To Furlough or Not to Furlough: Should law firms do it?

May 9, 2020

2 min read

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What's going on here?

Around 20 of the UK’s top firms have taken advantage of the Job Retention Scheme and furloughed part of their staff. Among the firms using the scheme are DLA Piper, Taylor Wessing, Eversheds Sutherland. The scheme sees that 80% of employees’ salaries are paid by the government (up to £2,500 monthly).

What does this mean?

There are two main takeaways this story highlights.

Firstly, it showcases the discrepancy between the high profit margin of City firms and the thinly capitalised balance sheets with which they operate. Being partnerships, it is natural that the firms want to use the bulk of the profit to pay their partners. In a partnership structure, the partners receive, at the end of the year, a share of the profit the firm made in the last year. Putting more money back into the business would thus reduce the partner’s paycheck…. Something they may not want.

Secondly, the decision highlights the dependent nature of the services that law firms provide. As most companies are shutting down, law firms have lost most of their cash flow. This prompted them to reduce the high fixed costs, a big part of which is staff wages. For example, if a firm was carrying out leasing work for an airline, the money would have stopped coming in overnight. Unfortunately, the reduced M&A activity and the postponement of high-profile litigations deepened the cash-flow crisis.

What's the big picture effect?

This affects law firms in a variety of ways. First of all, there is a high risk of reputational damage that firms using the Job Retention Scheme can incur.  As Linklater’s former partner Trevor Clark warned: “This scheme is not aimed at large City law firms, for the same reason it is not aimed at Premier League football clubs”.

However, Edward Sparrow, President of the City of London Law Society defends the firms that took advantage of the scheme. He argued that it would be “ill-informed” to “single out” law firms. Given that many have also postponed partners’ pay,  law firms are searching for alternative methods to stay afloat before restoring to the scheme. Yet, as many smaller companies are not able to access the scheme, there is still room to criticise the larger firms.

Secondly, as many practice groups have become “quiet”, firms are redeploying their lawyers in an attempt to secure more cash and face the crisis. Many firms are moving associates to insolvency and restructuring divisions. They are expecting a triple demand for practitioners working in these areas than normal. As one lawyer put it, “during a downturn all deal lawyers become restructuring advisers to help clients navigate a crisis”.

Report written by Bogdan Ciacli

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