A Macro Financial and Management Perspective
Before considering the financial comparison of direct costs for contract versus permanent hiring structures, decision makers should take a macro perspective to evaluate other indirect costs that might impact the top and bottom lines of the firm’s financials.
Permanent search timelines are significantly longer than the time frame required to identify and hire a contract attorney. With the need for additional headcount not always being anticipated, the first consideration should be: “How does each approach impact our ability to support the current workload in order to meet an established timeline?” The immediacy for additional support may shift the approach to a contract employment model.
One should also consider the support costs associated with each approach. Most often, there will be some level of onboarding and training required for both hiring models, but this expense is more limited for a contract hire. Firms invest significantly more in training and mentoring a permanent employee. If a certain position requires significant training due to a complex platform or unique processes, the larger training expense may drive a permanent hire approach so that the firm can receive a better return on the upfront investment. Other indirect costs that should be considered for both hiring approaches include real estate/facilities, technology requirements and support staff.
Depending on the project type or focus, a firm must also consider the additional management infrastructure required to oversee a contract attorney. There is a risk that the contract attorney will take away focus from internal team members who are already limited. The additional management of a contract hire may require a significant reallocation of firm personnel, thereby further reducing the overall capacity at a time when every hour counts.
Direct Financial Considerations of Compensation
It is important to understand the direct costs of a contract attorney in comparison to a permanent hire. The primary differentiating factor is the ability to pay a contract attorney on a per-hour basis, based upon hours worked as opposed to the fixed salary of a permanent employee. The variable cost model of a contract attorney should be considered more when the consistency of the additional workload is unknown. Contract employment models allow a firm to quickly flex based upon actual workload. This often translates into equivalent billable hours and avoids additional costs of an underutilized permanent employee.
Base pay of a contract attorney is often slightly lower than a permanent hire. However, this depends on the specific market, need and practice area. Since most contract employees fall into a W-2 payroll structure, State Unemployment Tax Act (SUTA) tax, workers’ compensation and any other state or local tax obligations are a direct function of base pay. Therefore, the net expense of each hiring approach is comparable unless there is a more significant spread between a permanent employee’s and a contract employee’s base pay rate.
One consideration to help drive a base pay rate down is to offer a remote contract role. Whereas many firms are still reluctant to grow with fully remote, permanent attorney positions, some firms can easily accommodate and benefit from a remote contract attorney. The largest advantage to making a role remote is that it instantly grows the pool of candidates. A larger supply of candidates typically translates into savings in the base pay rate. If your office is in a top-tier market, your firm may utilize a remote contract attorney from a less expensive market. Experienced attorneys are often found in unlikely places across the country. This strategy also increases access to highly experienced attorneys who may not be available through a permanent hiring structure but can add additional value by filling a gap in knowledge or expertise.
There are risks in hiring an out-of-state contract employee. A firm must be ready to research and manage state and local requirements in relation to tax withholding, SUTA accounts, business licenses, etc. Expanding payroll to a new state also requires monitoring and understanding the constantly changing state and local laws that can create additional financial risks. One example of this is the required paid sick leave (even for contract workers) in New York, which workers begin accruing from the first day of employment.
A firm should assess other direct costs that often favor a contract hiring model. With a more limited pool of candidates in the current market, the direct costs associated with sourcing and recruiting a permanent employee have significantly grown in comparison to the lower costs to source a contract employee.
Additionally, a firm is typically not obligated or expected to offer benefits to contract employees. According to a March 2022 U.S. Bureau of Labor Statistics news release, benefits make up approximately 29.5% of the overall cost of an average U.S. worker within private industry. That number may seem hard to believe until one considers employer net costs of permanent hires, which may include medical, dental and vision insurance coverage; defined benefit and retirement plans, including 401(k)s; life insurance; short- and/or long-term disability coverage; paid time off; bar license renewal and association-related costs; information technology hardware and software licensing costs; and malpractice insurance, which certainly isn’t included in that statistic.
Lastly, the legal industry utilizes bonuses as a significant part of compensation packages. Bonuses are not prevalent within contract employment models. However, a project-based bonus might be considered as an incentive to keep a contract attorney engaged and committed through the duration of a project.
In addition to the financial analysis invested in a contract versus permanent hiring decision, other factors should be considered. When possible, a firm should take a long-term perspective by looking past the immediate need. Instead of using a contract attorney as a patch to get through an immediate uptick in work, firms should consider using the position as a bridge to build new infrastructure to support future work. This approach utilizes the contract employee for the immediate need while leveraging the additional help to fund and build capacity to serve additional clients. A contract attorney may have interest in eventually converting to a permanent employee. Regardless, the contract position can give support for committing to an additional, permanent employee.
Another consideration is to externalize the hiring of a contract attorney by working through a legal staffing company. Although a law firm will pay a markup on the contract attorney’s base pay rate, the increase in net hourly cost is made up through the value that this external partner can provide. A staffing company becomes the formal employer, thereby responsible for all tax withholdings and filings. The staffing company manages everything from sourcing candidates to underwriting payroll, which adds a financing dimension through negotiated payment terms. Externalizing this function also offloads most of the liability and HR issues to the staffing company.
Any law firm considering the utilization of a contract attorney should focus on the financial analysis while also understanding the nonfinancial aspects related to the firm’s management, growth and long-term strategy. Although speed and flexibility often drive a contract hiring strategy, it is important to assess the risks of a contract employment structure. A firm must be ready to reevaluate for each additional position as hiring strategies may shift based upon unique needs, the available talent pool or market conditions.