Rising costs have lawyers bursting at overhead seams
Prime Minister Christopher Luxon’s promise to “get our country back on track” seems particularly jarring as redundancies continue to whiplash the public sector and beyond. What does this mean for the legal profession? On the one hand, we could be seeing a spike in employment court claims, but it means the freshly redundant cohort will need to have the means to pay for it.
Adding insult to injury, World Vision released a report in February revealing basic food prices in New Zealand had soared more than 50 per cent, despite international trends suggesting prices were on the decline.
Cost of practice on the rise
The recession and the cost-of-living crisis are leaving no one behind, even lawyers. A recent survey released by the Law Society has revealed the price of running a legal practice of all sizes and locations has increased by 15.3 per cent annually for the past three years. For context, the annual rate of inflation was 4.7 per cent in December 2023.
To break even, the average law firm has non-recoverable overhead costs of $1.3 million, with regional firms having to pay more at $1.6m compared to metropolitan areas (at $937,000).
Overhead costs are highest for sole practitioners, increasing from $122,000 in 2021 to $166,000 (17 per cent) in 2023. Large firms of more than 50 lawyers faced increases of 14 per cent during the three-year period, followed by barristers and small firms of two to 19 lawyers (13 per cent). Medium firms of 20-49 lawyers have faced an 8 per cent overhead increase.
Legal aid providers bear the brunt of the financial burdens, paying an average of $1.5m a year in overheads, compared to non-legal aid providers who pay $1m. Barrister legal aid providers pay $100,000 a year, compared to $92,000 for non-legal aid barristers, for example.
What kind of overhead costs are we talking?
The majority of non-recoverable overheads relate to salaries, wages, ACC, recruitment, with lawyers spending an average of $855,000 in 2023, compared to $621,000 in 2021. Legal training spending and recruitment increased by 36 per cent during the three-year period, for example, followed by staff welfare spending (29 per cent), and salaries, wages, and ACC (17 per cent).
Administration costs associated with technology and software expenses increased by 10 per cent in three years, from $117,000 in 2021 to $141,000 in 2023.
The impact of the cost-of-living crisis has manifested in rent and utility increases of 11 per cent over the three-year period, from $109,000 in 2021 to $133,000 in 2023.
Financial and insurance costs have increased a whopping 24 per cent in three years, from $40,000 in 2021 to $61,000 in 2023.
The majority of those costs (77 per cent) specifically relate to indemnity insurance, which has increased at a rate of 27 per cent, from $29,000 in 2021 to $47,000 in 2023. Smaller practices are hit hardest, with small firms seeing an increase of 33 per cent, followed by barristers (26 per cent), sole practitioners (22 per cent), medium firms (18 per cent in 2022-2023), and large firms ( 9 per cent).
Administration nightmare
Higher administrative burdens have been plaguing the sector, with the average lawyer recovering just 57 per cent of their time and billing 898 hours annually. Non-billable work could include pro-bono work, business administration, staff training, legal industry participation, and anti-money laundering and counter financing of terrorism compliance.
Again, legal aid providers are weathering the greatest storm, recovering 53 per cent of their time worked and billing 807 hours a year. Non-legal providers recover an average of 61 per cent of their time and bill 1000 hours a year. For example, a typical judicial review case requiring no specialist reports resulted in a legal aid invoice of $22,000, the report read. Of the 400 hours worked, 260 were unremunerated, bringing the combined total hourly rate to $54. The lawyer was unable to claim $1800 in disbursement costs.
Compare this to figures released to the Herald via the Official Information Act last year, where almost a billion dollars in legal-aid funding had been paid to lawyers representing people in criminal, civil, and family matters between 2019 and October 2023.
A different Law Society report in 2021 calculated just 15 per cent of legal aid lawyers were fully remunerated for time spent on their last legal aid case when the survey was completed. Even then, the Law Society estimated more than 20,000 couldn’t access legal aid as a result.
If this year’s figures are anything to go by, it means lawyers are increasingly working for free and bursting at the administrative seams. With greater incentives to join bigger practices and move away from legal aid and regionally based work, it’s the bank of people who can’t afford access to justice who will be impacted the most.