Why are lawyers so expensive?

If you have ever needed legal advice, you have no doubt asked this question. Indeed, the perception around lawyer’s high fees is so pervasive, that even if you haven’t sought advice yourself, you might have had cause to wonder ‘why do lawyers charge so much?’.

There are a number of factors that have a bearing on the cost of legal services.

Unavoidable costs

Running a law firm is not cheap – some of the costs associated with operating a law firm are unavoidable, including:

The cost of professional indemnity insurance

All lawyers in private practice are required to hold (or be covered by) professional indemnity insurance. Professional indemnity insurance ultimately protects the client, by ensuring there is an avenue through which the client can seek compensation if they are the recipient of negligent advice or representation.

Just like home insurance or CTP insurance, professional indemnity insurance is paid annually, and is factored into the charge out rates.

The cost of complying with regulations

Unlike many other industries, the legal profession is a regulated profession – meaning that there are various rules that govern how we must operate. Again, many of these rules – like the laws around dealing with client trust money or the ethical rules that prevent lawyers from acting in circumstances where there is a conflict of interest – are fundamentally about protecting the interests of the client and, in turn, maintaining public confidence in the legal profession.

They are critical to ensuring that members of the legal profession can be trusted to act in the best interests of the client, while upholding their duties to the court and the administration of justice.

Complying with these rules and regulations invariably comes at a cost – whether that is the cost of practice management software that, for example, allows lawyers to conduct conflict checks; the cost of engaging accounting staff to assist in the maintenance of financial records; or the cost of undertaking CPD in order to maintain a practicing certificate. These costs are incorporated into the fees that are charged to clients.

General business expenses

In addition to the above expenses – which are features of the legal profession – there are the expenses that are common across businesses (regardless of the industry), such as the costs associated with maintaining a website, a physical office, taxes, phone/internet connections, marketing and advertising costs, staff wages and entitlements, tea and coffee in the breakroom, etc.

Discretionary costs

However, there are some costs that are discretionary – meaning the law firm has made a choice to operate in a particular way that necessarily results in increased costs to its clients. Some factors that contribute to higher charge rates include:

Partner profit

It is common in the legal industry for the yearly budget of a fee-earner (ie a lawyer employed by the firm) to be comprised of three roughly-equal thirds, being:

• ⅓ of the budget covers the wage (including compulsory superannuation contributions) of the fee earner;
• ⅓ of the budget covers the shared operating costs for the firm – like the costs of support staff, marketing and advertising, rent and utilities, tea and coffee in the breakroom etc; and
• ⅓ of the budget is profit, and to be shared by the partners of the firm.

So, for a fee earner that is tasked with billing $450,000.00 per annum, they can usually expect:

• to receive a total remuneration package of $150,000.00 per annum;
• to contribute $150,000.00 to the operating costs of the firm; and
• to generate $150,000.00 in profit, to be split amongst the partners of the firm.

No win, no fee arrangements

While ‘no win, no fee’ arrangements sound appealing, in practice they can lead to higher fees being charged to the client because there is often a contingency uplift attached to a ‘no win, no fee’ cost agreement with the client.

This means that because the law firm is bearing the risk that they will not get paid for their work (either contemporaneously or at all), they may charge a higher rate for entering into such an arrangement with the client.

The market

Lawyers are acutely aware of what the market says they can charge for their services, and will usually set their fees accordingly. If a law firm’s fees are too high, then they will see a reduction in their work, however, if they are charging roughly the same rate as every other operator, then any reduction in their work will be negligible.

There is also a prevalent perception that costs are indicative of the quality of the services being provided. While that is true in some instances – ie you will pay more for the experienced senior associate than the law graduate because the latter’s time is less valuable – it is certainly not true in every instances. Clients can often receive the same quality advice from a smaller practice, at a lower charge out rate, simply because that practice has lower operating costs (not because the quality of the advice or service is any lower).

How is Workplace Allies different?

Because Workplace Allies is a not-for-profit law firm, our fees do not include the ⅓ component for partner profit, meaning our fees are automatically ⅓ lower than the comparable rate charged at a for-profit firm. We don’t enter into ‘no win, no fee’ agreements, so there is no contingency uplift attached to our fees, and we are not concerned by what the market says we could charge for our services.

On top of this, our operating costs are lower, because we are a smaller firm and a registered non-profit for tax purposes.

Every saving is passed on to our clients because our fees are only designed to cover the firm’s operating costs.

When people talk about businesses being ethical, what they mean by that is that they’re not breaking the law. That’s the threshold of an ethical business, and I think we need to raise the bar a little bit… there is value in standing up for people who are not getting justice in this country.

JERRY GREENFIELD — Cofounder, Ben & Jerry’s Ice Cream