How do hourly rates convert?

So the hourly rate saga has all been a massive let down…

The rates need to increase. Incrementally is fine. In order to fend off those “self-serving” accusations, it is important for people to understand where these hourly rates go to; particularly in civil litigation practices.

But I thought all lawyers were loaded and get hundreds of pounds an hour?…

The majority of solicitors receive a fraction of the rate they are billed out. I imagine most will be in the region of £10 – £30 per hour. The issue is that people fail to realise the following points:

(i) A lot of firms work on CCFAs, and do not look to the lay client to make up any shortfall;
(ii) Success fee uplifts are in palliative health/runoff. The ability to subsidise is about to finish;
(iii) The money that eventually makes it through the door is apportioned to many things.

Where does the money go?

Profit costs, VAT and disbursements is the easy answer. However, it is important to see what the profit costs cover.

These end up being apportioned but there is still an outdated theory of the rule of thumb using the 1/3 – 1/3/ – 1/3 split. i.e. 33% goes to the partners, 33% to the fee earner and 33% overheads.

This no longer reflects where the money goes.

Profit costs need to cover:

– tax liabilities of the firm (this is more important than you realise);
– debt repayments / financing of the firm;
– PII cover;
– lease / mortgage payment;
– managing agent fees;
– insurance;
– security, including alarm systems;
– fee earner’s salary;
– maintenance of IT systems, including payments for licenses on case management software;
– support staff salaries;
– administrative overheads such as printing, scanning, telephones, fax, email systems, networks, electronic storage, physical file storage and archive;
– childcare voucher contributions (another expensive but little known payment);
– cleaners;
– training (including CPD, SRA training such as compliance, etc)
– non-fee earning activities in general such as conflict checks, compliance, risks, financial issues;
– client entertainment and travel;
– time on clients that you cannot recover such as putting on free training sessions;
– sponsorship and charity events that you are obliged to pay to give off a “we are not scumbags” image to the public;
– etc, etc

While a number of those listed apply to most businesses, a number of the more expensive costs are limited to law firms. People underestimate the tax that a firm pays on work in progress (“WIP”) which can cause it to drop into its overdraft a couple of times a year.

What the hourly rate now goes towards is the partners and overheads, with some left over for the fee earner. Overheads are increasing and financing of the firm is where things have changed.

So why does the hourly rate need to increase?

Because almost everything else has gone up since the rates were last approved.

I am not against a new category to cover paralegals. The trick they have missed is a failure to distinguish between paralegals. It could be a higher rate for paralegals with a post-graduate qualification and a lower rate for those who do not. If they want to really get into the details then there could be sub-categories of grade E that has rates for ILEX members (level 3 and/or 6).

What those setting the rates will not realise is that firms will always work around it. If they are limited to £75 per hour for paralegals then a firm will:

– hire a paralegal without a target;
– get the grade A/B/C fee earners to start a document and then log out after saving it;
– the paralegal will then log in and complete the document;
– the higher rate fee earner will finalise and approve the document;
– this work is then billed out at the higher rate;
– the paralegal has their performance measured on quality rather than fee income.

Yes it all seems wrong, but it is likely that the above is just one example of how firms will work around it. This is particularly likely in the paralegal factories.

Over and out.

Legal Orange.


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