An in-house lawyer punches the clock after a week of negotiating contracts, finalizing commercial work, and even a little litigation — but who picks up the tab, individual departments for which the tasks were done or the corporation as a whole?
There isn't a hard-and-fast rule but generally, the bigger the in-house team of lawyers, the more likely individual departments foot the expense on their own.
David Allgood, Toronto-based executive vice president and general counsel for the Royal Bank of Canada, says its 150 in-house lawyers bill individual divisions in quarter-hour increments for their work in litigation or product development. The cost of internal legal tasks for one of Canada’s biggest companies, such as shareholder meetings or raising capital, are allocated based on the amount of billable hours per department. “You could say the overhead costs should be allocated equally over four [business units], for example. The price of being in the enterprise is paying your share of the overhead costs as well. We’ve picked ‘your share is the same as you consume otherwise,’ I think our approach is the cleanest way of doing things.”
Allgood says some components of its annual budget, such as public company documents required by regulators, simply can’t be pinpointed to a particular division.
“At the end of the day, we’re a cost centre. To determine the business [divisions’] profits and losses appropriately, you need to allocate the consumption of their costs. The profit and loss of each division should add up to the profit and loss of the corporation as a whole. You have to allocate your functional costs like law to your business.”
Allgood says it’s simply not practical to have each division run on its own without centralized functions because some lawyers spend all of their time working for particular parts of the business while others split their time among different operating units.
He says less than a decade ago, legal costs weren’t allocated on an hourly basis at Royal Bank. They were doled out based on revenue, not the actual use of legal services. The bank could very well have used similar models based on profit, net income before tax, or net income after tax, he says.
“If you had a much smaller legal department, you might [have each division run on its own]. It might be that each lawyer worked completely for one business, so you wouldn’t need to allocate. But once you have more than one [division] and you have true overhead costs, you have legal costs that you can’t really say relate to a division but relate to the fact you’re a company.”
One of Canada’s mutual fund giants takes a different approach to billing. Donald MacDonald, Winnipeg-based vice president and counsel at Investors Group, says it doesn’t bill individual departments because the purpose of the legal department is to assist the business, particularly with laws and regulatory matters.
“We don’t want people to be deterred from calling the legal department on a matter that could have significant regulatory or risk issues because they think they’ll get billed for it."
From an in-house lawyer’s standpoint, MacDonald says the strong preference is not to bill because time sheets are administratively burdensome, and bickering with particular departments about the amount of legal services they actually used gives off bad vibrations. “It wouldn’t create an environment of teamwork that we strive for,” he says.
