Billable hours have been a mainstay of law firm profit for many years. The system requires law firms to charge by the hour for services performed at rate that varies depending on the seniority of the attorney. Clients are sometimes comforted when they receive an itemized hourly bill, detailing what work was done by whom. Ideally, this type of billing would keep firms honest about the amount and types of work that they do. However, in reality, the billable hour leads to waste of time and human resources, and clients are catching on.
Why Does the Billable Hour Exist?
In the past, the cost of legal services was internally regulated through state bar associations by minimum fee schedules which detailed the lowest possible rates that a firm could charge. This prevented lawyers from cutting their rates in order to compete on the market. In 1975, the Supreme Court ruled that lawyers participating in “trade or commerce” were not except from federal anti-trust laws and could not engage in price fixing, which is per se illegal.
Firms searched for new ways to profit without participating in “anticompetitive activities,” and the billable hour was born. Soon, some firms turned the new system into what one Bloomberg Business commentator called a “cash printing press.” Firms profit when associates churn thousands of billable hours. This often means working as hard as humanly possible to maximize the amount of research, writing, and other legal work done on each case.
Hourly Billing Creates Incentives to be Inefficient and Even Unethical
Under the billable hour, time really is money. As Nathaniel Burney writes, “billing by the hour can actually be a bad thing if one happens to be the kind of lawyer who gets results.” There’s simply no incentive for associates to get faster or to cut out busy work. Each attorney is encouraged to bill for every minute fraction of an hour worked, and may be professionally scorned for failing to work long hours---even if they get the most done.
Some clients, especially those with “deep pockets,” may also fall victim to unnecessary increases in billing due to differences in the attorneys assigned to their account. They may be told that more senior attorneys are more competent, justifying the greater expense. Thus, even routine research that most law school grads could do is billed at a much higher hourly rate: an associate billed out at $400 an hour might be replaced with a partner billed out at $850 an hour for the sake of “quality.” This is also inefficient: senior attorneys’ time would be better spent on complex matters that require great intellectual rigor and understanding of the law.
Lastly, clients who pay by the hour are often charged for a smidgeon more work than was actually required. In some firms, this can lead to unethical behavior. Attorneys may engage in work that is purposely duplicative or unnecessarily detailed just for the sake of consuming time. Hourly billing may also lead to stealing from clients by augmenting or even fabricating hours. The American Bar Association chronicles some outrageous examples of this: for example, a Connecticut lawyer once billed a client 94 hours for a single day of work.
Hourly Billing Wastes the Potential of Talented Associates
A reward for academic achievement in law school can often be a highly paid first-year associate position at a firm. For some, these positions can be disheartening burn-out traps. The true prize for these ambitious new attorneys turns out to be years of sleep deprivation, lack of personal time, and consistently increasing expectations for how many hours will be put in.
Mid-level associates are often required to work well upwards of 2000 billable hours (not total hours) a year. Yale Law School’s career center estimates that a year with 2200 billable hours would in fact require over 3,000 hours of time at work. With a half-hour commute to work, this means 7:30 am to 8:30 pm on Monday through Friday and an extra 9:30 am to 5:30 pm shift three Saturdays per month.
The lack of life balance (and of sleep) that a schedule like this demands would be a concern in an industry where efficiency was valued. In law firms, however, lowered productivity due to overwork and mental fatigue just increases profit margins.
Moving Away from the Billable Hour
The ideal firm for both discerning clients and talented, honest lawyers would be one that both achieved excellent results and billed fairly for them. Some of these outstanding firms already exist. However, reality dictates that for many firms, there are simply too many perverse incentives in the current system. Firms have also hit a dilemma, in that clients now demand good value for their money. Firms that stay on the current path may lose business by failing to differentiate themselves from their time and money wasting competitors.
Two main alternatives to hourly billing now exist.
Energetic firms may wish to bill for each task performed (or for the whole case) using a fixed rate. This is seen as one of the best alternative fee systems because it encourages efficiency, especially when performing routine legal tasks. Many large clients are now demanding this type of billing for some matters. However, beware one problem: when billing is only based on the end product, some attorneys may take time-saving shortcuts that decrease work quality.
Firms that operate in high-risk and high-reward areas such as tort law can (and already do) use contingency or reverse contingency billing. Contingency billing rewards a firm with a percentage of the settlement or judgment in a successful case. Reverse contingency billing, on the other hand, rewards a firm with the percentage of the amount a client doesn’t have to pay when an adversary loses a suit. These approaches transfer some of the risk of a lawsuit from client to firm. One downside is that this discourages firms from taking on the riskier cases. On the other hand, it also forces attorneys to pay attention to the quality of their work and fight hard.
However, these two methods are only a starting point. As a profession, we must brainstorm new ways to fairly charge clients for our services. Until we do, firms will remain beholden to an inefficient system that encourages dishonesty and squanders attorney talent.
Authored by Alexis Watts, LegalMatch Legal Writer