Will The Next Wave Of Layoffs Target Nonequity Partners?

By Xiumei Dong
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Law360 (July 17, 2020, 3:49 PM EDT) -- As coronavirus cases again spike across the country and the virus continues to cast a shadow over the legal market, several industry experts said more lawyers could fall victim to a drop in legal work, and this time, it could also put the nonequity partners at risk.

Since COVID-19 outbreak began in late February and early March, a large number of law firms in the U.S. have announced cost-cutting measures, including layoffs and furloughs of associates and staff, to reduce the impact of the pandemic.

But, as the experts expect a second wave of crisis and layoffs in the fall, firms may move the cuts up the ladder, targeting the senior lawyers who do not have an ownership stake in the firm.

"I see some firms whose leadership already wanted to 'counsel out' more underperformers, including in particular nonequities in many cases," said Kent Zimmermann, a principal at legal industry consultancy Zeughauser Group.

"I've seen them pick up the pace on those cuts, and have less internal resistance to doing so," Zimmermann added, noting that more firms are looking to layoff income partners to save on cost and boost profitability.

While equity partners are comfortable "subsidizing to a degree" to keep nonequity partners when the economy is doing well, as the economic downturn began, they were asked to tighten their belts, Zimmermann explained. Therefore, they are now less permissive to "underperformers" at the firm, he said.

"I think nonequities, particularly those that are on a multiyear, chronic basis, are materially underperforming the firm's expectations. They're going to be at more risk in many firms," he added.

Jim Cotterman, a principal with legal industry consultancy Altman Weil, also said the downturn could cause firms to downsize their nonequity partner ranks.

"Law firms have had a long-running challenge with declining productivity and too many lawyers for the available work," Cotterman said. "Efforts that increase options and improve efficiency extend that challenge. The pandemic has exacerbated that challenge."

However, unlike the previous recession, where the economy went into free fall because of the collapse of the financial markets, Cotterman said this recession is caused by a health pandemic, giving firms more time to work things out.

"So, that's why I think their responses were very measured, and then the furloughs and the terminations were very limited and selected," Cotterman said.

Over the past decades, BigLaw's nonequity partner ranks have grown at a faster rate than any other law firm job title, Zimmermann noted, and one reason for the growth is that firms wanted to improve their profits by equity partner.

Therefore, instead of some of the underperforming senior attorneys being asked to leave, they received a new name as "nonequity partners" or "income partners," who receive a salary but no ownership stake or share of the law firm.

"So, the nonequity ranks, in part because of that dynamic, have swelled with more underperformance across the industry than any other category of attorney," Zimmermann added.

According to data analyzed by legal publication The American Lawyer, which sampled 29 firms from the 2019 Am Law 50 and 42 firms from the second 50, law firms in both ranks have seen nonequity partnerships increase by 17% from 2004 to 2019.

Meanwhile, the number of equity partners has been essentially flat at the median Am Law 100 firm. Last year, the Am Law 100 firms reported about 21,000 equity partners and nearly 17,000 nonequity partners.

"For the last few years, we have had the longest expansion in peacetime ever," said Hugh Simons, a former senior partner at the Boston Consulting Group who analyzed the Am Law data.

Simons explained that, in the past, firms have not wanted to let the lawyers go because they were afraid of not having the capacity to meet clients' needs. Therefore, they created spaces in nonequity ranks and other places for "lawyers who would never in the long term be equity partners."

"Now that these cycles turn, they all get cleared out," Simons said.

Simons pointed out that law firms are still in the early phase of the layoffs. With the third quarter now underway, more firms could be considering reducing their headcount and other austerity measures.

"They will disproportionately shed nonequity partners, and off-partner-track lawyers, to counsel and specialists," Simons said.

However, unlike with associate layoffs, firms tend to be more private and discreet when they are counseling out nonequity partners, Simons and other industry experts said. Although they declined to comment on which firms have laid off nonequity partners, some said they expect to see more cuts in the fall when firms conduct their performance reviews.

Those equity partners who got "counseled out" by firms will most likely end up working at much smaller, less profitable shops, Simons said. When the economy picks up, he added, firms may have the incentive to fill up their teams with nonequity partners again.

"In order for profits for equity partners to continue to grow ... then the ratio of nonequity to equity partners has to grow," Simons explained. "So the way you grow the ratio, though, can be done one of two ways: You can reduce the number of equity partners or increase the number of nonequity partners."

--Editing by Marygrace Murphy.

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

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