It’s no secret that hiring a traditional law firm associate is expensive and it has only got more expensive over the past few years. In fact, the expense can be so intimidating that many solo attorneys and small firms delay hiring just to avoid the cost … despite the fact they desperately need help! Salary makes up a large chunk of law firm associate compensation but what other costs are involved? Let’s explore.
The National Association for Law Placement (NALP) compiles data on first-year associate starting salaries in the private sector of the legal industry. In their most recent report, NALP found that “the overall median first-year base salary as of January 1, 2023 was $200,000, up $35,000 (+21.2%) from 2021.” This is a huge increase in a short time, especially as law firms have also been feeling the pain of inflation the past few years.
Now, perhaps you may think this 21.2% increase in associate attorney salaries is only for big law. This would be a smart, educated guess as the media has given a lot of attention to the so-called salary wars happening in big law the past few years. However, NALP addressed this and reported that despite much of the press coverage that has been focused on salaries in larger-sized firms, in terms of percentage growth, salaries were up the most in the smallest firms (which happen to comprise the largest sector of the legal industry).
In firms under 100 lawyers, the median first-year salary grew from $120,000 in the 2021 survey to $155,000 in 2023 (+29.2%) according to NALP. These pay increases cascaded from big law throughout the market at an accelerated pace. While it normally takes two or more years for big law salary raises to trickle down through the legal profession it has happened much faster than pre-pandemic.
Another factor for associate salaries is your specific geographical market. Whether you’re a big law firm in New York or a small one in the Midwest will also factor into how to calculate compensation for a law firm associate. Starting salaries for entry-level lawyers can vary greatly in different regions of the country.
NALP reported that across 26 different cities, there is a wide range of median first-year salaries ranging from $145,000 to $215,000. Eleven U.S. cities now have a median starting salary of $215,000. These include Austin, Boston, Chicago, Dallas, Houston, Los Angeles/Orange County, New York City, San Diego, San Francisco, Silicon Valley, and the Washington, DC area.
Starting salaries for lawyer jobs can also vary based on your practice area. Firms that specialize in areas such as intellectual property or commercial litigation may pay different starting salaries than personal injury or family law firms.
Experience is another factor that needs to go into how much you should expect to pay a full-time associate attorney. If you are hiring a fifth-year attorney, you should of course expect to pay them more than a first-year associate. NALP reports the median annual salary for a first-year associate is $200,000, while the median annual salary for an eighth-year associate is $307,500 as of 2021.
Despite the rise in salaries, associate turnover rates for law firms also reached record highs. The on-going war for talent is creating a vicious cycle of salary increases and turnover that is simply not sustainable for a successful, modern law firm business model. Law firms need to start thinking about alternative staffing models to help supplement their capacity and represent their clients adequately.
Unfortunately you don’t learn everything you need to know to be a lawyer in law school. So if you’re planning to hire a new lawyer fresh out of law school, you’ll also need to factor in training time and professional development costs. And by “time,” that likely means your time. Teaching a young attorney all the practical industry knowledge, best practices, firm standards, and tricks of the trade they need to know to perform well is in your best interest, but it’s time consuming.
Mentoring a new associate is a serious time commitment. You need to dedicate time every week, perhaps even every single day, to supervise their work as well as give practice and legal advice.
This can turn into a huge expense that many attorneys easily become frustrated with — because while you may feel like you’re investing in a long-term hire, it’s possible that you could spend a lot of resources training an employee who ends up leaving you to go work for a competitor. Then you have hundreds of hours of your own billable time down the drain.
Conversely, if you hire a more senior associate, they may bring bad habits or simply different work standards with them. Even if you don’t have to teach experienced attorneys the ground-level basics, you’ll still need to help them unlearn any bad habits and/or adjust to your firm’s way of functioning. And if that isn’t an easy transition, you may find yourself picking up the slack during the training period.
Besides salaries, benefits can add up quickly in the legal industry. According to the U.S. Bureau of Labor Statistics, as of December 2022, 31% of employee costs to employers were related to benefits. While the average per hour cost of an employee was $42.48, benefits accounted for $13.17 (31%) of that cost while wages/salaries accounted for $29.32 (69%). This means that whatever the employee’s salary is, you could need to add another 30% or more to cover the cost of their benefits.
Then there’s retirement, which is typically 2% to 6% in matching contributions from an employer. If you have a first-year new hire at the median salary rate of $165,000, that’s another $3,300 to $9,900 per year for retirement for that associate. As of December 2022, the BLS reported that retirement costs accounted for 3.4 percent of total compensation costs.
Health insurance is another large expense of hiring a traditional associate. According to the 2022 Milliman Medical Index, the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan is $30,260. The Kaiser Family Foundation reports that as of 2021, employers paid 73% of the annual premium to cover a family of four.
The benefits list is seemingly endless. Other benefits to consider when calculating the cost of hiring an associate include dental insurance ($1,500 to $4,500), disability insurance ($2,000 to $5,000), life insurance ($250 to $500), employer contributions to FICA (7.65% of salary, which at $165,000 would be another $12,623). None of this includes other possibly benefits such as unemployment insurance, tuition reimbursement, student loan benefits, financial wellness benefits, and any other voluntary benefits which might be standard for your law firm to provide to associates (think commuter benefits, gym memberships, etc).
An associate is also going to need to be covered by malpractice insurance for the legal work they provide. Rates are typically around $2,500 to $3,500 per year according to ALPS, but can be much higher. The annual rate for a policy can fluctuate depending upon practice area, experience level, prior claims and state or location risk factors.
Be certain to discuss your firm’s insurance needs with your carrier as your staffing grows and changes. Find out if law student clerks, summer associates and/or paralegals are covered by your malpractice insurance.
BAR DUES & CLE
The employing law firm also typically pays for an associate’s annual bar association dues and continuing legal education expenses. These costs can vary from state to state, as the number of hours required vary across the country. In our experience, this can account for at least $1,000 per year per associate.
In addition there can be local bars or specialty bars that a new associate attorney may benefit from joining. Networking has been a huge challenge for new lawyers during the pandemic. However, now that many groups are resuming in-person meetings there can be immense personal and professional benefits to the law firm fronting the cost of these memberships.
OFFICE & EQUIPMENT
Now more than ever, associates need access to an entire suite of office equipment. And while multiple employees used to be able to share larger equipment such as in-office printers, any work-from-home employee will now also need access to their own version of the equipment at home.
Hardware needs may include laptops, scanners, printers, paper goods and office supplies, office furniture, and a cell phone (with service coverage). These costs will easily range in the thousands of dollars every year.
Software may include access to your practice management software as well as any research accounts they need access to. Litigation attorneys may need e-discovery tools. Transactional practice groups may need deal management software for their legal services. Estate planning firms may need specialized drafting software for legal documents. These necessities can easily add up to around $2,500 per year per associate or more and are paid for by the law firm.
Whether you’re primarily a virtual law firm or hybrid, most attorneys will at some point need actual office space at which to meet with clients or conduct depositions in person. Office space will need to be provided in some capacity for those aspects of legal work best done in person.
It’s natural that the workflow of a law firm will ebb and flow. Sometimes you’re drowning in work. Sometimes you’re waiting for the next new client to call.
These peaks and valleys in workflow also hold many law firms back from making a full-
The 2020 Altman Weil Law Firms in Transition report found that 84.4% of surveyed law firms reported having chronically under-performing lawyers. Further, the report found that in nearly a quarter of all law firms, more than 10% of lawyers were considered to be under-performers.
Can your law firm really afford an underperforming associate? Carefully consider your workflow pipeline before committing to a full-time hire.
THE BOTTOM LINE
When you tally up all of these expenses, and keep in mind these could be less or more depending on your specific market and area of practice, the all-in cost to hire a first year associate is likely around $296,600.
|Associate Cost – 1st Year Associate|
|Benefits – Health Insurance (31% of salary)||$62,000|
|Retirement Contributions (3.4% of salary)||$6,800|
|Disability insurance ($2,000 to $5,000)||$3,500|
|Life insurance ($250 to $500)||$500|
|Employer contributions to FICA (7.65% of salary)||$15,300|
|Bar Dues & CLE||$1,000|
|Computer & Office Supplies||$2,000|
If your goal is to generate $200,000 of profit for the firm from hiring this first-year associate, then their work needs to bring in revenue totaling $496,600. This would mean if the associate is expected to bill and collect 1,800 billable hours, their hourly rate would be calculated as $496,600 / 1,800 hours = $275 per hour.
An hourly rate of $275 may seem much too high or much too low depending on your practice area and reasonable market rates in your location. You should consider a similar analysis as you carefully plan out your next associate hire.
Now, it is important to keep in mind that there are other more affordable, accessible and flexible hiring options for law firms in 2023 and beyond. Working with a contract lawyer aka freelance lawyer aka remote associate can be a smarter staffing solution than a full-time associate for a lot of reasons.
First, freelance attorneys don’t have overhead costs tied to them. There are no benefits, insurance, equipment, or salaries to commit to when hiring a freelancer, and the freelancer will only work when you need them to.
You can have them help you on a full-time or part-time basis depending on your needs. So if you don’t have as much work in any given month, you’ll have no overhead as you would an employee. No salary, health insurance, retirement, or other benefit costs.
Another benefit is that working with a remote associate often allows you to connect with a seasoned lawyer who can do the legal work without training or hand holding. You – and your client – can benefit from the attorney’s years of experience.
Last, with outsourcing you don’t have to worry about the natural fluctuations in your work volume. If you aren’t busy, don’t send any work to the freelancer. If you are slammed, you can connect with multiple freelance attorneys to get the immediate help you need.
LAWCLERK IS HERE TO HELP
At LAWCLERK, we know a thing or two (or many!) about hiring associates. That’s why we have built a variety of tools to help busy attorneys get more work done.