument on which to prevail.
Inflation and the Legal Field
If history is any indicator, it is likely that inflation will again begin to outpace legal salaries in the next several years. The industry seems to have a penchant for making bold leaps forward intermittently rather than at a stable and predictable pace. For associates who may not have received the salary raise they were hoping for this year, it’s an employees market. You might still be able to snag that raise if you know where to look and how to market yourself.
If your firm is still stretched thin from the Great Resignation, you might find needing help to market your firm both to potential clients and new hires. By claiming your profile on Avvo, you can reach more prospective customers as well as peers. Check out more on Avvo.com.