A blog by Joel Barolsky of Barolsky Advisors

Firms must plan for a profit hit from the commission’s ruling

In Articles, Commentary on 6 March 2020 at 5:54 pm

Full text of my opinion piece first published in the Australian Financial Review on 6 March 2020.

A law firm’s budget and its five-year projections are based on key assumptions around staffing costs and productivity. The recent Fair Work ruling could potentially blow these assumptions out the water.

The key lesson is to be prepared for different scenarios and have contingency plans in place for some award mayhem.

AFR 6 March Fair Work

The Fair Work Commission has ordered law firms – from March 1 – to record all hours worked by graduate lawyers and paralegals to ensure they are not paid below minimum rates or are losing out on penalties if they work long hours.

It is unclear how many junior workers will actually take advantage of these new provisions as the enforcement of an industrial award runs counter to the professional culture in most law firms.

Moreover, the bargaining position of juniors is weak because of the oversupply of graduates. Council of Australian Law Deans data revealed that Australia’s 39 law schools graduated 7,583 students in 2015. Less than 40 per cent of those students will get legal traineeship positions in law firms.

Despite these constraints, it is not hard to imagine some overworked grad preparing a spreadsheet to prove they’ve been paid well below the minimum wage per hour and claim a bonus – say 20 per cent – for overtime. News of this payment would spread quickly and Fair Work claims would soon become commonplace.

Three scenarios

Only time will tell whether that happens, but it is worth doing some scenario planning to assess the potential impact.

There are three Fair Work-related scenarios worth considering.

  • One is a business as usual situation, with the take up being minimal.
  • Two is that it will be the new norm, with most graduate lawyers and paralegals claiming their full entitlements.
  • The third involves bracket creep, with claims for overtime and penalties extending all the way up the pyramid to associates and senior associates.

If you want to have a sleepless night or three, ask your chief financial officer to model the financial impact of the bracket creep scenario at your firm. With staff comprising about 60 per cent of all costs, the profit hit could be huge.

However, one could argue that hard cash overtime penalties will force more firms to adopt more sustainable work practices, which might improve the mental health of a notoriously fragile profession.

Contingency plans

Planning for the bracket creep scenario will likely involve better resource management, supervision and cross-practice collaboration.

For example, most firms do little to even-out workloads where some teams are operating way above capacity and others well below. If a firm suddenly has to pay overtime for a team operating at 150 per cent capacity, you can bet a lot more effort will be made for practice leaders to collaborate and share resources.

While specialist lawyers are clearly not interchangeable, smart and well-trained lawyers are quick learners who can work flexibly across the firm.

Bracket creep could exacerbate bad work habits amongst some partners, but force a change in others.

The hoarders will try to save costs by delegating even less and doing more work themselves. On the other hand, some partners might finally get the message that the key to practice profitability is to optimise leverage, to redesign workflows to make them more effective and efficient, and to lead teams with a style that’s communicative and empowering.

A big increase in staff costs may push some lead some firms to look more closely at legal technology, especially where it could be used as a substitute for labour. The economics of automating contract preparation and review would suddenly become far more attractive. There would also be more incentives to use non-award staff to do legal process work.

My prediction

On balance I think the first scenario – business as usual – is the most likely. But all firms should be considering this question: what would do if awards governed your rewards?

 

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