(a) There is the old cliché, “Time is <metaphorically> money.” But in a law firm, “Time is literally money!” If you are to thrive ...or even merely survive... in a law firm, this precept needs to become engrained in you. Details of billing practices (explained below) will vary with the specific firm, but typically you will need to account for every working hour; or, more precisely, every working tenth hour. Typically, once a week, you will need to submit a time sheet providing details of what you did the previous week (with a granularity of one-tenth hour).
(b) Time is partitioned into various buckets. Again, details will depend on the firm. Typical principal buckets are the following:
(1) “Billable”*: These are hours you spend working on a client’s job (e.g., drafting a new patent application or responding to an office action). These are hours that could be potentially billed to a client.
(2) “Billed”*: These are hours that are actually billed to a client; i.e., the hours that a client is actually charged for.
* I will clarify below the distinction between “billable” and “billed”. But carefully note that some firms interchange the definition of “billable” and “billed” from the ones I use here; so check what convention your specific firm uses.
(3) “Non-Billable (Tracked)”: These are hours that you do not spend on a client’s job, but the firm still wants them tracked. Examples are hours spent in a group meeting discussing changes in the firm’s organization; hours spent learning about changes in the patent law resulting from recent court decisions; hours being trained in new software installed by IT; hours spent in diversity/ethics/sexual misconduct/... classes; ...
(4) “Non-Billable (Not Tracked)”: These are hours that you do not spend on a client’s job, but the firm does not track them. These include obvious personal time: lunch and coffee breaks, bathroom breaks, physical exercise breaks (critical to your health when working in a law office), ... But they also include essential work-related (but not client-specific) tasks, such as planning your work schedule, filling out your time sheet, and organizing your files.
(5) Distinction between “Billable” and “Billed” Hours. [Below I will use examples of rates and charges. These are purely for simplified hypothetical discussion and are not intended to be representative of what you should expect.] You will be assigned a billing rate; let’s assume it’s $300/hr. Let’s further assume that you are drafting a new patent application for Client X, and the total time you spend on the job is 40 hrs. All those 40 hrs are billable; i.e., Client X could potentially be charged 40 hrs x $300/hr = $12,000 for the time you spent on the job.
- In the absence of any other contractual restrictions, all 40 hrs would actually be billed to Client X; i.e., Client X would receive a bill for $12,000 for your time. [For a newbie, this would be unlikely. A client cannot be expected to cover the costs of bringing you on board. Even if there is no contractual limit, your supervising partner will likely cap your charges at what he would consider reasonable.]
- But suppose the contract with Client X stipulated that he would be billed at $300/hr, subject to a cap (maximum fee) of $9,000 for hours worked. Then Client X would receive a bill for $9,000 for your time. Since $9,000/($300/hr) = 30 hr, effectively only 30 hr is actually billed to the client. [In some instances, depending on the firm, your effective billed hours could be even less if other people (e.g., a senior guy who reviews your work or a paralegal who handles the filing) also charge hours to the same job.]
- Now suppose that Client X is a MegaCorp (Google, Microsoft, AT&T, IBM, Boeing ...) that has negotiated a large-volume, low flat-rate contract with your firm. Suppose the contract specifies a low flat rate of $6,000 per new patent application, regardless of actual time spent on it [sometimes, there are different tiers of flat rates, depending on the estimated complexity]. Since $6,000/($300/hr) = 20 hr, effectively only 20 hr is actually billed to the client. [Again, as discussed above, in some instances, depending on the firm, your effective billed hours could be even less if other people also charge hours to the same job.]
- The ratio of effective billed hours/billable hours is your “efficiency”, again depending on the firm. Your average efficiency is tracked at least yearly (and sometimes more frequently, especially during your first year). In patent prosecution work (preparing new applications and responding to office actions), your average efficiency is rarely 100%, even for competent, experienced workers. In your early months as a newbie learning the trade, it will likely be dismally low (say, ~25%). By the end of the year, if you are successful, it will likely be ~50%. By the end of the third year, if you are successful, it will likely plateau at ~80% (with ~85% being considered excellent). [Note: Different rules apply for patent litigation (work involving patent lawsuits). But from your description of your firm, it’s likely that the firm is primarily involved with patent prosecution.]
(c) With all that in mind, I will now turn to your question of compensation. The two options you listed are indeed common, and there are other variations as well. But I’ll stick to the two presented to you, but in order of simplicity.
(1) Commission/Percentage Billed. This is easy. You get paid a set percentage of the fee that the client is actually charged for your time (regardless of the number of hours you actually spent). [Note: The client also pays for other fees, such as filing fees. Here, we are concerned only with the fees for your time.] So, what is a reasonable percentage? The starting point is “the rule of three”. As a rough initial estimate, for every $ a client pays for work, one-third goes to you (person who does the work), one-third goes to the partners, and one-third goes to overhead (such as office lease, office equipment, and support staff). So the starting point is ~33%. For a newbie, the low end is ~25%. For an experienced person, the high end is ~$50% (and in exceptional cases, could be higher). Again, clarify whether any adjustments are made for other people who charge hours for the same job.
- If you choose this route, find out whether you will be hired as an employee of the firm, or as an independent contractor.
- The plus side for the firm is that there is less risk (i.e., they pay you on the basis of how much money clients actually pay for your work, rather than pay you a salary based on an estimate of how much money clients may pay for your work).
- The plus side for you is that there is less pressure on you to meet a required minimum number of billable or billed hours per year (see further discussion below). Under some circumstances, this may be worth it (see further discussion below).
- The negative side for the firm is none that I see (other than you leaving for a better deal).
- The negative side for you is considerable:
* You don’t get a steady income stream each month. This route is viable only if you have a buffer of ~3 months expenses in the bank, or if you have a spouse with an adequate steady income stream each month. If you don’t work (vacation, holidays, out sick), you don’t get paid. If it’s a slow month, you get paid less. If it’s a busy month, you get paid more. Furthermore, there is also a lag between the time you do the work, the time the bills are sent out, and the time you’re paid. So a buffer is especially critical for your first several months on the job (e.g., you might get little, or even no, pay your first month). Once you’ve established a queue of completed jobs, your monthly revenue stream is more stable.
* If the firm loses major clients and there isn’t enough work to go around (even temporarily), you’re more vulnerable than salaried employees. Salaried employees get paid even when work slows down (as long as they’re still employed), so what work that does come in will typically go to them (with the exception of niche cases in which only you are technically qualified to handle). Whereas, if you don’t get work, you don’t get paid.
* You’re vulnerable to being assigned complex, low flat-rate cases. The concept of flat-rate cases is based on the premise that some cases are easy, some cases are hard, and most cases are moderate: over the course of the year, the time you spend per case will average out to something in the middle (target hours per case). But, a partner might abuse you by assigning you a constant stream of hard cases (particularly since you have a PhD Physics): after all, you get paid the same, regardless of how many hours you spend; whereas, if the case is assigned to a salaried employee, he will exceed his target hours per case and be penalized with reduced efficiency (see discussion above on efficiency), which reflects negatively on the partner as well.
(2) Salary plus Bonus. You get paid a steady salary (typically once every two weeks or once a month, depending on the firm) in return for an expected minimum number of billable or billed hours (depending on the firm) plus an end-of-the-year bonus based on the number of billable or billed hours that you exceed the minimum. It’s important to clarify up front whether your firm bases salary on billable or billed hours (and what convention they use for these terms).
- The big plus side for you is that you receive a steady income stream, and you have the potential for a substantial bonus (depending on how many extra hours you work). The big down side for you is that you’re under constant pressure to meet your minimum number of hours (and, in some firms, to exceed your minimum number of hours; that is, you’ll get a poor rating if you just barely meet the minimum).
- Check carefully what the required minimum is (and again whether the hours are billable or billed). If given a choice, you’re better off with a lower salary and a lower required minimum. Otherwise, it’s easy to burn out trying to achieve high minimums.
As an example, assume you want to attain 8 billable hrs a day. To do this, you will likely spend at least 10 hrs/day at the office: 8 billable hrs + 1 hr non-billable (tracked) + 1 hr non-billable (not tracked). So a 50-hr work week will yield 40 billable hrs. If you were to work all 52 weeks a yr at this pace, you would attain 2080 billable hrs a yr, which yields 1040 billed hrs a yr at 50% efficiency and 1664 billed hrs a yr at 80% efficiency. But, if you were to effectively work 48 weeks a yr (to account for vacation, holidays, and sick days), you would attain 1920 billable hrs a yr, which yields 960 billed hrs a yr at 50% efficiency and 1536 billed hrs a yr at 80% efficiency. So, if a firm offers you a great salary in return for 2000 billed hrs minimum, the workload will be heavy at 80% efficiency, and dangerously unhealthy at 50% efficiency.
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I’ll stop here, since this is a lot to absorb. I’m sure you’ll need clarification. Feel free to ask away. I’ll also post separately on why dollar compensation should not be the number one priority for a newbie.
ETA: Also inquire about options for medical insurance (in particular, if you're married and can get insurance through your spouse).
All in all, I couldn't ask for a better job. I'm so much happier with this than engineering or computer science.
