Business of Law

Smaller law firms are bracing for the new pay transparency laws

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Smaller law firms are bracing for new pay transparency laws

The legal industry has long been criticized for pay inequality, especially when it comes to female and minority attorneys. But a recent spate of pay transparency laws may put an end to this, regardless of whether the firms like it.

In January, pay transparency laws officially took effect in California, Rhode Island and Washington state; New York state will follow in September. (Colorado and New York City already blazed the trail in 2021 and 2022, respectively.) While the pay transparency laws vary by state—and won’t affect larger law firms as much as smaller firms because BigLaw is already relatively transparent—they essentially require companies to provide a pay range for prospective applicants. For example, New York City’s Local Law 32 requires that any firm with more than four employees must list the salary range for any position in New York City (not including bonus and equity compensation).

Legal recruiting firm Major, Lindsey & Africa’s 2022 Partner Compensation Survey reported the average male partner’s total compensation is about 34% more than the average female partner’s. And those who identify as nonwhite report an average total compensation 10% lower than that of white partners.

But while the creation of the new laws presents an opportunity for law firms to embrace a more transparent and equitable approach to compensation, these laws can pose larger challenges for smaller law firms, says Rachel Demarest Gold, a partner with Abrams Fensterman in Lake Success, New York.

“The bigger challenge this law poses is that it expects employers to know exactly the slot they need to fill when they post a job,” Gold says. “That may work for the vast majority of hourly jobs and large companies with narrowly defined positions, but for a small firm looking to add an attorney, what each applicant brings to the table is an inextricable part of determining the monetary value of their contribution.”

The New York law requires a firm to either set narrow parameters and limit its options or to anticipate and justify each possible quality that would add value to an applicant’s contribution. That isn’t always feasible, she says, because at smaller law firms, attorneys must multitask.

“These laws presume job descriptions are a one-size-fits-all and impugn bad faith where there may be applicants with unanticipated value,” Gold says. “There are legitimate subjective elements involved in determining a salary that need to be evaluated in the hiring process, such as the size of one’s book of business or the role experience plays.”

Developing and justifying a salary range will require the investment of resources. Employers will need to make sure they have job descriptions for the positions they advertise to fill, and they have to be able to explain why one position pays more than another. Firms will need to take stock of their existing employees’ salaries and develop job responsibilities that explain disparities.

“For smaller law firms, this is a particular challenge because it’s harder to quantify the value of certain employee qualities,” Gold says. “Going forward, everyone must make sure to document any deviation in salary ultimately paid from an advertised range.”

Remote possibilities

Firms that have remote workers need to look at their processes and postings across the country and beyond. If employers fail to comply, the fines can be steep, costing up to $250,000. This process is timely and costly, which is a potential downside of the pay transparency act.

Another drawback: the outcome. A study of 100,000 academics over two decades that was published in the journal Nature Human Behaviour found that when salaries were searchable, the gender pay gap improved by up to 50%. But the difference between those who performed best and worst also shrank. In other words, performance-based incentives are minimized.

Still, some small firms don’t believe the transparency laws will affect them at all—positively or negatively.

Alex Shahrestani, a managing partner with Promise Legal in Austin, Texas, works in a firm with two other full-time attorneys and two contract attorneys. While the law doesn’t require pay transparency for his firm, Shahrestani believes it’s important, though he handles the matter differently than most.

Pay for attorneys at the firm is based on what they collect from clients. All attorneys receive an equal split of 60% of what is collected; the attorney who originated the project gets another 20% of what is collected. That way, the pay is transparent.

“We allow our attorneys to take or refuse projects as they see fit and discourage client hoarding and other competitive behaviors within the firm,” Shahrestani says.

Benjamin Michael, the founder of Michael & Associates in Austin, says his firm is similar. It tries to include pay ranges in all job postings and narrows that range during the first interview to be fair to prospective candidates and make sure they’re not wasting anyone’s time, even though it’s not yet required by law.

At the moment, Texas requires that only firms with employees working in states with pay transparency laws follow those states’ laws. But a Texas law scheduled to take effect in September will make it illegal to discriminate against applicants based on requests for salary information.

“We still do some final negotiating during the job offer process, but there are never any surprises by that point,” says Michael, who doesn’t believe that complying with the new pay transparency laws will be a major challenge.

Another important issue with regard to pay transparency is the financial status of the firm, says Dan Siegel, an attorney in Havertown, Pennsylvania, and the secretary of the ABA Law Practice Division. Siegel says his staff understands the salary structure, benefits and the financial status of the firm, which makes an enormous difference.

“Many firms are secretive and prefer to create silos that do not help,” he says. In his firm, he adds, the paralegal and the single associate discuss the salary structure, referral fees, raises, vacations, bonuses and more—which has eliminated any possible friction regarding money.

“To me,” Siegel says, “transparency is crucial.”

This story was originally published in the August-September 2023 issue of the ABA Journal under the headline: “Show Me the Money: Smaller law firms are bracing for the new pay transparency laws.”

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