The New Deal For Partners

March 20, 2008

This opinion piece was written for Legal Week

There was once a time when a partner at a law firm could expect to have a job for life. Retiring partners could even expect their firm to pay a handsome pension, for so long as they or their spouse were alive. Those days are now long gone. The blood about to be spilled on the carpet by Linklaters, Addleshaws and Ashurst (and doubtless many others) is final confirmation for those that need it that being a partner is no bar to being sacked. The scale of the reduction in partner numbers proposed by the larger firms is staggering, given that the economy is barely 6 months into a recession expected to last 18 months or more. But whilst the numbers involved will raise eyebrows, the principle of sacking partners who do not justify their income has been embedded in the culture of City firms for many years.

Ironically, the lockstep system, long considered the hallmark of a traditional partnership model (in which partners receive a share of profits based on their seniority, rather than their billings), will have exacerbated this situation. The 'eat what you kill' approach favoured by American firms can seem ruthless, encouraging individual billings at the expense of collegiality, but it contains a safety valve in that underperforming partners automatically receive a smaller slice of the profits. In a pure lockstep arrangement, an established partner who underperforms will continue to receive the same share of profits, which may be far more than his fellow partners consider equitable.

Sympathy for partners facing redundancy may be tempered by the large profits of recent years which most will have benefited from. But the hunt for profitability as measured by PEP (profits per equity partner) masked the loss of niceties such as pensions and golden parachutes. The partnership bargain has fundamentally changed, with the model for the first decade of the 21st century being for partners to maximise their earnings whilst they remain a partner, but getting nothing when they leave. In times of job security, the new bargain will have seemed a good idea and it has undoubtedly encouraged a more mobile and dynamic labour market at the partner level. For partners who are now 'at risk', the lack of a cushion on departure will be a source of discomfort. The Legal Services Act may further add to feelings of being hard done by, as partnership agreements rarely consider the implications of a large capital receipt, as would occur on the sale or flotation of the business. Typically such a sale would not benefit former partners, even if they only left the firm the day before the business was sold.

The downturn and the Legal Services Act may bring a recalibration of what is considered fair in the context of a law firm's partnership arrangements. But a partner facing redundancy today needs to consider the position they are in now, not where it may be in 5 years. For these partners, getting their finances in order is an obvious preliminary step. But there is more that can be done. If the firm is flexible, and has an eye on the eventual recovery, it may be receptive to ideas that go beyond the basic terms of the Partnership Agreement, so long as they cut the firm's immediate costs. Options can range from secondments (even at partner level), sabbaticals, part-time working, or anything whereby the firm pays less, but the ‘at risk’ partner gets to hang on to his title and perhaps even an income.

Partnership Agreements are rarely tested in the good times and many firms have failed to keep theirs updated. Some seemingly old-fashioned provisions associated with 20th century partnerships still remain. For example, long notice periods of up to 2 years are still common; a period which would generally be considered excessive for employees of equivalent seniority in a limited company. Offering to leave early can be a key weapon in negotiations.

Unless the firm is going bust, some partners will stay whilst others will go. In such circumstances, the motives for selecting partners for redundancy will be closely scrutinised. Partners are not entitled to redundancy pay or compensation for unfair dismissal, but they are protected from discrimination. If age, sex, race, religion or disability are perceived to be factors in the selection process, then there is the risk of a claim. These risks are not always obvious. For example, a partner who is a carer for a disabled person may have the legal right to be treated as though they themselves suffered from a disability.  Younger partners may also benefit from age discrimination legislation if they are sacked on a 'last in first out' basis. Increased litigation from former partners seems a logical consequence of the erosion of the loyalty between partners and their firms.

It is unlikely that the future will bring a return to the business practices of the 20th century and an attempt to do so could delay the UK legal sector from returning to growth. But the focus on PEP of the past decade has meant that partners should be just as nervous as employees when it comes to job security. If there is a silver lining for such partners, it may be that those who are asked to leave avoid the personally liabilities that can go along with an insolvent liquidation. Partnership Agreements are often drafted on a 'last man standing' principle, so getting out early, whilst undoubtedly painful, may prove to be tomorrow's silver lining to today’s clouds.

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