Pay cuts, delayed partner distributions and layoffs took place at many law firms this spring in an immediate response to the economic turmoil during the coronavirus pandemic. Months later, conditions are ripe for a possible second wave of austerity measures to sweep through the legal industry, legal market observers said.

Some law firm leaders, in interviews, said they see reason for optimism, but they aren't taking layoffs off the table.

Law firms could be considering more head count reductions and other serious austerity measures in the third quarter, observers said, as they shift from reactionary cost-cutting measures to long-term preservation in a recessed economy. Significant discretionary spending has already been cut from budgets, after travel and entertainment restrictions were imposed during the pandemic. Small Business Administration loans are running out. Demand continues to be depressed, and corporate clients are asking for considerable discounts, according to new data.

"Firms are getting to grips with the idea that the economy will stay down for a while," said Hugh Simons, a law firm strategist formerly the chief operating officer at Ropes & Gray. "The next step is structural change. Clients are thinking about how to lower legal costs and still meet their needs, and as we get into the fall, two things will happen: firms don't want to be seen doing layoffs until they have to, but they're also realizing the economy will be down for a while, maybe the next year and a half. This is all coming at the normal timing of annual associate reviews."

"I think that layoffs are coming," Simons added, noting they've been delayed for a number of reasons. "It's cruel to let someone go in the middle of a pandemic, and it's really hard to fire someone over Zoom. Nobody wants the stigma of doing something like that."

In the first two weeks of the third quarter, two Am Law 200 firms' layoffs — at New York-based Hughes Hubbard & Reed and Detroit-based Miller, Canfield, Paddock and Stone — were revealed.

Hughes Hubbard said it resisted personnel cuts, explaining in a statement that it "decided in the early stage of the pandemic to keep our entire team intact for as long as we could."

But on July 7, it confirmed it laid off an undisclosed number of attorneys and staff, noting that a few months into the pandemic, and after receiving between $5 million to $10 million in PPP loan money to preserve 442 jobs, further reductions were necessary. The firm cited "the deep impact of court closures and a slowdown in deal activity."

At Miller Canfield, the firm, which also received a $5 million to $10 million PPP loan to preserve 313 jobs, recently cut ties with one principal and six nonprincipals, including three associates, according to a statement on Above the Law. The firm also furloughed two full-time attorneys, including one associate.

Although many firms had hoped that PPP programs and a temporary economic shutdown would be enough, this has not been the case, said Jim Cotterman, an Altman Weil consultant focusing on law firm finance and compensation.

"I believe firms are prepared to undertake more unpleasantness if conditions worsen or do not improve sufficiently for them to maintain operational capability through to a recovery," he said.

Firms, he said, have "adopted a pragmatic approach to lengthen their operating runways while simultaneously preserving operating capability for what comes next." He said firms' typical actions have included increased access to liquidity, curtailment of nonessential expenses, tiered pay reductions, selected furloughs and limited terminations.

While various cost-cutting measures this spring may have staved off further action in the short term, Cotterman said vast uncertainty remains.

Lower demand means less work going around, Simons said, explaining that "partners don't push work down to nonequity partners, who don't push work down to senior associates."

That's when lower demand becomes a matter of attorney development, Simons said, another potential trigger for associate layoffs.

"People at the bottom simply aren't getting work to grow," he said. "That's when you have to take people out, so the remaining midlevel associates a few years from now develop into high-quality mid- and senior associates."

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Cause for optimism

Still, a bleak economic outlook could spell fortune for some firms, Simons said, where strong bankruptcy and restructuring, finance, private equity, class action employment litigation, regulatory and life science practices can help firms' cash flow.

Perkins Coie's managing partner William Malley/courtesy photo Perkins Coie managing partner Bill Malley/courtesy photo

At Perkins Coie, managing partner Bill Malley said data privacy and security as well as helping clients respond to new regulatory requirements in California resulting from the pandemic have been especially helpful as the firm navigates through a period of uncertainty.

The firm has settled into a routine after transitioning to remote work this spring and instituted several resiliency measures, including a 15% salary reduction for nonpartner lawyers, a 10% salary reduction for staff making more than $200,000, and delayed payouts for partners, he said.

"Uncertainty has remained the overriding theme of today," he said in an interview. When it comes to taking any other potential financial measures, Malley said it was a matter of balancing caution in the short term versus growth in the long term.

Economic circumstances in the U.S. speak to a continued need for caution, he said. "But by the same token, we've looked at the need to plan for the long term and invest in growth, and we've made a number of new partner hires recently."

In the third quarter, Malley said providing flexible working arrangements will be even more important in order for lawyers to get their work done, with some summer camps, day cares and schools remaining closed. Perkins Coie is defaulting to remote work through the end of the year, although some offices are reopened.

Another law firm that made cost-cutting decisions this spring, Sullivan & Worcester, is also taking decisions day-by-day in the third quarter, managing partner Joel Carpenter said. The firm in April cut discretionary expenses, furloughed employees, reduced attorney salaries and cut equity partner draws.

Three months later, Carpenter said the cuts were difficult but were necessary to help the firm through the early days of the pandemic, but uncertainty remains for the rest of the year.

Joel Carpenter, managing partner of Sullivan & Worcester/courtesy photo Joel Carpenter, managing partner of Sullivan & Worcester/courtesy photo

"In the third quarter, I'm hoping and expecting we remain stable, and that things don't go down again," he said in an interview. "We have clients who are suffering to varying degrees in the pandemic, but if things stay stable, we aren't contemplating any layoffs at this point. However, you can never say never about anything because you don't know what the future holds. But I'm cautiously optimistic."

Carpenter said he was nervous about new spikes in coronavirus cases in states such as Texas, Florida and California and how that will impact economic recovery as well as Sullivan's business.

In the third quarter, he said he's looking at how many hours are going into the books. Although average hours are down slightly at the firm, he said he was encouraged by some new matters that came into the New York office last week, as well as transactional work down the pipeline.

"Every month since the pandemic hit has been below what we originally budgeted, but that's kind of what we expected," he said. "Things dropped substantially when the world went remote overnight. Since then, things have stabilized as opposed to continuing to get worse, which is obviously a relief to us, that the trend of heading south didn't continue. But we haven't come back to where we hope to be."

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