The true cost of an employee goes beyond just their salary, encompassing a range of hidden expenses that are key for any law firm to recognize.
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When you ask the head of most law firms about an employee’s compensation, you’ll likely hear a figure like “$15 an hour” or “$50,000 a year.” While that dollar amount is correct, it typically represents only 70% to 75% of the total compensation. The hourly rate or base pay is merely the starting point. Many industries meticulously track the full “burden” or cost of an employee, but in the legal world, numerous expenses often get buried and aren’t factored into the equation.
Payroll Doesn’t Tell the Whole Story
Do you truly know what you’re spending to maintain your legal team? Read on to uncover hidden costs you might not be considering, and that your attorneys and staff may not be aware of either.
- Medical Insurance: Most employers contribute to individual medical coverage, with fewer covering entire families. A typical monthly premium for an individual is around $650. If your firm pays 50%, that’s $325 per month, or $3,900 annually.
- Payroll Taxes: The combination of Social Security (6.2%) and Medicare (1.45%), collectively known as FICA, is mandatory and a significant employee cost. This tax is split equally between the employee and the employer, with the employer’s share at 7.65% of compensation up to the Social Security wage base ($168,600 for 2024). While firms may not view payroll taxes as a benefit, employees do benefit from future Social Security and Medicare eligibility.
- Unemployment Taxes: Typical federal and state unemployment taxes are estimated at about $400 per employee per year. Like payroll taxes, these are mandatory but can offer a safety net for employees.
- Vacation, Sick Days, and Holidays: This can be a substantial expense for law firms, especially when billable employees are out. Imagine an attorney or paralegal has two weeks of vacation, three sick days, and seven holidays, totaling 20 days annually. Depending on the employee’s role and the team’s capacity, covering absences might require bringing in contract attorneys, temporary staff, or paying overtime to existing employees, directly impacting billable hours.
- Retirement Plan: Most firms offer some type of retirement plan, such as a 401(k) or a Simplified Employee Pension (SEP) IRA. For instance, a firm contributing 3% of covered compensation for all eligible employees would be contributing $1,500 for an employee earning $50,000 per year.
- Long-Term Disability: Long-term disability coverage can be costly, as the risk of disability is higher than that of premature death. The premium and benefit amounts are tied to salary. For employees earning $75,000 and $100,000, the annual cost of providing disability would be approximately $450 and $600, respectively.
- Life Insurance: While insuring employees’ lives isn’t the biggest expense, it’s a valuable benefit for survivors if an employee passes away while employed. Group coverage costs vary by age. Providing $100,000 of coverage for a 45-year-old is about $120 per year.
Wait, Wait, There’s More: Beyond the Benefits Package
When calculating the cost of your legal talent, don’t forget the “extras.” This includes everything from firm-provided coffee and snacks to celebratory lunches, professional development opportunities, and the annual holiday party or bonus. Just providing refreshments can add $2 to $3 a day per employee – that’s $500 to $750 annually per team member.
While we’re not suggesting you nickel-and-dime your employees, gaining a firm understanding of how these incremental expenses add up is crucial for effective firm management.
Understanding these true costs not only gives you a clearer picture of your firm’s expenditures but also offers a powerful tool for employee retention and satisfaction. Savvy law firm owners often share this comprehensive compensation information with employees, perhaps in an annual employment letter. This demonstrates that the salary figure on their contract doesn’t represent the full value of what they’re receiving. Articulating the full compensation package clearly communicates that you value your legal professionals and that investing in them is a core tenet of your firm’s culture.
It’s Your Firm’s Money
The payroll line item on your budget is a familiar number. However, to truly grasp how much you’re spending on your workforce, you need to dig deeper. Take the time to uncover all these expenses and view them in aggregate.
You’ll never regret knowing the real story about where your firm’s money is going.
