©Gentile & Associates

CAPITALISM WORKS ON A SMALL SCALE

As the owner of a small law firm you are both laborer and capitalist. 

As a laborer, you earn your wages which are directly proportional to the time spent on the services you perform: spend 2 hours preparing a will or closing a mortgage, collect some money.  This is no different than the hourly wage your father earned as a bricklayer, except that his was recognized as good honest work. 

As a businessperson, you hire other people and you pay them for their work.  As a capitalist, you make money by collecting the surplus value of your employee's labor, the difference between what their labor earns you and what you pay them.  If you hire an associate to prepare a will or attend a mortgage closing for your client, then the difference between what you pay the associate and what you collect from the client is your profit, after you deduct your fixed expenses.  The more work you can hire someone else to perform for you, the more surplus value there is for you to collect. 

Consider the following scenario.  You have settled a small personal injury matter for $10,000 at the second pre-trial conference after expending $750.00 in disbursements.  Based on the standard contingency retainer in a tort case, you collect a fee of one-third of the net settlement or verdict after reimbursements of your disbursements.  The client nets $6,166 your fee is $3,083.33. 

What is your profit?  It depends upon whether your were a laborer or a capitalist.  The following tasks were performed in the process of bring the matter to settlement:

Of these total hours, there are 4 appearances totaling 15.5 attorney hours and 8.5 administrative hours.

Calculate the hourly rate of compensation if you personally performed all 24 hours of work by dividing the fee collected by the hours you spent on the case.  Divide $3,083 by 24 hours and you arrive at a calculation of a fee of $128 per hour.  That is an honest wage for an honest day’s work. 

Now inject some capitalism into the equation and consider the following thought experiment: If you had a paralegal perform all of the administrative, non-attorney tasks, would your net hourly fee increase, or does the expense of the labor result in no increase in profit?  Assume a pay rate for the paralegal of $20 per hour including the cost of benefits, then the labor costs for the administrative tasks is $170 ($20/hour x 8.5 hours).  Deduct this labor expense from your fee and your net fee is now $2,913 ($3,083 - $170).  Just a bit of capitalism has increased your compensation by almost 50%, to $188 per hour.

Take your experiment to the next level.  Calculate the result if you hired an attorney to perform the lawyer's tasks.  A per diem attorney is the most expensive kind of coverage you can retain, but it is the easiest expense to control and the simplest way to start bringing in attorneys to help with the work.  If you had a per diem attorney cover all 4 appearances (a preliminary conference, one deposition of each of the two parties, and two pre-trial conferences, the cost of the labor is  $850.  Does it make sense to hire per diem attorneys?  Do the math.  Subtract the expense of the per diem attorney and the calculation of your hourly fee is as follows:  $3,083 - 170 = $2,913, - $850 = $2,063.  Assume you spent 2 hours in supervision of employees and talking to the client, your hourly fee on this case is $2,063/2 = $1,031.50 per hour.  Even with expensive per diem services, your hourly rate increased almost 10 fold, because you did less work. This is what the founding fathers envisioned when they created a free market economy with surplus labor.

You don't start making money, of course, until you have paid your fixed costs.  If you have a paralegal, a presentable office, some equipment, a car, all the necessary insurance for your business, and you buy a few index numbers each month, your fixed costs are probably about $6,000 per month.  If you are the laborer, performing all of the tasks on all of your cases, you are working 47 hours each week to keep your doors open.  If you have hired a paralegal and are using per diem attorneys for your appearances, you can cover your fixed costs in 6 hours.   

Whether your practice specializes in probate matters, torts or real estate transactions, you can make the calculation to determine what your profit is.  To improve your bottom line, increase your rate of compensation by raising your fees, hiring staff, or reducing your fixed costs. 

So you are ready to hire your first employee.  For each new employee, you must complete an IRS W-4 (withholding Allowance Certificate and the IRS I-9 Employment Eligibility Allowance Certificate (which confirms that the employee has a status with the INS that allows him to work in the U.S.  When hiring an employee, you must carry additional insurance associated with your employees, you must pay employer's taxes to the City/State and Federal government, and you must withhold taxes from your employees’ salaries and deposit that money at a bank with a Federal Voucher. 

The rule of thumb is that an employer spends an additional 30% over the actual salary to cover all the expenses associated with employment, including full health insurance and vacation pay.  You can reduce this amount by limiting benefits, but in the long run, the goal is to have a strong benefits program to keep your well-trained and productive employees on staff.

You are required to carry Workers Compensation Insurance and Disability Insurance, both of which can be obtained a private carrier or from the State Insurance Fund at 199 Church Street, New York, New York.  You must pay employment taxes on a quarterly basis and file summary reports with the State and the Federal Tax Authorities, and you must deposit employee's share of employment and social security taxes that you have withheld from your employees salary.  By the end of January of each year, you must generate and distribute W-2 forms and by the end of March you must file the W-2's with the IRS as an attachment to a W-3 form.

A small firm typically cannot justify the expense of a full time bookkeeper to take care of the employment tax and filing requirements. 

You can do it yourself.  Any of the advanced accounting packages, including QuickBooks and Peachtree will allow you to press a few buttons to cut paychecks with the proper taxes deducted.  These programs will generate the data required for the quarterly and annual tax forms.

It is easy enough to loose track of these requirements, though, and incur penalties and interest charges.  You can hire a payroll service to cut paychecks and make all necessary tax filings for about $50 per employee each month.   Your accountant can also provide this service for you.  The chances are the added expense of hiring a service to take care of these items will more than be offset by the elimination of penalties for late and inaccurate filings.

It may be possible to fulfill your staffing needs with independent contractors, rather than direct employees.  A per diem attorney, for example, is an independent contractor.  There are no taxes withheld for independent contractors, who receive an IRS 1099 form at the end of the year.  You are not required to carry any insurance for independent contractors.  You must take care, however, that the work arrangement qualifies for independent contractor status with the IRS.  If you do not meet all of the requirements, you will incur severe penalties and back taxes.  Proceed carefully, with the advice of an accountant.

Once all of this is done, you can start watching the clock and tapping your fingers until your paralegal arrives between 9:15 and 9:20 for her 9:00 a.m. shift.  It’s the trains - you know how it is - you once were an employee...

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