The immigration debate and its effect on City law firms
Proposed immigration caps have the capacity to push up assistant level compensation and may force high end legal work out of the United Kingdom.
The Law Society’s chief executive Desmond Hudson, London’s Mayor Boris Johnson and the business secretary Vince Cable are all, with varying degrees of noise opposed to the strict application of the immigration cap on non-EU workers. The cap was a platform pledge of David Cameron’s campaign but commentators and figures from the business community have been almost universal in their condemnation, fearing that a severe tightening of the numbers of skilled, non-EU workers allowed into the UK will be more than just operationally problematic but will have a damaging effect on the way UK businesses interact on an international stage. The knock-on effects could potentially see companies pulling their headquarters from the UK due to their inability to recruit the talent they need, having a direct, far reaching and dampening economic effect. Not exactly what is needed at this stage of the game, with Desmond Husdon’s view that “imposing this cap now will strangle city law firms and in turn hit the businesses they act for.”
In July 2010, to stem the flow of what the government feared would be a flood of applications ahead of the permanent cap, an interim cap on the number of Tier 1 and 2 UK visas issued to ‘highly skilled migrants’ was introduced. Some would argue that this interim measure was rushed and ill-conceived with numbers for allowances of Tier 2 visas being calculated on 2009 hiring figures when 54% of professional services firms surveyed by the CBI for its Employment trends survey in 2009 were operating some kind of hiring freeze. One City law firm has already found as a result, the cap has been set too low (as reported in The Lawyer, 16th August 2010) with Norton Rose, failing to secure a visa for one of its future Indian qualified trainees.
But it’s not just the ‘sponsored’ Tier 2 visa that governs internal transfers within law firms and companies that will be affected, the granting of the Tier 1 visa that allows highly skilled migrants to come to the UK under their own steam and populate the deal rooms of the larger City law firms will also have a cap imposed. The Law Society’s chief executive is not alone in his view that, “migrants brought in to work in the legal sector are highly-qualified, well paid individuals who make a significant contribution to the UK economy.”
Whether you subscribe to the ‘double dip’ or not, there is no question that law firms are recruiting again, with some reporting utilisation levels in key transactional groups across corporate and finance up to ‘early 2008 levels’. Deal flow is returning (albeit in a trickle) to create entirely respectable activity levels and there is certainly a more robust approach to hiring, with the environment of fear that prevailed following the free fall we observed post collapse of Lehman et al somewhat subsiding.
Some argue that a return to the halcyon, rec-recession days may never come but we know (because in some shape or form, we’ve been here before) that when M & A activity really picks up again, the Magic Circle and larger City firms will look to their usual fishing pools for talent. And the talent will be there; the Antipodean legal markets suffered far less than this side of the world. Of course there were cost cutting measures implemented such as salary freezes and flexible working arrangements but the top Australian firms for example, made far fewer redundancies, meaning that their assistant pool has remained relatively intact. Perfect then for when the City based behemoths come looking again - when the market is desperately lacking corporate assistants in the ‘sweet spot’ 2-4 post qualification mark? Well, not if law firms have only very restricted capacity to sponsor them to work here or if they can’t make it here under their own steam. It’s not too much of a stretch then to see how problematic the immigration cap will be and what a detrimental effect it will have. Particularly because the number of assistants qualifying into transactional areas through the latter part of 2008 and all of 2009 was drastically reduced with trainee retention rates the lowest they have been in recent history and very few firms looking to recruit externally during that time.
Combine this restriction on hiring from non-EU jurisdictions and a simple lack of numbers of associates in ‘demand’ transactional areas at appropriate qualification levels and there’s another domino effect that will place law firms in a very uncomfortable position: associate wage inflation and a return to salary differentials between different disciplines. Not only will this be expensive for law firms but it’s a management nightmare trying to explain to an employment associate why they’re paid less than their corporate colleague and even more troublesome to maintain some meaningful level of distance in compensation levels between junior and senior colleagues. Perhaps the general shift away from associate lockstep remuneration will help in this regard but even with that added flexibility there is a real risk that ‘levels’ will be skewed artificially to accommodate.
There is still an argument for regulation or restrictions on numbers but perhaps when an economy is tentatively spluttering back to life is not the time to implement them. The ‘highly skilled’ labour force is one sector of the market that adds to the economy in the form of tax revenues and the private sector’s circumscribed ability to recruit them will directly affect companies’/firms’ willingness to invest in the UK. Surely anything that enables the UK to make one of its more significant industries (Legal Business calculates that the top 100 UK law firms produce total revenue of £13.72 billion) more productive, more competitive and more attractive should be welcomed? And surely any measures that could result in large chunks of the transactional work that UK law firms are prized and lauded for being outsourced to other economies should not?
The UK legal industry will lose out. Its ability to operate in a global marketplace will be damaged as its ability to recruit talent from non-EU jurisdictions (becoming even more important as emerging markets work takes centre stage) is hamstrung. Desmond Hudson says: “Having access to quality talent from other jurisdictions ensures the legal sector is better placed to carry out its work in the international marketplace. By imposing a cap, there is a mistaken assumption that there will be lawyers of equal expertise in the UK and EU, but it is often the knowledge of a particular overseas jurisdiction which is of particular value to a firm”.
An inability to move staff around the globe with ease or to recruit in from non-EU markets to cover a skills gap will have a negative consequence for the UK legal sector now competing with other legal markets for transactional work. Legal outsourcing is becoming more prevalent - not just to India and other emerging markets and no longer for purely ancillary transactional matters – The Lawyer reported in May of this year that Lewis Silkin is outsourcing complex contentious work to litigation partners in the New Zealand offices of top-tier Australian outfit Minter Ellison. There is nothing to stop clients instructing firms in alternate jurisdictions directly; an inability to service work due to a lack of appropriate expertise will doubtless create opportunities for other international hubs to deprive the UK legal sector of its current competitive advantage as the jurisdiction of choice and in turn its ability to pull itself out of its current malaise. Whilst a damaging blow, this is not as dire for those for those firms with an international footprint and an established network of offices in other legal hubs giving them an ability to cross refer work and retain profits but it is certainly a major issue for single site UK firms.
Articles by Kristi Edwards
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