An empty street in New York's Times Square during the coronavirus pandemic. Photo: Ryland West

The COVID-19 crisis has inflicted financial trauma on parts of the U.S. legal industry with unprecedented speed, with some law firms considering⁠—or already beginning to implement⁠—everything from pay cuts to layoffs to insulate their businesses from the worst of the economic fallout.

Industry consultant Eric Seeger said he spoke this week with a major litigation firm that said everything was on the table—laying off staff, pausing partner draws, cutting staff salaries, and culling underperforming lawyers and practice groups.

"This is not your normal cyclical event. The bottom fell out of the economy with no real opportunity to prepare for it," said Seeger, adding that many firms are now operating in "survival mode."

"Things were humming along and suddenly, they have to totally redirect their attention to things that weren't even on their radar a few weeks ago," he said. "This is consuming a lot of management time—necessarily, but unexpectedly."

A number of managing partners from small and large law firms said they haven't resorted to staff or attorney reductions yet—and they hope they don't have to. But if the worst economic predictions bear out, such moves may become inevitable. And they are preparing now.

Fox Rothschild has been engaged in substantial contingency planning.

"It runs the spectrum from rather soft and benign steps to draconian and extreme steps depending on the extent of the crisis. Currently, we intend to continue the status quo, and keep everybody paid with benefits," said chairman Mark Silow. "But we've thought through potential layoffs and furloughs, as well as reductions in compensation. We've been through every option that a responsible business would consider."

Cash flow is something law firms will have to keep an eye on during these times, said one former chairman who guided an Am Law 100 firm during the Great Recession. Seeger separately noted that law firms are probably low on cash right now because they just gave out partner bonuses last year.

"You can do all the cost cutting in the world, but if your revenue is not maintained in difficult times, the cost cutting only gets you so far," the former chairman said.

That's one issue facing William Quinlan, a Chicago-based high-end litigator who runs a law firm of 10 lawyers. Right now, Quinlan said he and his team are very busy and aren't facing a cash flow crisis. But he won't be billing for his team's work in March until April.

"Today the answer is no. The problem with being as small as we are, I don't have the $100 million bankroll. We'll feel the impact faster than Kirkland and Jenner would," Quinlan said.

Benesch managing partner Gregg Eisenberg expressed similar sentiments. Right now the firm's lawyers are very busy while Benesch's leadership is examining the firm's finances. "We believe we're in good shape," he said.

But from Quinlan's small firm to Benesch's 200 lawyers to firms at the top of the Am Law 100, time is the critical variable. Eisenberg said he's not worried about the immediate future. But what happens if the pandemic is still wreaking similar economic havoc in the summer and fall? He pointed out that a sizable portion of a law firm's revenue comes in at the end of the year.

"We have a long runway, our balance sheet is clean. Our concern, and I think it's shared by the entire economic engine, is how long is this going to last? Will this lead us to a mild or a deep recession?" Eisenberg said.

Consultant Marcie Borgal Shunk, who leads the Tilt Institute, noted that cash flow will be a particular concern for firms with a concentration of clients in areas such as retail, travel and hospitality.

She said she's already seeing firms take a step back on distributions and draws for partners, with the logic being: "We're not just blanket saying you're going to make less money, but right now we need to keep some of the money in the firm in order to continue to operate."

The former Am Law 100 chairman said that during the last recession, his firm didn't lay off employees en mass like other firms did, but the partnership did "tighten our belt and constrain hiring."

Already within the past couple of weeks, at least three New York law firms—Goldberg Segalla, Belkin Burden Goldman and Robinson Brog—have made staff cuts; Belkin Burden also cut salaries. On Thursday, the Department of Labor reported that 3.28 million workers applied for unemployment benefits last week, breaking previous records.

But public perception is a good reason for firms to think twice about being quick to slash positions.

"If you, all of the sudden, decide that working remotely is going OK, and you might as well cut all administrative staff, that strikes me as a severe and unpolitical thing to do," said Bill Brandt, president and CEO of DSI Civic Financial Restructuring.

"It's not enough to say, 'That's OK, we'll hire them back in 60 days.' Only a lawyer could make as politically crass a statement as that. If everyone's going to row in the same direction in the time of a national emergency, instead of making the standard economic decision about staff, you might as well add some altruistic elements to it," added Brandt, who has helped handle workouts, turnarounds and restructurings for 36 law firms.

He said that with extraordinarily low interest rates and pressure from the federal government on banks to increase liquidity, firms would be better served by drawing on their existing lines of credit. That would help mitigate against a potential slowdown in payments from clients who have seen their payment capabilities disrupted by both the move to remote work as well as their own cash flow problems.

"I would draw down on the credit line to keep staff on board," Brandt added. "If you completely cut all your staff and hunker down, I don't think that portrays an image to your clients and the greater world of the benevolent law firm that you're trying to be."

Jack Newsham also contributed to this report. 

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