The 80% tax on legal help

I’m a fan of back-of-the-envelope calculations to get a grip on the dimensions of a problem.  So here’s one that shows how badly legal professional rules inflate the cost of legal help for ordinary people.  (You can get the full story behind this calculation here and the explanation for why changing the rules to get rid of the legal professional tax doesn’t mean abandoning client protection and quality here.)

The starting point is the average hourly cost of legal help for individuals and small businesses (as opposed to corporations).  We don’t really know what this number is because nobody collects systematic data on this.  Surveys of lawyers done by bar associations (see e.g. Michigan, Texas)show medians for solo and small firm lawyers in the $200-$250+ range.  A 2013-2014 survey of consumer lawyers nationally found a median hourly rate of $350.  I usually use a conservative guesstimate of $200 an hour.

Suppose lawyers charging $200 were taking that rate home as a full-time salary:  40 hours a week, 48 weeks a year.  That would yield almost $400,000 year.  Of course, it’s not possible for someone who is running a solo or small firm law practice to bill and collect for every hour worked.  Plus some of that money has to go to the cost of running the practice:  office, assistants, technology, etc.  And that’s going to be the point.

What do solo and small firm practitioners, those who serve ordinary individuals and (very) small businesses end up taking home?  Again, there are no systematic data available.  I’ve done another back-of-the-envelope calculation to guesstimate this:  the bottom 40% of law firms arranged by revenues in the U.S. Census had average revenues of about $135,000 and average payroll of about $45,000.  That leaves them with $90,000 out of which to pay all other expenses; what’s left is their take-home pay.  That sounds like it produces take-home of about $60-70,000.  That’s consistent with the After the JD study Wave 3 which shows a median income for solo practitioners of about $50,000.  Let’s use a guesstimate of $65,000.

Now a bit of math:  the effective rate for a full-time lawyer who takes home $65,000 is about $35 an hour.

So a lawyer who is charging people $200 an hour is actually getting paid about $35 an hour for all the hours he or she works.  What is in that $200 rate?  Hours that the attorney doesn’t have any client work to do.  Hours that the attorney spends running the business, billing clients, trying to collect payment from clients.  Hours billed that are never collected.  Office rent.  Insurance.  Technology and equipment.  Time spent at conferences and networking events to find clients.  Advertising and creating content on a website or newsletter or legal publication to generate clients.

Now suppose that this same lawyer were able to work for a business that supplies legal services to the public–a LegalZoom or RocketLawyer or Avvo.  And imagine that in this job the lawyer just does law: the company does everything else.  Pays the overhead. Builds the website.  Finds the clients.  Pays for the insurance. Figures out how to price the work and get paid.  Let’s ballpark the cost of this overhead at 15% of the total–$5 per hour.

That means the company can charge the client $40 an hour and pay the lawyer $35. The lawyer earns the same salary.  But the cost to the customer falls by 80%.  That’s the 80% legal professional tax.

That 80% markup is the cost of the legal professional rules that prohibit the lawyer from taking a job with a company that provides legal services to the public.  The rules that prohibit the “corporate practice of law” or any “fee-sharing” (otherwise known as profit- and revenue-sharing) with anyone who is not a lawyer–like investors or business managers or software engineers.  A small-scale practice–which is where we find the lawyers who provide services to individuals and small businesses–is hugely inefficient.  Lawyers don’t benefit from that inefficient scale.  But clients pay for it–and mostly, can’t pay for it and so can’t access services.

That’s the irony:  Lots of lawyers are actually willing to provide their legal help to the market in exchange for an average of about $35 an hour.  That deal could be struck with the millions of people who need some legal help and who could pay that price (but not $200 an hour) if the rules let lawyers work for and with the non-lawyer professionals and investors who can get us to the scale and technology needed to generate large-scale access.

 

 

 

 

4 comments

  1. I have worked for a services company that provided professional labor to the US government. Fully loaded costs on an hourly basis were roughly twice salary. This included salary, benefits (health insurance, life insurance, average of 3 weeks vacation, 10 federal holidays per year, sick leave, employer part of payroll taxes), administrative support, IT, building rent, utilities, management time, mandated training time, supplies, etc.

    As for the “corporate practice of law”, medicine used to have such restrictions. Obamacare seems to have swept them away through various novel arrangements that are corporate practice in all but name.

    1. John–fantastic data. Thanks for sharing. Looks like those firms are probably on average younger lawyers than the ABA averages suggest (but not newbies–30% have more than 15 years experience) and we don’t know how many are intentionally part-timers. But bottom-line number is staggering: 2.2 hours billable and only 1.5 hours actually collected for 8 hours worked.

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