The Impact on Law Firms of Deferring Associate Start Dates

The legal industry has experienced its share of challenges and transformations in recent years. From the global financial crisis to the COVID-19 pandemic, law firms have had to adapt to shifting economic landscapes and evolving client needs. One significant change that has become more prevalent in recent times is the deferral of associate start dates. While this may seem like a practical response to uncertain times, it comes with its own set of financial implications for law firms.

By the Numbers

According to recent U.S. Department of Labor data, the legal services sector lost 1,200 jobs in July and 4,200 more in August, its lowest level so far this year. The jobs report also adjusted downward its projections for legal sector employment. According to a recent report from Wells Fargo’s Legal Specialty Group, “law firms continue to be swollen with excess lawyers” through the midpoint of 2023.

Large law firms are advising on fewer deals, with a smaller combined value, as mergers and acquisitions activity fell to its lowest level in more than a decade during the first quarter of 2023, according to data released by Refinitiv. Law firms surveyed by Wells Fargo “reported a drop in productivity during the first six months of 2023. Lawyers so far this year have logged an average 1,538 billable hours during that time period—150 fewer hours than in the first half of 2021, when average billable hours peaked, according to Wells Fargo.” “We’ve never seen numbers this low,” according to Wells Fargo Senior Vice-President Owen Burman, Bethesda MD, in a recent Reuters article.

Even though law firms have sharply curbed their hiring—with some deferring new lawyer start dates—the number of lawyers employed full-time at the firms surveyed by Wells Fargo increased by 3.9 percent in the first half of the year. Despite this fact, overall demand for legal services dropped by 0.4 percent during the first six months of 2023, compared with the same time last year when demand increased by 0.2 percent. According to the survey, “law firms’ biggest challenge in the near-term is that client demand for their services does not justify the number of lawyers they have.”

Understanding Associate Deferral

Deferring the start date for incoming associates is a strategy law firms use to manage their workforce and mitigate financial risks. Traditionally, law firms hire a new class of associates each year, with start dates usually set for the fall after these fresh graduates have taken the bar exam. However, economic uncertainties, changes in client demand, and over-hiring in the wake of disruptions like the COVID-19 pandemic have led firms to implement a deferral strategy.

Reasons for Deferral

The reasons for start date deferral are varied, but they all relate in some manner to a law firm’s top or bottom line:

• Economic Uncertainty: Economic downturns can severely impact law firm revenues. During such periods, clients may cut back on legal services, and firms may find it challenging to support a large incoming class of associates. 
• Client Demand Fluctuations: The demand for legal services can be unpredictable. When client workloads decrease, law firms might not have enough work to justify hiring a new class of associates. 
• Cost Management: Law firms often need to control costs to maintain profitability. By deferring start dates, firms can reduce salary and benefits expenditures during challenging times.

Financial Impact of Deferring Associate Start Dates

Start date deferral can have a significant positive financial impact on a law firm, assuming the cost savings exceed the revenue loss:

• Immediate Cost Savings: One of the most apparent financial benefits of deferring associate start dates is the immediate reduction in expenses. Law firms are relieved of the financial burden of salaries, benefits, and training costs associated with new associates. 
• Preservation of Profit Margins: By deferring start dates, law firms can maintain their profit margins in the face of reduced revenue. This financial strategy allows firms to weather economic downturns without resorting to extensive layoffs or other drastic measures. 
• Resource Allocation: Law firms can reallocate resources to more pressing needs, such as technology upgrades, marketing efforts, or expanding practices in growing areas of law. This can lead to long-term financial stability and growth. 
• Retention of Top Talent: While deferring start dates can be frustrating for incoming associates, it can also be a retention tool. Firms can offer financial incentives or guarantees to associates who agree to delay their start, ensuring that top talent remains committed to the firm. 
• Flexibility: Deferral provides law firms with the flexibility to adapt to changing circumstances. If economic conditions improve, firms can choose to accelerate start dates or hire additional associates as needed.

Challenges and Considerations

Despite the financial benefits, there are challenges and considerations that law firms must address when deferring associate start dates:

1. Talent Pipeline: Delaying start dates may impact the talent pipeline, potentially leading to a shortage of experienced attorneys in the future if firms don’t hire new associates regularly. 
2. Associate Morale: Extended deferrals can harm associate morale and commitment to the firm. It is essential to communicate openly with associates about the reasons behind deferrals and any compensation adjustments made. 
3. Client Expectations: Clients may have expectations about the size and composition of legal teams working on their matters. Law firms must manage client relationships carefully when making staffing changes. 
4. Training and Development: Delaying start dates means associates join the firm later, potentially affecting their training and development. Law firms must have plans in place to address this challenge and ensure that associates receive necessary support and mentorship.

In April 2023, following a round of layoffs, Bay Area stalwarts began deferring first years to January 2024. In May 2023, Dechert—one of the 50 largest law firms in the U.S. by gross revenue—announced a global reduction in force. At the time, the firm let go of about 5 percent of its total workforce, including 55 attorneys and 43 business professionals. More than a dozen other large U.S. law firms have announced similar reductions in workforce since late last year. In June, Cooley offered a year-long deferral for certain incoming corporate associates with a $100,000 stipend.

More recently, Dechert announced the option for associates to defer their 2024 start, with the inducement of a $75,000 stipend if they choose to work with a nonprofit or pro bono entity through the firm. The associates who accept this deferment would start at the firm in fall 2025. Industry recruiters expect to see more deferrals, especially at firms that swiftly hired in 2021 and rely on deal activity tied to the tech sector. “I am not as certain as I was earlier in the year that things will quickly improve. There may be more fallout (layoffs or deferrals) before things start to get better,” cautioned HFF Legal Search partner and co-founder Jennifer Henderson, Los Angeles, CA, in The American Lawyer.

Deferring associate start dates has become a financial strategy that law firms use to adapt to economic uncertainties and manage their workforce effectively. While it offers immediate cost savings and helps preserve profit margins during tough times, it also comes with challenges related to talent retention, morale, and client expectations. “Deferrals allow firms to retain the top talent they’ve recruited,” Henderson reiterated. “And they can always bring them back sooner if demand improves…. It isn’t beneficial for these associates to start in a firm where they won’t have enough work to do, and it doesn’t behoove the firm to have associates not getting training and experience,” she explained.