Law Firms: Commissions On Legal Work, Ethical?

Paying employees on a commission basis is a common practice among businesses, and the same goes for law firms. Many law firm owners are interested in moving their lawyers from salary to commission as it allows for payroll variability based on the performance of the firm. Commission pay is a sum of compensation paid for performing a task, such as completing a sale, and is often used as an incentive to increase worker productivity. While it is a common practice for sales jobs, it is less common for law firms, especially those handling large and complex cases. However, some law firms do pay their associate attorneys on a commission basis, and it is referred to as contingency, where attorneys get paid a percentage of the settlement when the case is settled or a jury returns a verdict for their client.

Law firms transitioning to commission-based pay structures

Transitioning to a commission-based pay structure can be a challenging but rewarding process for law firms. Here are some key considerations and steps to make the transition successful:

Understanding the Benefits of Commission-Based Pay: Law firm owners often consider transitioning to a commission-based pay structure to reduce financial stress and worry about making payroll. By implementing a variable pay system, law firms can tie payroll more closely to the performance of the firm, reducing costs during down periods and sharing the success during good months. This approach can also motivate associates to increase their productivity and provide them with a sense of ownership over their earnings.

Planning the Transition: It is essential to initiate the transition from a fixed to a variable payroll during a strong financial period for the firm. Law firm owners should develop a comprehensive compensation plan that aligns with the firm's business goals and ensures fairness for all associates. It is crucial to keep the plan simple, such as paying associates a percentage of the gross fee they generate.

Communicating the Change: Effective communication is vital during the transition process. Law firm owners should ensure that all associates understand the new compensation system and how it will affect their paychecks. Associates should have the opportunity to ask questions and address any concerns or fears they may have. This process may take time, and it is important to anticipate some resistance or turnover as a result of the change.

Implementing the New Structure: The transition to a commission-based pay structure should be gradual and closely monitored. Law firm owners should stay in close touch with associates during this period, providing ongoing support and addressing any issues that arise. It may take up to 18 months or more for the new system to be fully implemented and accepted within the firm.

Legal Considerations: It is important to note that commission-based pay structures in the legal industry may be subject to specific regulations and laws, which can vary by state and country. Law firms should seek legal advice to ensure they comply with all applicable rules, such as properly documenting the commission structure and clearly defining the criteria for earning commissions.

By carefully planning and executing the transition to a commission-based pay structure, law firms can achieve greater flexibility in their payroll, motivate their associates, and better align payroll with the firm's performance. This transition requires thoughtful communication, a comprehensive understanding of the legal landscape, and a commitment to supporting associates through the change.

Commission pay guidelines for employees

Commission pay is a sum of compensation paid for performing a task, such as completing a sale. It is often paid as a percentage of the deal or the number of sales made. Many businesses pay on a commission basis as it benefits their income and keeps finance costs down. Commission pay can be used as an incentive to increase worker productivity or as a primary method of payment for sales-based positions.

When paying employees on a commission basis, it is a way for a business to keep finance costs down, as the amount paid to employees depends on the number of deals made. This also means businesses won't spend money on employees who don't meet their quota. A base compensation in addition to commissions guarantees employees a salary, even during low sales periods.

In California, commission pay structures need to be properly documented. The sales commission contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid. It should also include forfeiture provisions that state whether or not employees are obligated to receive commissions earned after they have left the job.

In Texas, employers have wide discretion to implement and modify the terms of a commission plan or bonus agreement. However, they generally cannot interfere with an employee's earned commissions. Disputes often arise when an employee is terminated or resigns before a commission or bonus payment is due. In such cases, it is important to consider whether the employee was terminated with good cause or voluntarily resigned, and whether there is a written contract in place.

When transitioning employees from salary to commission, it is important to make the change during a good financial period for the business and to keep everyone involved closely informed throughout the transition process.

Commission disputes and legal recourse

Commission disputes can be a tricky affair, and it is essential to understand your rights and the legal recourse available to you. While the specifics may vary based on your jurisdiction, here are some general guidelines and legal options to consider if you are involved in a commission dispute:

Review Contractual Terms:

The first step is to carefully review the written agreement or contract outlining the commission arrangement. Ensure that the terms are clearly stated and define the performance requirements or quotas needed to earn the commission. A well-drafted contract that addresses all relevant terms reduces the likelihood of disputes. If there is no written contract, other evidence such as emails, text messages, or witness statements can be used to determine the agreed-upon terms.

Understand Applicable Laws:

Commission disputes are often governed by contract law, employment laws, and agency agreements specific to your jurisdiction. For instance, in California, commission pay structures must be properly documented and set out in writing. In Texas, employers have wide discretion to modify commission plans, but they generally cannot interfere with an employee's earned commissions. Understanding the relevant laws will help you assess your legal options.

Alternative Dispute Resolution (ADR):

Mediation or arbitration can be considered as alternatives to court litigation. These methods offer a less formal and more expedient way to resolve the dispute without the need for a lengthy court process. If your contract includes an arbitration clause, you may be required to pursue this route.

File a Breach of Contract Claim:

If your employer has violated the terms of your commission contract, you may have grounds to file a breach of contract claim in court. This could result in a judgment for the amount owed, plus interest and legal costs.

Small Claims Court:

For smaller amounts involved, you may be eligible to file in the Small Claims Court, which is designed to be a simpler and faster process with fewer formal requirements than regular civil suits.

Agency Law:

If your commission arrangement is tied to an agency relationship, agency laws may apply, and you may have additional avenues for recourse. Agency law often protects the agent's rights to commissions.

Statute of Limitations:

Be mindful of the statute of limitations applicable in your jurisdiction. For example, in New York State, the statute of limitations for wage and hour claims is generally six years from the date of the incident.

Remember, it is always advisable to seek legal advice from a skilled employment lawyer or attorney experienced in commission law cases to guide you through the specific laws and options available in your jurisdiction.

Benefits of commission-based pay for law firms

Many law firm owners want to transition their lawyers from salary to commission-based pay. This is because, in addition to reducing stress for the owners, a commission-based pay structure offers several other benefits.

Firstly, it minimises the need for large cash reserves. During good months, associates can share in the success of the firm, and during bad months, the firm does not have to pay associates a high salary. This variability in payroll is especially beneficial for undercapitalized law firms.

Secondly, commission-based pay incentivises associates to increase their productivity. This pay structure rewards associates who are ambitious and thrive in competitive environments. Associates are motivated to work harder to make deals since their salary depends on it.

Thirdly, implementing a commission-based pay structure can strengthen a law firm. Although change is difficult, adapting to it can make the team stronger.

Finally, transitioning to a commission-based pay structure can be done in a way that associates are comfortable with. Law firm owners can start by offering to pay associates anything they earn in excess of their salary, with the guarantee that they won't earn less than their original salary for a certain period.

Commission-based pay for litigation lawyers

The way that lawyers get paid varies from law firm to law firm. Some law firms pay their lawyers a fixed salary that increases over time, while others pay a base salary plus bonuses. Some law firms do not offer salaries and instead pay their lawyers a commission for their work. This is a goal for many law firm owners, as it reduces the stress of making payroll and minimises the need for large cash reserves.

Commission pay is a sum of compensation that is paid for performing a task, such as completing a sale. It can be paid as a percentage of the deal or the number of sales made. Many commission-based pay rates include base pay, which guarantees employees a salary even if they are experiencing low sales. Commission pay can be beneficial for employees who are energetic and capable sales representatives, as they will gain substantial commissions compared to their counterparts. It can also be beneficial for businesses, as it keeps finance costs down and ensures that money is only spent on successful sales representatives.

In the context of litigation lawyers, it is possible for firms to agree on a hybrid fee structure that includes a discount on the hourly rate plus a percentage of the recovery. However, at the level of business litigation involving large sums of money, law firms often do not work on a contingency basis. Instead, they may charge a few million in legal fees, win or lose.

If you are an employee who is paid by commission and you believe your employer is not honouring your sales commission agreement, you can hire an attorney experienced in commission law cases to help you understand the relevant laws and get paid what you have earned.

Frequently asked questions