Partnership unmasked

  • Subtitle: Law Office Management
Written by  Marg. Bruineman Posted Date: January 6, 2014
Illustration: Jeremy Bruneel
Illustration: Jeremy Bruneel
Becoming an equity partner represents a commitment of the firm to the lawyer and the lawyer to the firm. It also represents an important stepping-stone for many. But what does the mythical process actually involve? How do you get there? And who has the greater advantage in a partnership arrangement?

 “There’s a whole bunch of mysteries in the partnership framework,” says Richard Ferguson. There are also a variety of arrangements but there aren’t always a lot of options, not everything is negotiable, and it doesn’t all happen instantly. The very first thing a lawyer needs to consider is whether a partnership is a good fit.

Ferguson, past chairman of the Canadian Bar Association’s law practice management and technology section, has a great deal of experience in the evolution of law firms and different arrangements. As a young lawyer he was involved in a partnership that amalgamated with another. And he was managing partner during its dissolution. That was followed by another partnership and now he is involved in a legal association. “For a young lawyer going in, they really have to understand what that firm does,” says Ferguson, whose Richard G. Ferguson Professional Corp. is in an associated practice with three other lawyers as Lynass Ferguson & Shoctor, a business law firm in Edmonton. “It would seem to me if I was a young lawyer looking, I would study the history to see the firm’s business model. . . . I think I would like to talk to recently admitted partners as well as former or retired partners,” who may well provide a picture of how the firm treats lawyers, he says.

When looking under the hood of the firm, he suggests examining what areas they practise in and how that fits with your interests, what energy is demanded of you, and how your work and contribution is compensated and recognized by the firm. Right out of the gate, negotiations often begin with a non-competition agreement; preventing the lawyer from taking all his business with him should he decide to leave the firm.

The long-term plans need to be part of the discussion, too. That includes issues surrounding retirement and liabilities should the partnership dissolve, which could involve severance obligations for staff and long-term file storage costs. “I would hope they spend as much time drafting those agreements for themselves as they would for their clients,” says Ferguson.

From a compensation perspective, Colin Cameron, of Profits for Partners Management Consulting Inc. in Vancouver, points out there are three main types of partnership arrangements: the equality partnership, the formula-based partnership, and one based on the subjective merit compensation system. All require some kind of a buy-in, typically a year’s salary that can be paid up front or deducted from the lawyer’s draw, usually over three to 10 years. “In my experience, equality compensation systems are most common in small firms (under 10 lawyers), as they are the simplest to manage. Subjective merit compensation systems are more common in mid-size and large firms. These systems take more time and effort to manage, but users believe they result in higher profitability,” says Cameron.

The formula-based model sees the individual lawyer receive a percentage from the firm every year. A partner more involved in management and supervisory roles might well draw a higher than average percentage. Productivity and performance also figure into the calculation.

Subjective merit compensation takes into account the accomplishments of each of the partners. The firm’s compensation committee makes the determination based on subjective elements of what the partner did for the firm, like training others, playing a supervisory role, and bringing in clients. The criterions, which examine accomplishments, are subjective, over and above the numbers.

There are other options to traditional partnerships. Smaller collectives involving cost sharing or space sharing arrangements are increasingly popular. But the earnings remain yours in these eat-what-you-kill arrangements. Typically the administrative aspects are shared. And if one lawyer has a more active practice with more assistants and clearly uses a larger portion of the administrative supports, some sort of compromise, often through a cost percentage, is negotiated.

The objective of buying into a firm is to invest in it, seeing the capital returns when it’s time to leave or retire, and enjoying the annual profits and distributions during the time they are a partner. “The equity partnership would typically be, in this market, about $275,000,” says Adam Pekarsky, a partner in Calgary-based Pekarsky Stein. An associate in mid- to large-sized firms typically sees a lock-step compensation plan that is tiered based on year of call until a lawyer’s earnings reach about the $180,000 level, so with each year of seniority, all associates in that year make the same amount of money. A lawyer going off the grid, achieving the maximum level of compensation, according to that formula, then qualifies for partner status.

But more firms are using another option as a stepping-stone, offering most of the trappings of a partnership without having the capital contribution. The non-equity partnership means no shared profit and no liability for the lawyer and usually no voting rights. Pekarsky describes it as a marketing tool used by both the lawyer and the firm and it signifies you’ve climbed another rung in the ladder. He also sees it as a leveraging tool used by firms to get an extra two to four years out of lawyers before bringing them into full partnership.

It’s also used for lawyers who are about to retire, but aren’t quite ready to leave. They’ve taken their equity out of the firm, but they’re still working and it remains important for them to be seen as a partner, so they become non-equity partners. But for young lawyers, this interim phase delays their access to a full partnership, so it could well take up to 12 years from their year of call to become equity partners.

In a full partnership, the role of the individual lawyer is much different in a small firm than it is in a large firm. From his perspective at a boutique firm, Pekarsky feels much more like an entrepreneur who daily makes decisions about the direction of his business. In a large firm the decisions are largely left to a senior leadership group. “The whole quest for partnership is just a giant pie-eating competition where the first prize is a piece of the pie,” he says. “Your ability to influence is so minimal, you may as well be an employee.”

In fact, what status the individual lawyer has within the large firm is a question the Supreme Court of Canada has been asked to answer. In McCormick v. Fasken Martineau DuMoulin LLP, Michael McCormick was obliged to retire from his law firm in 2010 at age 65, as per the firm’s partnership agreement where he was in an equity partnership. He filed an age discrimination complaint with British Columbia’s human rights tribunal that found although a partner, McCormick was in fact an employee and subject to human rights legislation. That finding was upheld at the British Columbia Supreme Court, overturned by the appeal court, and now awaits a decision by the Supreme Court of Canada, which heard the case in December.

“It’s a question of whether or not a person is covered by the protection of human rights legislation when a person is a partner,” said Vancouver lawyer Murray Tevlin, acting for McCormick. Human rights boards from Ontario, British Columbia, Alberta, and Canada are interveners in the case as are several accounting firms. “The law firm that is involved in this, Faskens, is a tremendous law firm. We did not want to have to do this. It’s almost like suing your friend. . . . It will be good for the profession to have an answer to this,” adds Tevlin. “We say that’s against the way we do things in Canada.”

How the court ultimately decides could well impact other professions and is expected to set the tone of what a partnership means for the individuals involved.

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