Three-quarters of law firms furloughed fee-earners last year and 84% support staff, a Law Society survey has found.
It also revealed that a significant minority of firms, 15%, were forced by Covid-19 to negotiate ‘time to pay’ arrangements with HMRC to cover employees’ PAYE and National Insurance contributions.
The Law Society management section’s Financial Benchmarking Survey 2021 was based on responses from 145 law firms, including 52 with turnovers of less than £2m and two with turnovers of over £35m. It was carried out between July and October 2020.
The researchers, accountants Hazlewoods, said the proportion of support staff furloughed was “considerably higher” than fee-earners, with a median of one in three. A quarter of firms said they had furloughed over half their support staff.
At the time, law firms made gloomy predictions about the impact on the pandemic on financial performance, with a forecast median drop in income of 15% and median reduction in profits of 24%.
Researchers commented: “Our experience is that the majority of firms initially produced overly pessimistic financial projections for the 2020/21 financial year, and whilst income has indeed fallen (although generally by less than first feared), overheads have too, helping to maintain profitability levels.
“As a result, many salary reviews and promotions that were originally deferred from early 2020 have since been implemented.”
Law firms were similarly pessimistic last autumn about the need for redundancies, with a third anticipating making redundancies amongst their fee-earning staff – at an average of two fee-earners – and 44% expecting to make some of their support staff redundant.
“It is true to say that there have been redundancies in the sector, but nothing particularly widespread, and for many, it is fairly likely that Covid-19 merely gave rise to an opportunity to reassess staffing needs in certain teams, to a certain extent.
“Fee-earners, in particular, are still leaving one firm to join another, and it remains challenging to recruit quality solicitors.”
Researchers went on: “One of the few upsides of Covid-19 is that it forced almost all law firms into a place where they are now able to operate effectively with either all or part of their workforce working remotely, either all of the time, or part of the time.
“As a result, the level of confidence in feeling that a more flexible way of approaching work in the longer-term is not only feasible, but desirable, has increased dramatically.”
The survey found that median practice fee income increased by 1.6% last year, the smallest increase for nine years, whilst median fee income per equity partner increased by 3.7%, from £775,515 in 2019 to £804,437 in 2020.
Firms reported a drop in profits per equity partner for the second year running – a median drop of 6.9%. Despite increased fee income, overheads grew more quickly than fees, leading to the fall in profits.
Median spending on non-salary overheads per fee earner was up by 4.5%, much of it driven by rises in the cost of professional indemnity insurance and additional spending on IT.
Paul Bennett, chair of the law management section, commented: “The increasing cost base of professional indemnity and IT will not surprise anyone but does highlight the importance of growing the income. Growth must be with a focus on profitability as we emerge from the pandemic…
“There are clear green shoots and opportunities to increase the long-term financial rewards, but this data is from the first wave of the pandemic challenges so we will no doubt see trends develop in next year’s survey.”