July/August 2003  Volume 29, Issue 5
July/August 2003 Issue
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Trends Report
Non-Equity Partnerships: Multiplying Like Rabbits
by Robert W. Denney

Over the years, many changes have occurred in the traditional partner-associate structure. Permanent associates, temporary attorneys, staff or contract lawyers, of counsel and non-equity partners (NEPs) have all been added to the mix. Non-equity partnership has existed for years -- but until five years ago, only about 50 U.S. firms actually had NEPs. Moreover, as many firms dropped the category each year as adopted it. Recent years, however, have seen a definite trend of creating at least one tier of NEPs. Plus, hardly any firms are eliminating the category now. In fact, various sources estimate that, as of 2002, half of firms with more than 150 lawyers had created some form of non-equity partnership. Even smaller firms -- some with as few as 10 lawyers -- are following the trend.

What's propelling it? There are at least five reasons more firms are creating an NEP tier. One is to lengthen the track to equity partnership to give younger lawyers more time to build their skills, particularly in business development. A second is to postpone the often-difficult decision of who should be made a "full" partner. A third reason is to avoid slicing the profit pie into more pieces, particularly when profits are flat or down. Another is to attempt to retain associates who may not, or will not, become equity partners and might otherwise leave the firm.

Lastly, many young lawyers today don't want to become partners. They don't want to assume the responsibilities, work the extra hours or invest the required capital, usually because they want a better "quality of life."

Today, there are two principal types of NEP status: temporary and permanent. There are also variations.

Temporary status. In firms where NEP status is defined as "temporary," or simply an additional step to full partnership, associates (or laterals) are elected NEPs for a designated period, usually not more than three years, but two years in some firms. The additional time before consideration for equity status enables them to gain more legal and client service experience, develop areas of expertise and become more effective business developers. It also gives the firm more time to evaluate the lawyers.

Some firms with a temporary non-equity tier also allow occasional exceptions so that a "fast track" associate may bypass the tier and be elected directly to equity partnership. And some allow associates to request temporary non-equity status because they wish to work part-time for a while (usually to start a family) but then return full-time.

Permanent status. In firms where the category is defined as "permanent," NEPs will generally not then be considered for equity partnership -- although there can be exceptions. In order to retain these lawyers, the firm designates them as "partners" to the outside world without defining their NEP status.

Combination forms. Some firms combine temporary and permanent NEPs in one tier. This gives the firm flexibility in the case of a "permanent" NEP who may subsequently become a desirable candidate for equity partnership. It also gives NEPs who still want to become equity partners the possibility of being considered at some future point.
Therefore, non-equity partnership can take the following forms:

  • A temporary, extra step en route to equity partnership
  • A temporary, extra step that can be by-passed
  • A permanent, final step in lieu of equity partnership
  • A step that can be either temporary or permanent, depending on the firm's evaluation of the lawyer or the lawyer's choice of lifestyle

What does the status mean? Be it temporary or permanent, the tier generally involves the following:

  • NEPs have no capital contribution or buy-in.
  • NEPs are designated as partners in all firm directories and materials.
  • NEPs receive all financial information.
  • NEPs vote on all matters except compensation of equity partners, admission to equity partnership, merger or dissolution of the firm and, in some firms, election of the managing partner or executive committee.
  • NEPs can serve on all committees except the XCom. Some firms, however, provide one XCom seat for a non-equity partner -- with only the NEPs voting on that seat.
  • Most NEPs are salaried at rates above that of senior associates but below that of the lowest equity partners.
  • Most firms pay NEPs a bonus, based on firm profitability and the lawyer's performance. They typically designate a percentage of firm profits for distribution among the NEPs.

When deciding whether to create an NEP tier in your firm, consider your long-range plans, the associates' desires and the competitive forces in the marketplace.

NEP Advantages
NEP status has several advantages for lawyers. For one, while they are considered to be full partners outside of the firm, they gain additional time to develop before facing the possibility of not being elected to full partnership. Also, lawyers who wish to work part-time (for a few years or permanently) can still become "partners." And lawyers who don't wish to assume the financial obligations and time commitments required of equity partners can still become partners.

From the firm's perspective, the tier maintains or even increases leverage because NEPs are not classified as partners in determining the leverage ratio. In firms where the status is permanent, the principal disadvantage for NEPs is that the rest of the firm (or they themselves) may consider the status "second-class." This is particularly true of lawyers who want to become equity partners. Some may leave the firm if offered equity status elsewhere.

NEP Alternatives
Non-equity partnership is not the only alternative for a firm. Other options include extending the equity partnership track with no promises or commitments; creating a permanent category of "senior associate," "senior lawyer," "special counsel" or the like; and designating certain five- or six-year associates as "senior associates" and giving them a substantial bonus. This usually indicates the firm's strong commitment that these associates will become equity partners once they complete the normal partnership track. Another option is the historic "up or out" approach.

Bob Denney ( bob@robertdenney.com) is President of Robert Denney Associates, Inc., providing strategic management and marketing consulting to law firms. He can be reached at (610) 964-1938.