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Law Firms' Breach of Contract?:

Like many law professors these days, I've watched in dismay as many graduating students find that the jobs they thought were waiting for them after graduation are no longer there, either eliminated entirely or deferred into the uncertain future. [I'm dismayed on a personal level — as a social and economic phenomenon, this retrenchment might well be a good thing; law firms are built on an entirely unsustainable business model; there is no rational marketplace in which a first-year associate can earn money for a firm paying her $150,000, and I'm not surprised to see that model stressed and deformed when adverse economic conditions hit]. It got me to wondering — aren't these firms breaching their contracts with these students? I'm no contracts expert — am I missing something? Firm X makes Student Y an offer, Y accepts, and then X withdraws the offer, or alters it without additional consideration being exchanged. Is that not a breach? And if it is, how long will it be before some student sues for damages?

Update: I understand that the "at-will" nature of the employment (assuming these are all at-will positions) changes the analysis -- but I'm not convinced it eliminates the cause of action for breach of contract. X offers (in September, 2008) to hire me beginning in September 2009, and I accept. They rescind the offer in April. I have damages, even though their promise to hire me would have allowed them to fire me immediately. I didn't look for another job in the intervening six months. I rented an apartment in NYC. I don't have health insurance.

The latter strikes me as potentially very important -- if I'm hired and then immediately fired as an at-will employee, I have all sorts of vested rights -- perhaps in the firm 401(k) plan, certainly in their health insurance coverage (which, once I'm fired, can't be taken away from me, as I understand things, for one year, by virtue of COBRA). Now, because they never hired me in the first place but instead rescinded the offer, I'm uninsured beginning in September. That's damage flowing from their breach of contract, no? If the goal of contract law is to place me in the position I would have been in had they performed as per their promise, I should get insurance for the year, no?

rick.felt:
At-will employer. So that's the end of it, right? Fired for any reason or no reason at all.

I'd imagine that equitable relief is available for expenses resulting on reasonable reliance on the promise of employment, like rent and relocation costs, but what's reasonable? Is it reasonable to take a two-year lease on a studio in New York?
4.20.2009 9:46am
Reader (mail):
Isn't it because the contract is to be an employee at will, so the employer (or employee) can terminate at any time without there being a breach?

And why can't they make money? If they bill 2500 per year (which is a lot, but not outrageous), and they bill $100 per hour, that seems close to breaking even in the first year. Years two and three will be better still. I don't see why the model is broken.
4.20.2009 9:47am
Ron Mexico:
"There is no rational marketplace in which a first-year associate can earn money for a firm paying her $150,000"

Why do you believe this to be the case? At $300+ per hour, the associate is immensely profitable due to the high number of hours associates being paid that salary are expected to bill. Perhaps it's that you don't think they provide corresponding value to the clients at that level, but that's for the clients to decide. Don't forget that most of these associates are some of the most highly educated and credentialed graduates in the country who are working significantly more than most "normal" jobs entail (the importance of pedigree to clients cannot be understated). If you aren't willing to pay them at least this amount, then the whole business model collapses.
4.20.2009 9:48am
cboldt (mail):
I would expect employment offers to include adequate contingency clauses / escape hatches that a plain reading results in a conclusion of "no breach."
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Those contracts that recite an unconditional promise to employ might well be tested in litigation. But doing so is a sure-fire way to "turn off" potential employers in the future. It is a small world.
4.20.2009 9:50am
Curt Fischer:

There is no rational marketplace in which a first-year associate can earn money for a firm paying her $150,000.


Granting that this is true, what does it imply about the tuition charged by elite law schools, related to tuition that would be charged in a "rational marketplace"?
4.20.2009 9:51am
Joe Kowalski (mail):

At-will employer.

I would be very surprised if employment at a law firm for an attorney, even if just out ot law school was a straight at will setup. There very likely is a contract, and it probably has some very favorable clauses in there for the firm when it comes to allowing the firm to abrogate the whole deal, but such a thing would be contracted in advance, and the prospective employee would have had an opportunity to negotiate those terms.
4.20.2009 9:53am
Andy L.:
Reader writes: And why can't they make money? If they bill 2500 per year (which is a lot, but not outrageous), and they bill $100 per hour, that seems close to breaking even in the first year. Years two and three will be better still. I don't see why the model is broken.

But the cost per associate at a large big-city firm is probably like $350,000 to $400,000. So, even under your scenario, the law firm isn't even close to breaking even. (Plus, even if you have first-year associates billing 2500 hours (which is very dubious), you still have to get paid. Realization rates after write offs, compromises, special billing rates, etc. can drastically affect the amount the firm makes in revenue.) An associate probably becomes more profitable at years 4-7. But during the first couple years, the associate is a drain on the firm and a drain on the client. Who wants to pay $300/hour for a new associate who couldn't litigate their way out of a paper bag? I agree the model is bending/breaking under the pressure.
4.20.2009 9:57am
Anon1111:
@ Joe Kowalski

Every law firm associate I have known, including myself, was/is an at-will employee. This would cover essentially every biglaw firm out there.
4.20.2009 9:58am
rick.felt:
Why do you believe this to be the case? At $300+ per hour, the associate is immensely profitable due to the high number of hours associates being paid that salary are expected to bill.

The formula isn't as simple as Rate * Time = Revenue. What the lawyer puts on his timesheet, what goes in the draft bill, what goes in the final bill, and what the client ultimately pays may all be drastically different.

And, of course, the marginal cost of employing a worker at $150,000 isn't $150,000. It's considerably more.
4.20.2009 9:58am
Mr. Mandias (mail) (www):
I would be very surprised if employment at a law firm for an attorney, even if just out ot law school was a straight at will setup.

Be very surprised.
4.20.2009 9:58am
David M. Nieporent (www):
I would be very surprised if employment at a law firm for an attorney, even if just out ot law school was a straight at will setup. There very likely is a contract, and it probably has some very favorable clauses in there for the firm when it comes to allowing the firm to abrogate the whole deal, but such a thing would be contracted in advance, and the prospective employee would have had an opportunity to negotiate those terms.
It's a straight at-will setup.
4.20.2009 10:01am
bluebook:
I'm a 3L who has a job offer from a big firm. Yes it is totally at will employment. There are no contracts whatsoever. I can rescind my own offer at any time and so can the law firm. Both parties know this and in a better economy it would be the students rescinding the offers to go to better firms if they could.

Oh and starting salary is $160,000 in most markets (New York, DC, Boston, etc.). And in big firms, first years are billed at above $300/hour and most first years work about 2000 billable hours. Even assuming that almost all of those hours are written off because we're slow, only with 700 hours actually billed to clients the firm makes $210,000 from a first year. More than enough to cover their salary and overhead. Of course they probably bill the clients a little more than 600 hours and that's profit.
4.20.2009 10:03am
wfjag:

Firm X makes Student Y an offer, Y accepts, and then X withdraws the offer, or alters it without additional consideration being exchanged. Is that not a breach? And if it is, how long will it be before some student sues for damages?

Law firm counters suit with offer of specific performance. Law student either accepts or suit is dismissed for failure to mitigate. Once there, young associate -- who sued firm -- sees chances of partnership there -- or anywhere else -- filed in the circular filing cabinet next to the senior partners' desks. In the meantime, as Reader alluded to, the firm works the associate to death (2500 (min.) billed hours + pro bono + CLE + community activities) and makes a profit.
4.20.2009 10:04am
SSFC (www):
I'm dismayed on a personal level — as a social and economic phenomenon, this retrenchment might well be a good thing; law firms are built on an entirely unsustainable business model; there is no rational marketplace in which a first-year associate can earn money for a firm paying her $150,000, and I'm not surprised to see that model stressed and deformed when adverse economic conditions hit.


I wonder how many law professors at top schools warned their students of this?
4.20.2009 10:07am
AndrewK (mail):
I'm not sure it IS at-will.

Especially in this market, I know several students who have based their decision as to where to work based upon the LENGTH of the summer program. The argument would be that when presented with two contracts of at-will employment at similar firms, and one firm offers an extra two-weeks, this is consideration for an implied contract for term employment rather than indefinite at-will summer employment.
4.20.2009 10:08am
Allan (mail):
Billing 2,500 hours a year likely means working 4,000 hours per year, especially for a new attorney. That is, for those keeping count, 2 40 hour per week jobs. So, in reality, the attorney is making $75,000 per job.

It is much less expensive for a law firm to hire one person to work 80 hours per week than it is to hire two people. That goes for many businesses, including manufacturing. Hence, the worker-bees in society got themselves unions and favorable legislators, resulting in 40 hour work weeks and overtime. When will attorneys at big firms ever smarten up?

Also note that one associate requires one or two support staff, at $40,000 to $50,000 per year, plus office space at, maybe, $30,000. Other costs would include the employer's portion of FICA (gone when a worker makes over $100,000 or so), worker's comp., and unemployment insurance. Plus, there are the benefits, such as health care. And there is a marginal cost in overhead for each employee. So, law firms are getting a good deal by hiring one associate to do the work of two people.

That does not mean that the associate is a money-maker for the firm. It just means that one associate is better than two.
4.20.2009 10:10am
Matt E:
Surely there is no breach in a true Southern at-will employment state but do students in more liberal states like CA or NJ have any options? If I recall in some of these states the "at-will employment" rule is actually riddled with exceptions so it's not fair to answer the question with a one phrase answer. And if any of these big firm associates were in Montana (long shot i know) i'm pretty sure they are subject to a "for cause" standard.
4.20.2009 10:11am
Wilpert Archibald Gobsmacked (mail):
Not looking for bunny trails, but shouldn't this thread also include further discussion re: the disparity between "billable" and "productive" time?
4.20.2009 10:14am
Ian D-B (mail):
Just because a first year associate brings less money into the firm than his or her salary doesn't mean he or she is overpaid. Suppose you go work at McDonald's. On your first day you're probably just being trained and produce almost nothing. They're still going to pay you for that day. In general, employers smooth salaries. Senior associates earn less than they produce. Junior associates simply represent an investment for the future (firm-specific human capital, etc.).

I'm reluctant to think that partners pulling down a couple million a year are really making a massive mistake and paying their associates way too much. And anyway, even if they are, what's unsustainable about the model? The partners are making money, the associates are making money. Seems sustainable to me.
4.20.2009 10:23am
Cornellian (mail):
I'm not sure that a rescinded offer of employment is completely non-actionable, even if the employment would have been at-will. Suppose the firm knew that it was in financial trouble and knew there was a very good possibility that it would not be able to go through with the offer but made the offer anyway because they were afraid that not making offers would be an admission of weakness in the marketplace. Suppose also that the student turned down 3 other offers in order to accept this one, and could have obtained other positions in the time between last August and now had he/she known that the offer was going to be rescinded. In those circumstances I wouldn't be surprised to find there was some kind of tort liability.

Of course, not every situation will match this template, but I don't think one can conclude there's zero risk of liability just because the employment would have been at-will.
4.20.2009 10:23am
Kevin!:
It's at-will in California. It's at-will at every large firm anyone has ever heard of. Why is everyone so surprised at this? Why in the world would law firms offer contractual employment?
4.20.2009 10:24am
Reader (mail):
I recognize there are costs to employing an associate other than his salary, but I'd be surprised if it's anywhere near $400k. But firms also bill much more than $100 per hour.

There are a bunch of ways to crunch the numbers, but in any case it's easy to see how the model works - maybe they eat a little bit of cost for a year or two, but then the associate becomes profitable so it's worth the investment.

The at-will answer is very clear - I'm surprised there's that much confusion on that point.

I don't think this post was very well thought out.
4.20.2009 10:27am
Engineer:
As a high-tech worker, my reaction is "so what?". Life is hard.

Probably professionals from many fields (and foreign countries) would react the same way.
4.20.2009 10:28am
David Drake:
rick.felt has it right. The firm has to write off the much of time most young associates put on their time-sheets because of the wasted effort. That is, a good fifth year associate could do in an hour what it takes a new associate three or four hours to do. And you have to count the time that the supervising partner spends on correcting the work and instructing the associate. In my experience, an associate only begins to be worth the money being paid to him or her after a minimum of three years in practice.

Now, it could be that large law firms bill their corporate clients for this time (I don't know as I never worked at a really large law firm). But if they do, it's scandalous: it would be like a restaurant charging the price of two steaks to a diner because the chef overcooked the first one. If large firms are really billing new associates at $300 an hour (plus billing another lawyer at, say $600, to correct their work, it goes beyond scandalous.
4.20.2009 10:28am
David Drake:
rick.felt has it right. The firm has to write off the much of time most young associates put on their time-sheets because of the wasted effort. That is, a good fifth year associate could do in an hour what it takes a new associate three or four hours to do. And you have to count the time that the supervising partner spends on correcting the work and instructing the associate. In my experience, an associate only begins to be worth the money being paid to him or her after a minimum of three years in practice.

Now, it could be that large law firms bill their corporate clients for this time (I don't know as I never worked at a really large law firm). But if they do, it's scandalous: it would be like a restaurant charging the price of two steaks to a diner because the chef overcooked the first one. If large firms are really billing new associates at $300 an hour (plus billing another lawyer at, say $600, to correct their work, it goes beyond scandalous.
4.20.2009 10:28am
David Drake:
rick.felt has it right. The firm has to write off the much of time most young associates put on their time-sheets because of the wasted effort. That is, a good fifth year associate could do in an hour what it takes a new associate three or four hours to do. And you have to count the time that the supervising partner spends on correcting the work and instructing the associate. In my experience, an associate only begins to be worth the money being paid to him or her after a minimum of three years in practice.

Now, it could be that large law firms bill their corporate clients for this time (I don't know as I never worked at a really large law firm). But if they do, it's scandalous: it would be like a restaurant charging the price of two steaks to a diner because the chef overcooked the first one. If large firms are really billing new associates at $300 an hour (plus billing another lawyer at, say $600, to correct their work, it goes beyond scandalous.
4.20.2009 10:28am
Aultimer:

bluebook:

starting salary is $160,000 [].. 700 hours actually billed to clients the firm makes $210,000 from a first year. More than enough to cover their salary and overhead.

In any professional services firm, a realization rate of 2.0x to 2.5x (collected $ to billable labor cost $) is necessary to make a profit, and target is more like 3.0x (although at NYC rates, they probably don't aim that high).

$50K doesn't come close to covering all the allocated overhead to an associate (not forgetting other employer-paid taxes and benefits). Examples - IT cost, admin/secretarial, net rent, utilities, training, marketing/biz dev.
4.20.2009 10:30am
merevaudevillian:
There are a couple of firms kicking around a class action lawsuit under Section 90.
4.20.2009 10:31am
rick.felt:
Oh and starting salary is $160,000 in most markets (New York, DC, Boston, etc.). And in big firms, first years are billed at above $300/hour and most first years work about 2000 billable hours. Even assuming that almost all of those hours are written off because we're slow, only with 700 hours actually billed to clients the firm makes $210,000 from a first year. More than enough to cover their salary and overhead. Of course they probably bill the clients a little more than 600 hours and that's profit.

Yeah, your arithmetic is fine, but it's not particularly relevant where the rubber meets the road. Big firms are rescinding 1L offers and laying off more skilled mid-level associates. Whatever these associates are putting on their timesheets, it isn't translating into profits.
4.20.2009 10:31am
Dennis Nolan (mail):
It's impossible to evaluate a contract claim without knowing what the contract was --- in particular, without reading the offer and acceptance letters and any other related documents. The documents might define the relationship as at will, but that would seem unlikely. It's equally unlikely that the documents would guarantee employment for a specific period. If the contract is silent on duration, most state courts would regard it a creating an at-will relationship. If so, end of story.

Even if there is a plausible contract claim, there are practical impediments to suit. For starters, there's the cost (in time and emotional commitment as well as cash) and the risk associated with any suit. For another, the amount at stake would likely not justify a suit. Absent a stated contract term, the most a court would do would be to imply an employment agreement for a "reasonable" time. My hunch is that the court would be thinking in terms of months, not years. (And severance payments or the like would further reduce the recovery.)

Third, a major firm is likely to have far more resources to throw at a case like this than would a putative plaintiff. An unemployed law school graduate wouldn't be able to pay an attorney's hourly rate and few plaintiff's attorneys would work on a contingency fee if the suit would require an action against a firm known for fierce litigation. Pro se litigation by a fledgling lawyer against a law firm would border on stupidity.

Finally, the putative plaintiff would have to consider the reputational risk. Suing a local law firm would hardly enhance one's attractiveness to other local law firms.
4.20.2009 10:34am
Dquartner (mail):
It is not at-will employment. To be an at-will employee you actually have to work first.

There is definitely a breach of contract if the firm withdraws or differs the offer.

To explain: Even if you are an at-will employee, the firm is essentially promising you in the offer that they will hire you for an indefinite period of time. The promise is to hire, not to hire for an indefinite duration. So when the firm differs, or withdraws, with no agreement or consideration otherwise, there is breach.

I am not sure what your damages would be because the firm could essentially say that they would have fired you anyway. But with a good lawyer and a little time, I am sure you could pray for some short-period of relief- how many firms do you know that actually lay off people on their first day?

The larger point is that no one will sue anyway because they want a job. And, if you want a job it doesn't really look good if you are suing somebody who never even actually hired you.
4.20.2009 10:38am
Monty:
I think Cornellian is right, while a contract claim would be dicey, a detrimental reliance claim could work. But wouldn't the damages would be measured only by the change in your position due to the reliance, and if most firms are restracting offers, it would be hard to show that you would have kept a job at an alternative firm had you not relied on the offer.
4.20.2009 10:38am
Bama 1L:
Pro se litigation by a fledgling lawyer against a law firm would border on stupidity.

Freedom's just another word for nothing left to lose.
4.20.2009 10:39am
Anderson (mail):
Is an offer of an at-will position an illusory promise?
4.20.2009 10:39am
OSU2L (mail):
Unfortunately there are two veins to Post's post about the "unsustainable business model"...two questions: Are the associates worth what they are being paid? Is the work of the associates worth what it is being billed for? (i.e.---should a corporation be happy it is paying some associate straight out of law school $300 an hour?). That model can crumble at both ends.
4.20.2009 10:40am
Mr. Efficiency:

Billing 2,500 hours a year likely means working 4,000 hours per year, especially for a new attorney.


Maybe I'm just Mr. Efficiency, but this strikes me as dramatically exaggerated. Maybe a sole practitioner or rainmaker works 4,000 hours for 2,500 billed, but aside from timekeeping and the basics of keeping one's office from turning into a landfill, junior associates don't have that much nonbillable overhead time. Billing 50 hours in a week means being in the office something like 55 hours a week IME--more than a 9-5 job, to be sure, but hardly two 40-hour jobs.

Now, how many of the 50 hours the first-year associate bills actually wind up getting charged to the client (as opposed to written off by the billing partner) varies with the associate, the partner, the client, and the firm, but at most places, the associate never knows when or how often this happens.
4.20.2009 10:40am
Bored Lawyer:

law firms are built on an entirely unsustainable business model; there is no rational marketplace in which a first-year associate can earn money for a firm paying her $150,000


Unfortunately, this is where we see reality contradicting theory.

The fact of the matter is that BIGLAW firms do and have paid top salaries to associates for some time. The manageing partners of these firms are not known for their soft-heartedness or generosity. Yet year after year they continue to offer and pay these top salaries -- and even in these tough economic times will continue to do so, albeit to a somewhat restricted group of people. So I am dubious as to the assertion that there is no rational economic reason to offer these salaries. (see more below).

Meanwhile, as for the claim that "law firms are built on an entirely unsustainable business model," have you recently audited the profitability of top firms? Many are quite profitable, and their partner's take home, on average, is five or more times what is paid out to starting associates. (Some partners of course make more, some less, but a business model where the partners take home an average of $500k to $750k is not doing so badly, no?)

One must conclude, therefore, that notwithstanding that first and second year associates may not be that profitable in their early years, there is some hidden economic incentive for firms to pay them so generously.

May I make two suggestions why a firm would do so:

1. Training a pool of talent that will become profitable in the later years (for those who stay on).

2. Investing in a close contact with those who might go on to in-house positions and, eventually, to be in a position to give the firm work.
4.20.2009 10:41am
rick.felt:
Even if you are an at-will employee, the firm is essentially promising you in the offer that they will hire you for an indefinite period of time. The promise is to hire, not to hire for an indefinite duration. So when the firm differs, or withdraws, with no agreement or consideration otherwise, there is breach.

If you're correct, you're setting up a perverse incentive. A firm that rescinded an offer six months before the employee's start date would be liable for breach, but a firm that let the employee spend a day at the office before firing him would not. If you were the employee, which outcome would you prefer? Having a six-month period to find alternate employment, or moving to a new city and taking out a lease on an apartment, then finding out after you first day that you don't have a job?
4.20.2009 10:43am
Dquartner (mail):
Sorry, apologies for bad spelling *defers.

Again though, the argument is that the firm promised to hire you regardless of how long. Thus, to break that promise, there is breach.

The issue is damages. And, there was a good comment above stating that the firm would simply re-offer the contract, hire you and either work you to death or again just fire you on the first day.
4.20.2009 10:47am
Joseph Slater (mail):
What Dennis Nolan said.
4.20.2009 10:48am
rick.felt:
The fact of the matter is that BIGLAW firms do and have paid top salaries to associates for some time.

Huge salaries to un-barred grab-asses who churn out useless memos in between diversity seminars and visits to volokh.com is sustainable when times are good. I don't think anyone here is disputing that. But it's not sustainable at all points in the business cycle. That doesn't mean that Biglaw is irrational for paying huge salaries. High salaries in good times and layoffs in bad times can be a component of a successful long-term business plan. But the reality is that Biglaw can't keep doing what it has been doing.
4.20.2009 10:49am
Aultimer:

Mr. Efficiency:

Billing 50 hours in a week means being in the office something like 55 hours a week IME--more than a 9-5 job, to be sure, but hardly two 40-hour jobs.

Only in the absolute best of cases can 55 hours "in the office" result in 50 billables. Just being a functioning human being requires bathroom breaks, meals and a personal communication or two. Seeking assignments, doing timesheets, mandatory meetings, training, and just waiting for others can easily turn 2 or 3 potential billables into non-billable time every day.
4.20.2009 10:49am
the federal white-collar criminal:
There seems to be some confusion and disbelief over employment "contracts" in big-firm law practice. I am a junior associate at a big law firm. Every big law firm sends an offer letter like this:

Dear X, Congratulations! After careful consideration of many qualified applicants, [law firm name] would like to extend you an offer of employment, at a starting salary of $160,000, plus benefits. [Recruiting person] will contact you shortly with additional details. We look forward to hearing from you."

Everyone accepts their offer by calling the firm and saying: "I accept your offer."

Back in the day, I received offer letters from several firms. They all looked the same. I saw friends' offer letters from a lot more. They also looked the same.
Lest you think this is all crazy, this is pretty much the first time that big law firms have laid offer attorneys. Ever. Also, given that recruiters hired by other firms would start calling with enormous signing bonuses after a year (and sometimes less), no associate wanted to tie their hands with an employment contract.

Moreover, where do you all work? I have never had a written employment contract in my life. I asked friends who work outside the legal profession; none of them do either. I thought at-will employment was pretty much the norm among white-collar employees.
4.20.2009 10:49am
Dquartner (mail):
Rick- I completely agree. That's why the firms are going through such lengths to give people fair warning. There are reputation costs here as well as litigation costs.
4.20.2009 10:49am
Commentor (mail):
If the promise is for at-will employment, then you cannot enforce it as there is no consideration and no mutual exchange of promises. The other side of at-will employment is that the employee may quit at any time for any reason, and there is no lawsuit by the employer against the employee for training expenses, etc.

These are very elementary contract principals. Anyone remember the promise of marriage cases from Contracts class?
4.20.2009 10:50am
Skyler (mail) (www):

I wonder how many law professors at top schools warned their students of this?



Most of them at my school do. But most of us students, especially first year, never believe that these warnings apply to them. We've always been high achievers and that's what we expect to continue to do.

But then, my purpose for going to law school wasn't to work for someone else, it was to have my own business. That's harder to do as an engineer than as a lawyer. I won't be a rich man, but I hope to be a free one.
4.20.2009 10:54am
Joeblow1078:
Law firms make money on first year associates. Simple math: $300 x 1200 hours (2000 hours billed at a 60% realization rate, which is piss poor even for a first year) = $360,000. Take out $160,000 for salary, another $40,000 for related taxes and benefits (benefits are not very good, so this is very generous), $100,000 for overhead (first year associates use very little staff and their footprint in the office is also very small), and you are left with $60,000. That is a 20% return on the investment, not too shabby.

This only explains the demand side. The supply picture for law firms is even worse. The top firms have been in a state of constant growth, meaning that they need more and more associates. Even worse, they have increased the leverage of partners to associates, partially to maximize individual partner profits, but partially because there is a lot more work to be performed by junior associates than by partners (the proportions have been in a constant shift toward more work for junior associates because of the volume of paper to be shuffled about, paper which is almost entirely the responsibility of junior associates). In short, while the pyramid has gotten bigger, it has also gotten much, much, fatter at the bottom and more pointed at the top. But while big firms have needed more and more junior associates (most who will leave the firm to preserve the pyramid), law firms have insisted on not lowering their standards. But there are by only a limited number of students who will graduate in the top 10% of the top 25 law schools, and that number has not kept pace with law firm hiring needs.

The current problem is simple: profitability assumes that there is 2000 hours of work. Right now there isn't at most firms, thus the layoffs. When things pick up, the market will more than support $160,000 salaries. The economic question that must be asked, why are firms not asking partners who are not bringing in business to leave. It would seem like there should be much more pressure to fire underperforming partners than associates.
4.20.2009 11:03am
Bored Lawyer:

Huge salaries to un-barred grab-asses who churn out useless memos in between diversity seminars and visits to volokh.com is sustainable when times are good. I don't think anyone here is disputing that. But it's not sustainable at all points in the business cycle. That doesn't mean that Biglaw is irrational for paying huge salaries. High salaries in good times and layoffs in bad times can be a component of a successful long-term business plan. But the reality is that Biglaw can't keep doing what it has been doing


The assertion was made above that paying high salaries to first year associates is economically irrational. That assertion is what I was contesting -- given the tight-fistedness of the management and partners of the top firms, that assertion is almost certainly false.

If there IS an econmic rationale for paying huge salaries, that does not go away because times are tough --tough times just make it harder to keep up with the payments.

I have suggested two economic reasons for paying high salaries. These are in the nature of medium to long term investments. As for any business, such investments are harder to make in tough times and easier in goods times. But those who can afford to do so will do so and reap the rewards in the long run.
4.20.2009 11:04am
Bored Lawyer:

The economic question that must be asked, why are firms not asking partners who are not bringing in business to leave. It would seem like there should be much more pressure to fire underperforming partners than associates.


From what I have read, that has already happened in many firms.
4.20.2009 11:10am
MarkField (mail):
Just to reinforce Kevin's point, CA law provides for at will employment unless the parties otherwise agree.

Like most in this thread, I doubt there's any breach of contract here. To me, the more interesting question is whether the high billing rates necessary to sustain the first year salaries (and profit per partner) are themselves sustainable. I practice in LA (small firm) and so does my wife (large one). We're constantly shaking our heads at the rates charged by the BigLaw firms.
4.20.2009 11:12am
Kenvee:
A lawsuit on those grounds sounds like a great way to insure that you won't work in law again for the rest of your life. ;) I definitely don't see the reputation cost being worth the minimal damages you'd recover from a lawsuit.
4.20.2009 11:14am
Gruest:
David Post, are you trolling your own blog? This flame's been on ATL for months, and only recently has been mocked down into silence.
4.20.2009 11:20am
Gruest:
Also, it's funny to hear people who clearly have NO IDEA what they're talking about run their mouths. No at-will employment for BigLaw associates, no layoffs ever before, no partners being asked to leave, etc. Folks should really sit on their hands more.
4.20.2009 11:22am
Mark Buehner (mail):
Hey, remember all the law students joking over drinks that there are more people in law school than there are lawyers? Not so funny now. I'm not sure why any of this should be a surprise. The supply of newly minted lawyers is vastly exceeding the demand, and its only going to get worse.
4.20.2009 11:23am
NaG (mail):
The ABA has been reporting that more and more corporate clients are now demanding that first-years not be allowed to bill on their projects/matters simply because a first-year does not have the experience or knowledge to be worth $300+/hour, even after getting time written off for being a novice. This is a good thing -- I think first-years should be paid less to start (no more than $90K) but get a steeper curve on raises. An associate with three years of experience is simply far, far better than a newbie, regardless of what the diploma says.

A 2,500-hour billing year is insane. Most BigLaw firms require 1,800 or 2,000, and very few associates ever get up to 2,400. Those that do usually regret it, because your life is miserable.
4.20.2009 11:25am
Realist Liberal:
Bored Lawyer~

The economic question that must be asked, why are firms not asking partners who are not bringing in business to leave. It would seem like there should be much more pressure to fire underperforming partners than associates.



From what I have read, that has already happened in many firms.


It may be happening but it is not happening at nearly the pace of laying off associates and rescinding or deferring offers.


Also, to just repeat what has been said repeatedly, my employment is at-will at my firm (on the small side of BigLaw). Every firm I know of is the same. And I'm in CA and my employment is still at will. The only "liberal" exception is that employees can't be fired for race, gender, religion, or sexual orientation.
4.20.2009 11:30am
DJR:
If you would like some facts,

My firm summarizes for associates our total compensation including its contributions to benefits. The firm's non-salary contributions to my befits are about $12,000. I also have 1/3 of a secretary whose annual salary is $60K. I have an office that is about 130 square feet, and average rental rates in Washington D.C. are $52/sf/year. Assuming my secretary gets the same benefits that I do, my cost to the firm (if I were a first year) would be approximately:

$172,000 - Salary &benefits
$ 24,000 - Secretary salary &benefits
$ 6,760 - Office space
------------------------------
$202,760

Our first years bill at about $300/hour, which means the firm will break even if the associate bills 676 hours that are collected from clients. Our target billables are 2000 hours. I personally exceeded that in my first year by more than 100 hours.

Please explain a model in which a firm like mine does not make money on first years? Even if you assume that my secretary makes an additional $15K in salary or benefits, or that I get a $20,000 bonus, the firm still comes out ahead even if it writes off 50% of first years' hours, and trust me, we don't write off anywhere close to 50%.
4.20.2009 11:40am
Thales (mail) (www):
It's at will employment unless specified otherwise in every state of the U.S. I've never heard of a full time law firm associate with a specific written contract--it's just not done. But that doesn't mean there are no remedies for reliance costs, which can be substantial in some circumstances (turned down other job offers, moved to a different city, sold a home, etc.). This is probably why firms are attempting to get ahead of this and notify students long before their scheduled employment begins, because of course the firm would only be liable for damages that could not be mitigated at reasonable expense.

It's also definitely not a two-sided relationship. If an offeree reneged, against any claim of reliance by the firm he could argue that the associate's performance and value is completely speculative--he could have saved the firm money by reneging, and replacing a reneging associate is easy as pie in an up *or* down economy. Add that it's impossible to enforce specific performance on the part of the employee in personal services contracts because of the 13th Amendment.
4.20.2009 11:43am
DiverDan (mail):
Bluebook, you are more than a little off on your assumptions that collecting $210,000 per year on a First year Associate earning a salary of $160,000 per year is "More than enough to cover their salary and overhead." First, the $160,000 salary does not include Employer's share of taxes like FICA [7.65% on first 100K, 1.45% above that], and Federal and State Unemployment [varies from State to State; figure 2.2% on first $20K], or benefits like Health Insurance [probably $300-$500 per month for 26 year old, depending on coverage], or Dependants Health Coverage. So $160,000 salary really costs employer more like $175,000 before you walk in the door. Then rent at the New York Office - if Associate shares a 300 sq.ft office with two others, that is 100 sq. ft. -- now bump that number up by 55-60% (or more) for common area allocations, like hallways, secretarial bays, reception area, bathrooms, copy rooms, break rooms, library, etc., and the Associate has to cover rent at $75 per foot for 160 Sq.ft., say another $12,000 (probably a VERY conservative estimate). Secretarial, even if three associates share a secretary, a good legal secretary is earning $65K or more, plus benefits, depending on experience; bump that $65K up by say 15% to cover taxes, benefits, etc., and you have $75K, or $25K per Associate; Now add in the Associate's share of thinks like Library Costs (those books, periodicals, and on-line research services aren't free), Malpractice Insurance (say $3500 per year for a First Year), Telephone equipment and service, office supplies, office furniture, Receptionists, Copy services, Recruitment costs, Continuing Legal Education, the Firm probably paid for your Bar BRI Course so you could pass the Bar, etc., etc., etc. Add them all up, and if the Firm isn't billing AND collecting close to $330K on a First Year Associate earning $160K in salary, it is losing money. Even if a First Year "Bills" 2500 hours a year, the Firm is going to have to write off much more than half of that for the simple reason that a Newby out of Law School takes at least 5-7 times as much time to do almost anything as a 5th Year Associate. Clients, even in good times, will not pay a bill for 7 hours at $300 per hour for something a 5th year at $450 per hour could accomplish is an hour or less; indeed, most knowledgeable clients (at least those with enough clout with the Billing Partner) don't even want to see any associate lower than a 3rd Year on their bills, unless it is for fairly routine functions.
4.20.2009 11:45am
Snaphappy:

And if it is, how long will it be before some student sues for damages?


While I can see a cause of action for detrimental reliance (a student who declines offers from other firms to accept an offer at a firm that delays start dates, for instance, might be able to recover any damages from the delay). Nevertheless, the answer to your question is: A very very long time. Consider a newly minted lawyer whose start date is deferred by 6 months, and who is given a deferral payment of $25K. His or her loss of potential salary is $55K, but with an obligation to mitigate damages. Let's say that instead of taking a trip to Europe, the student spends time trying to find a fill-in job but is unsuccessful. The options for the student are: a) Enter into litigation in an attempt to recover $32K (after contingency fees) against the firm that is still holding an offer open; or b) Suck it up, take a trip to Europe, and start in 6 months. Option "a" is career suicide. The student will not have a bright future at the firm (which still intends to pay $160K/year once he gets there), and no other firm will touch him or her. Only a very stupid person would make that choice, and few such people wind up with offers at biglaw.
4.20.2009 11:56am
The Drill SGT:
As Aultimer, and others have pointed out, Bluebooks sense of Law firm overhead is a bit underestimated. I know IT firms, not Law firms, but a towntown DC Mgt Consulting firm would have an overhead (wrap rate ) rate in the in the 2.5 - 3.+ range.

150/hr x 2000 hours gets you $300,000 before the client refuses to pay for the inflated hours, and the supervision time

$160,000 x 3.0 is a cost basis of $480,000

by any math, $300k is less than $480k
4.20.2009 12:02pm
Thales (mail) (www):
Technically there is no obligation/duty to mitigate damages, just a limitation of liability only to pay those damages that can't be reasonably mitigated.
4.20.2009 12:03pm
Anononymous314:
Clearly, this is all a massive scheme to give work to employment law attorneys, and therefore, under the same "economics" currently in vogue with the ruling regime, stimulate the legal economy, to the benefit of all.
4.20.2009 12:06pm
rick.felt:
Please explain a model in which a firm like mine does not make money on first years?

Well then you've convinced me. Biglaw firms paying $160,000 to unbarred 25-year-olds whose legal experience consists of ten weeks spent going to baseball games and two-hour lunches is profitable during a recession. All those any layoffs, deferrals, paid sabbaticals, or salary reductions are just illusions.
4.20.2009 12:08pm
Houston Lawyer:
There is a lot of missing the point going on here. As long as there is plenty of work, the existing model is sustainable. When the quantity of work drops off, the number of people supportable by the existing model must drop. That is happening now. When work picks up again there will be much moaning and groaning about not having enough people to do the work.

First year lawyers, and often second and third year lawyers are a pain to manage. Their training and the overview of their work eats up real billable time by the more experienced lawyers. That is why firms are so eager to hire third and fourth year lawyers; they have become independently useful.

Basically, everyone who is not a partner at a law firm is an at-will employee. My current firm periodically reminds me of this by sending me a form saying exactly that and requiring me to sign it.
4.20.2009 12:11pm
David M. Nieporent (www):
Please explain a model in which a firm like mine does not make money on first years? Even if you assume that my secretary makes an additional $15K in salary or benefits, or that I get a $20,000 bonus, the firm still comes out ahead even if it writes off 50% of first years' hours, and trust me, we don't write off anywhere close to 50%.
Apparently you don't have electricity in your offices either. Or provide malpractice insurance, or use Westlaw... in other words, you've underestimated overhead.

Furthermore, you've missed a key point: it's not enough to just knock down the hours by X%; you have to pay someone to do that knocking down. That is, everything a first year does has to be reviewed by someone else, substantively, during which time they can't exactly be doing their own useful work.
4.20.2009 12:22pm
B.A. Baracus (mail):
DJR, I agree that BigLaw firms end up making money on first year associates as long as they bill 17-1800 hours, but you grossly understate the cost associated with your employment. There is far more overhead than simply your share of office space and your share of your secretary's salary. You need to include your share of admin personnel (accounting, HR, recruiting, etc.) who do not bill clients by the hour but without who the firm cannot run. Most firms also spend a lot of money training associates, especially in their early years. It seems to me a reasonable estimate of the total cost associated with an associate is 2 to 2.5x salary, say $350K total per first year associate. Assuming that associate bills 1800 hours, and assuming that 25-30% of that time is written off, the first year associate brings maybe $390K (1300 hours x $300 per hour). So the firm makes some, but not a great deal, of money on that associate. The firm makes more each following year, because each year the attorney's billing rate increases and the amount of time written off decreases, and while salary increases some, overhead does not. The additional realized billables x the increased billing rate far exceeds the increase in salary. The point of all this is, firms make very little on first year associates, and less than you seem to suggest (although they make some). They make most of their money on associates in their 3rd year and beyond, until a limited few of those actually obtain partnership.
4.20.2009 12:24pm
D.A.:
"Lest you think this is all crazy, this is pretty much the first time that big law firms have laid offer attorneys. Ever."

Clearly the federal white collar criminal is young. And doesn't read his ABA Journals.
4.20.2009 12:25pm
DCP:

I don't understand why so many people are claiming this is an unsustainable business practice. Look at the money they make.

When I was 21, and freshly out of college (1997), I took a job at a big law firm doing menial clerical work. They billed me out at $50/hr and paid me a salary that translated to roughly $10-12/hr. The same was true with paralegals and other support staff. They billed the clients for everything. They even billed 25 cents per copy. I think one day, out of boredom, we were playing around with the electronic counter on the copy machine on my floor and figured out, based on billable entries, that that particular copy machine was generating about $100,000 a year in profits for the firm, once you subtracted the costs for paper, toner and maintenance. In any other business, that copy machine is a big overhead cost that's going to eat into bottom line profits. In a law firm, it's a revenue generator.

Do the math. Partners aren't getting seven figures a year because they're losing money on overhead.

If anything you have to wonder if the associates who have had their employment rescinded may be getting a blessing in disguise. As someone above pointed out, they are effectively working two jobs for that salary and most of them are miserable. On top of that they feel pressure to go out and buy a nicer car, rent a swank apartment, and buy a bunch of expensive suits just to fit the image of the firm.
4.20.2009 12:43pm
dmv (mail):
All this thinking about Biglaw made me throw up a little in my mouth.
4.20.2009 12:46pm
Ben P:

Yeah, your arithmetic is fine, but it's not particularly relevant where the rubber meets the road. Big firms are rescinding 1L offers and laying off more skilled mid-level associates. Whatever these associates are putting on their timesheets, it isn't translating into profits.



Except it is....

That's the part you typically see ranting about on Abovethelaw.

Now, I don't know the specific breakdown of numbers. Certainly senior associates are bringing in more than junior ones, but Profits Per Partner at the very large firms are still sky high.

That's exactly how these firms work, it's just like a financial firm leveraging its capital.

The profits per partner of big firms are driven by their ratio of associates to equity partners. To manage multi-million PPP's these firms often have 4 or more associates racking up billable hours per equity partner.

The problem is these associates come with massive fixed costs. If the work to sustain the hours billed by these associates dries up, the firm has to shed associates very quickly or it rapidly falls into the red ink and law firms don't typically have much of a safety cushion after paying out bonuses and partnership shares.

But this very model also means that it's very unlikely that these associates are hired under the assumption that they will lose money. They're there for the first few years to do nothing but churn out hours at a pace that no sane person would accept. Who cares if those hours are actually worth anything? The repeated justification for them billing these rates in the first place is that its *always* cheaper for companies to pay them rather than lose that bet the company case or have the merger go bad.
4.20.2009 12:46pm
jdd6y:
If there is a cause of action then it sounds in promissory fraud. The firm in question would have had to have known and misrepresented the state of the firm with the intent that the prospective employee would rely on that representation. The "damages" issue would be tough to prove absent some other offer of full-time employment. There definitely is some case law in this area, if I recall correctly. Reliance damages are recoverable, expectation damages are not, I believe.

As far as the 1st year's profitability, there are three issues that I see here.

The first is the "rate" for the 1st year is not for the value of the 1st year. Clients are really paying for the billing attorney and his value is distributed to various other revenue centers. Much of the time billed is not written off if the partner has strong bargaining power. I have seen many of these bills for first year time around $300 and they were typically billed and paid in full.

(Whether clients should be paying these markups is a good question. I would never advise any of my clients to hire firms that I used to work at except for the most high-level matters or where particular partners had connections with government bureaucrats who wielded decision-making power in the matter at hand. For state-law litigation, there is little or no reason to have these huge litigation teams with 5 lawyers doing the work of 2 lawyers and billing for it.)

Second, there is a cost allocation issue. The "cost" depends on the cost drivers that management chooses to use. In this case, supporting personnel (IT, secretary, receptionist, HR, accounting, etc) can be allocated in many ways. A straight-line allocation may be appropriate for HR but certainly would not be for secretarial time.

Third, there is a lot of variance among firms. A well-run firm does not need to spend nearly as much money per lawyer as many of these firms do. Lawyers have big egos and little management training (and often limited management talent). There is not much pressure on law-firm CEOs to improve operations because corporations cannot come in and buy a competitor, add a bunch of capital, and install professional management and lean-up the operations.

The bottom line is that 1st years can and are very profitable at many firms at 150,000 or 200,000 dollars. The quality of management and the bargaining power of the billing partner determine the shape of the profit function (with years of experience as the independent variable).
4.20.2009 12:46pm
dmv (mail):
DCP:

Maybe they claim it's unsustainable because they're not assuming that clients will continue to be willing to pay what the current model requires them to pay in order to sustain it.
4.20.2009 12:47pm
Arr-Squared (mail):
Moreover, where do you all work? I have never had a written employment contract in my life.


I am a professor, and my wife is a K-12 school administrator, and we both receive annual contracts. I've never heard of a university faculty member who did not.
4.20.2009 12:57pm
Dquartner (mail):
It makes sense for a professor to receive an annual contract because they have to make a commitment for a year. What would the school do if the professor simply decided to quit in the middle of the semester.

The presumption is at-will employment, but this does not mean that the presumption can't be negotiated around.
4.20.2009 1:04pm
Ben P:

I am a professor, and my wife is a K-12 school administrator, and we both receive annual contracts. I've never heard of a university faculty member who did not.


By comparison. I'm working at a firm substantially smaller than the Am100 firms that are the topic here so my experience may not be typical, but I've not heard from many that differed substantially except in that the large firms adhere much more closely to NALP guidelines.

My 2l Summer clerkship agreement was entirely oral. I got a phone call from the partner in charge of the summer associate program he told me I had a job and gave me a week or two to accept. I called him back a week later and told him I'd accept and we talked about the salary. I called them again in the spring to ask about a start date.

The fall of my third year I did a callback interview for an associate position. I got a phone call a few weeks later informing me I had a job. A week after that I got a letter congratulating me on accepting a position with the firm. Everything since that point has been informal email conversations.
4.20.2009 1:33pm
Le Messurier (mail):
This post and others like it in the past strike me with the realization that nobody knows what they are talking about when it comes to actual law firm compensation packages. The law professor posters certainly lack the experience in real world law firms that would give their opinions credence; comenters seem to be law students (1l, 2l, and 3l), recently minted associates, occasional long term big law associates, plus a few law-dolts like my self. I don't believe I've ever seen a comment be a senior partner, who is in fact, in the know about salary structure. Are there any such out there in VC land? Perhaps I'm off the mark, but I'd be interested to know.
4.20.2009 1:38pm
dbett:
Not sure about other states, but under Maryland Law this could give rise to a Negligent Misrepresentation claim. I can't recall the name of the case, but the Court of Appeals held that there was no breach of contract, but recognized the detrimental reliance element should (as a matter of policy) permit an action for Negligent Misrep.
4.20.2009 1:44pm
Bruce Hayden (mail):
A couple of things. I think that Drill SGT's "wrap rate" is typically in the 3x range. Maybe a bit lower for first years. But just figure that in the long run, law firms mostly expect to pay their associates 1/3 of what they bill them for, and then collect.

Someone above mentioned that this model has been very profitable. But note the "has been". The problem is that clients are now balking at $300 for first year associates when they can go to regional and local firms and get $200 or less an hour. There are frankly few things in the legal world where a first year associate is really worth $300 an hour, or a 5 or 6 year one twice that. We have found that the bigger the client, the more they are now worried about their cost of legal services.

Finally, I would suggest that the biggest reason for law firms to come through on their employment promises with new associates, or, indeed, their summer associates, is the reputation of the law firm. It will soon be obvious which firms are honorable, and which are not. Why would an aspiring lawyer join one of the less honorable ones (besides the obvious $160k starting salary)? And why would a client use one?
4.20.2009 1:48pm
David Redden (mail):
The students may have a cause of action for promissory estoppel, but only to the extent they can prove injury. As a practical matter, it is difficult to get an attorney to represent you for them because (1) they're difficult to prove,(2) it only allows contract (actual) damages, and (3) promissory estoppel doesn't contain a fee-shifting aspect like many other employee protections.
4.20.2009 2:06pm
Dquartner (mail):
I don't think promissory estoppel is the right answer because there is consideration. 1) A promise to hire and 2) a promise to work.

Where is the absence of consideration to evoke promissory estoppel?
4.20.2009 2:20pm
Dquartner (mail):
excuse me * invoke
4.20.2009 2:21pm
Nifonged:
Some excellent posts here, I can't comment on all that I agree (or disagree) with due to travel, but one quick point:

Regarding junior associate (or for that matter, any attorney) realization, many clients are billed at discounted rates. My last full year at "BIGLAW" I billed approximately a quarter of my 2,200 hours or so to one large client. Even though on internal memoranda it was stated that Nifonged = $X on billing, in reality it was Nifonged = $X multiplied by 80% on that particular client's bill. This happens a lot more than many young attorneys likely realize.
4.20.2009 2:28pm
rosetta's stones:
Hey Post, they shoulda got it in writing. If they didn't, they're out. That works both ways, too. I've seen folks not show up the day they were to report for a new job. They pursued parallel offers, and come that final day they chose the one they liked best. Caveat everybody, counselors.
.
.
.

In consulting engineering, the smallest cost multiplier would be 1.4 x (salary cost). That's the bare cost for you to get a warm body with workman's comp, insurance and salary, etc... no computer... no overhead... no supervision... nada.

A good multiplier would be up over 3.0, and you will get fat off that number. A cheap multiplier would be down in the low 2's. There, you better make sure there's no hidden costs floating around, because that won't cover them.

If you're billing out youngsters 2,000 hours per year at anything over a 2 multiplier, you're likely breaking even on them, at minimum. Presumably, billings for other professional work would be similar.
4.20.2009 2:34pm
Contracts Law Dabbler (www):
In my contracts class we read Grouse v. Group Health Plan, Inc., 306 N.W.2d 114 (Minn. 1981). The casebook was Fuller/Eisenberg.

In Grouse, a pharmacist accepted a job offer and relied upon it (e.g., by turning down another offer). The offerer then told Grouse that the offer was revoked. He sued for damages, and the would-be employer relied on Grouse's "at will" status in arguing that he had no damages.

After discussing promissory estoppel as articulated in Restatement of Contracts § 90, the Supreme Court of Minnesota said Grouse could recover based on his reliance. It held:

The conclusion we reach does not imply that an employer will be liable whenever he discharges an employee whose term of employment is at will. What we do hold is that under the facts of this case the appellant had a right to assume he would be given a good faith opportunity to perform his duties to the satisfaction of respondent once he was on the job. He was not only denied that opportunity but resigned the position he already held in reliance on the firm offer which respondent tendered him. Since, as respondent points out, the prospective employment might have been terminated at any time, the measure of damages is not so much what he would have earned from respondent as what he lost in quitting the job he held and in declining at least one other offer of employment elsewhere.

---

So if a law student accepts an offer at Firm X, and in doing so he declines offers from Firms Y and Z, is it so crazy that he might have a cause of action against Firm X should that firm revoke the offer late in the game, causing the student actual monetary harm? (Yes, suing might not be practical, but I don't see why people are so shocked that he might have a claim.)
4.20.2009 3:06pm
Dquartner (mail):
Dabbler. see also Hackett v. Foodmaker, Inc., 69 Mich.App. 591, 245 N.W.2d 140 (1976).

The court there held on a basis of contract.

maybe this is a rust-belt phenomenon.
4.20.2009 3:41pm
Frozen Esq. (mail):
You still have a contract if you are employed at-will. You just have an at-will employment contract. You still would have to have prove damages to recover, and given that employment would be "at will," your damages would be severely curtailed. No expectation of continued employment = front pay very unlikely. Principles of good faith/fair dealing also would apply. I would expect a notice date of April, 09 is a bit late for good faith; the big firm should know sooner than the end of the hiring season that they can't afford to hire someone, provide notice, and give the putative employee a bit of time to cover or mitigate.
4.20.2009 4:04pm
Thales (mail) (www):
"Hey Post, they shoulda got it in writing. If they didn't, they're out. That works both ways, too. I've seen folks not show up the day they were to report for a new job. They pursued parallel offers, and come that final day they chose the one they liked best. Caveat everybody, counselors."

Fortunately for the pre-terminated employees of the world that incurred reliance costs, the law doesn't quite work this way. As I noted above, it's not a one-sided phenomenon in reality--the employee incurs much greater reliance costs/damages than the firm in these situations.
4.20.2009 4:05pm
blog fiend (mail) (www):
Simple solution:

Law Firm (Monday afternoon): Hey, would you consider moving up your start date to today? You won't be eligible for benefits until September, but if you'd like to start your employment now, we'd like you to draft an arbitration clause for a stock buy/sell agreement. If you accept, draft the clause and submit it to me by 9am Tuesday.

Law Student copy-and-pastes a boilerplate arbitration clause from LexisNexis and sends it to Law Firm.

Law Firm (Tuesday, 9:05 a.m.): We've decided to terminate your employment. Your final paycheck will be mailed to you.

Result: No job, no insurance, no difference than if the firm didn't hire him in the first place.
4.20.2009 5:17pm
cathyf:
As for insurance, COBRA has value, but is set up to have minimal cost to the company. The value of the COBRA is that the employee gets to join the group and receive the group rate rather than the individual rate. But the ex-employee on COBRA pays the full cost of the insurance -- both the "employee" and "employer" parts. Yes, there are some HR admin costs, but they are pretty minimal.

And a firm could completely mitigate the insurance question with a simple offer made at the time of rescinding the original job offer: if you don't have another job with benefits by your original start date, come to the firm and we'll hire you for a day/week/month at minimum wage and full benefits, and then you can do COBRA for the next 18 months. The costs to the firm would be minimal (most people wouldn't take them up on it anyway), and the reputational gain to the firm for trying to mitigate the damages would more than compensate for it.
4.20.2009 5:31pm
ReaderY:
If employees could hold employers who rescind an offer liable for moving expenses and opportunity costs, then employers would be justified in holding employees who quit early liable for similar expenses and costs. But if employers could do that, we'd quickly have the sort of debt peonage system that flourished the last time such things were permitted. It's prohibited under the 13th Amendment.

Because have to swallow expenses in anticipation of longer employment for employees who quit early or fail to show under the 13th Amendment's prohibition of debt peonage, the sauce-for-the-goose-is-sauce-for-the-gander principles suggest employees may have to buck up and swallow it as well.
4.20.2009 6:00pm
Dennis Nolan (mail):
Regarding your update: The Grouse case cited above is the most that a court would likely award because the promise of an at-will job doesn't create full expectation damages. In your hypo, you might well have reliance damages, as Grouse did, but only if you had materially relied on the promised job. If you had to break a lease, for example, or if you had in the meantime turned down an alternative job (as Grouse did), you might have a modest recovery. Even using the court's terms, the most you were promised was a chance to show your ability.

As I wrote earlier, that would at most translate into lost wages for a reasonable period of time, in addition to the reliance damages --- and many courts would not even go that far. With limited damages, the practical difficulties I mentioned would likely deter you from suing.
4.20.2009 6:03pm
CJColucci:
The way a senior partner once explained it to me is that a well-run, profitable firm can roughly figure that a productive associate generates realizable billings around 3X salary, of which 1X goes to associate salary, 1X goes to overhead, and 1X goes into the partner profit pool. That was a long time ago, but it would mean that a $160K 1st-year would have to realize $480K in billings.
4.20.2009 6:18pm
Thales (mail) (www):
"If employees could hold employers who rescind an offer liable for moving expenses and opportunity costs, then employers would be justified in holding employees who quit early liable for similar expenses and costs. But if employers could do that, we'd quickly have the sort of debt peonage system that flourished the last time such things were permitted. It's prohibited under the 13th Amendment.

Because have to swallow expenses in anticipation of longer employment for employees who quit early or fail to show under the 13th Amendment's prohibition of debt peonage, the sauce-for-the-goose-is-sauce-for-the-gander principles suggest employees may have to buck up and swallow it as well."

Um, no. First, the 13th Amendment does not protect employers, but it does protect employees from forced service if they wish to quit. Second, there probably *are* circumstances under which a key employee's quitting after accepting an offer causes the employer to incur substantial reliance damages, but in most such cases, the employee may be able to demonstrate that his value to the employer prior to the opportunity to review his performance is speculative, and likely the downside risk will swamp the employer's reliance damages (i.e. it would have to be a very special employee indeed). Third, employees often do incur significant costs/reliance damages in a market where they do lack parity with the employer, and it would be simply inequitable (not to mention economically inefficient) to flatly deny them any ability to recover when the employer reneges.
4.20.2009 7:15pm
Joseph Slater (mail):
Specific enforcement of personal service contracts is, generally speaking, at least problematic under the 13th Am. But employers have been known to get money damages when employess break specific contractual promises re their employment.
4.20.2009 9:39pm
David Redden (mail):

I don't think promissory estoppel is the right answer because there is consideration. 1) A promise to hire and 2) a promise to work.

Where is the absence of consideration to evoke promissory estoppel?


I'm not aware of any general rule stating that absence of consideration is an element of a promissory estoppel claim. Even if such a general rule exists, I don't think a bare agreement to hire or a bare agreement to work alters the rights of the parties with respect to each other thanks to the employment-at-will rule. Unless some valuable consideration is given, like an agreement that restricts the circumstances in which the parties can break off the contemplated employment relationship, no contract exists. I am, of course, speaking in broad generalities and without the benefit of my contracts casebook. Circumstances and local laws may point a different way.

The more I think about it, the more I like their chances on a promissory estoppel claim, especially if the offer was particularly lucrative.
4.20.2009 11:24pm
ReaderY:
http://pacer.ca4.uscourts.gov/opinion.pdf/012200.U.pdf

This case is an illustrative example of just how rigid at-will employment is in North Carolina. For nearly a decade, the plaintiff worked in SIngapore under two-year contracts promising a specific position on return to the United States, a condition he bargained for in exchange for agreeing to go. However, shortly before he was to return to the United States, the company asked him to stay until they found a replacement, and gave him a contract extension for an indefinite period. He was terminated shortly after signing it.

The 4th Circuit held that under North Carolina's implementation of employment-at-will, the plaintiff has to prove he worked under a contract for a stated definite term to be eligible to sue for breach of contract: no definite term, no claim. Because the contract in effect at the time of termination didn't have a definite term, it simply didn't matter what the contract promised, and it simply didn't matter that multiple previous contracts had stated definite terms. And since he agreed to work under the contract extension and the law on the subject was clear, he ought to have known the consequences and there was no fraud.
4.21.2009 12:17am

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