By Xiumei Dong

Law360 (August 26, 2020, 8:31 PM EDT) -- While the legal industry is faring better amid the coronavirus pandemic than it did in the Great Recession, some experts say one sign of COVID-19's impact may be hidden from view — "stealth" layoffs used by law firms to cut costs without making waves in the market or appearing weak to the competition and clients.

A number of firms publicly accused of such cuts have disputed the idea, with some saying the staff reductions were due to performance and tied to regular review processes. 

Because of its secretive nature, it is hard to define what a stealth layoff is. Typically, stealth layoffs allow firms to reduce lawyer headcount, either in small quantities or large groups, without having to confirm that they are making economic-based reductions. Firms will also give the affected lawyers a certain number of weeks or months to find new jobs in traditional ways, according to market observers.

"Stealth layoffs allow law firms to cut overhead and, if not made public, provide the firms [a way] to do so without publicly acknowledging they were economically related," said Larry Watanabe, a partner at the California legal placement firm Watanabe LLC.

Watanabe and other legal recruiters said law firms have been conducting layoffs since the coronavirus pandemic surged in early spring. While some firms did publicly disclose layoffs, others kept them under wraps to avoid negative publicity.

"This pandemic has hit firms differently from one another," said Michelle Fivel, a recruiter who works with associates at Major Lindsey & Africa. Unlike the previous recession, some firms are doing quite well financially during this downturn, Fivel said, noting that she and her colleagues have heard firms say they are above the budget they had initially planned for 2020 before COVID-19 hit.

"So when that's the case, it's not something that everybody is dealing with uniformly. It's harder for firms to come forward to be public about the fact that they are suffering more than their competition is," Fivel said.

Associates at several law firms, including Snell & Wilmer LLP, Fox Rothschild LLP and Goodwin Procter LLP, have been tipping legal news publications that they were the subjects of "stealth" layoffs by their firms in recent months. The firms themselves have denied that assertion.

In an interview with Law360, a former Snell & Wilmer attorney who spoke on the condition of anonymity told of being laid off by the firm early in the year, with the stated reason being that the "practice group has lost confidence" in the lawyer.

"I think that it would have been better for everyone's sanity and maybe just for the record to say, 'Yeah, we're concerned about our financial stability. For that reason, we have to let you go,'" the attorney said. "But the way they were doing that is just to say your practice group has lost confidence in you or you've had a reduction in hours."

The lawyer said the firm cut multiple attorneys across different offices. But in a statement to Law360, Snell & Wilmer Chair Matt Feeney denied that the associate departures were the result of layoffs.

"Snell & Wilmer is not conducting layoffs, 'stealth' or otherwise," Feeney said. "Out of respect for the privacy of our former employees, we do not provide details on departures."

According to Fivel, the low-key nature of the layoffs makes it difficult to tell if they are for performance or economic reasons.

"I'm sure they're not totally unrelated," Fivel said. "I mean during leaner times, the bar is higher, and there's less tolerance at a firm to maintain somebody on the payroll who's not being productive, who's not being on the same standards as the other attorneys in their class."

Goodwin has responded with a statement saying the personnel changes were the result of the firm's annual midyear review for nonpartner lawyers. Goodwin operates on a fiscal year ending in September. As a matter of policy, the firm said it declined to comment on the performance management process.

Fox Rothschild confirmed that six of its associates were terminated, but the firm's managing partner, Mark Morris, said in a statement that the "dismissals stem from productivity and performance issues." The firm is assisting impacted employees in their job transition, the statement said.

Because most law firms have frozen associate hires due to the coronavirus pandemic, recruiters acknowledge that it has been challenging for the associates who were let go to get new jobs.

"A layoff, in general, is not a great thing for an associate to have to go through," Fivel said. "A stealth layoff, it's even worse because there is sort of a scarlet letter. The information is, 'Hey you didn't make it at this. You were not good enough, and you were let go because you were not good enough.' When it's an economic-related layoff, that stigma is gone."

Despite the way the associates are being laid off, if there is a gap in employment, it will dramatically impact their opportunities to get another position going forward, Fivel added.

"A lot of times, people have to go down around prestige ... and maybe not make the salary that they were making at the last firm," Fivel said.

According to U.S. Department of Labor data, the U.S. legal industry lost about 64,000 jobs in April, falling from 1,161,600 jobs to 1,097,600, hitting employment lows not seen since the 2008 recession. The sector has slowly picked up over the past few months, reaching 1,107,600 jobs in July. However, according to federal statistics, it is still off by 55,000 positions from a peak in February.

In the fourth quarter, Watanabe said he expects firms to tighten their belts and conduct stealth layoffs as many have learned to operate remotely and in leaner ways than before the pandemic.

"While billings are generally on track and many firms are actually claiming to be ahead of budget, the question remains as to how successful they will be in terms of actual collections," Watanabe said. "Firms will do whatever is necessary to remain competitive, and cutting costs is one surefire way to ensure greater levels of profitability."

Law firm revenue has risen by 5.3% year-over-year in the first half of 2020 as many practices upped their billing rates and shortened the collection cycle, according to a recent report from Citi Private Bank's Law Firm Group.

However, with demand falling by 0.9% over the first six months of the year, firms could be under higher pressure going into the second half, Citi said. The report surveyed 196 law firms and found that many are concerned about their ability to collect, carrying a 4.7% inventory growth into the third quarter, which has slowed compared to the 6.6% inventory increase last year.

With economic prospects still uncertain, Gary Klein of legal search firm Klein Landau & Romm Inc. said that law firms have also been using the pandemic as an "excuse" to streamline overhead.

"I don't think there's any doubt that firms have used the pandemic to eliminate underperforming people, lawyers, including at the partner level," Klein said. "It's a really good way to expose underperformance at a time when underperformance cannot be tolerated."

Furthermore, because the timing also coincides with law firms' annual review cycle, law firm strategist Hugh Simons, a former senior partner at the Boston Consulting Group, said it had made it "very easy" to let people go in stealth mode.

"It is in the best interest of an associate who has been let go and is looking for a new job to be able to say that they got laid off because there wasn't enough business," Simons said.

--Editing by Jill Coffey and Emily Kokoll.

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