Compensating nonlawyer employees

April 2017 | Eye on Ethics

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Bringing in business is essential for law firms, and lawyers thusly associated are evaluated on their prowess in this area as well as their practice skills.  But nonlawyer employees can also be valuable in this regard, and have access to networks of individuals that may or may not be available to the lawyers in a firm.  The question arises if a lawyer’s compensation is based in part on how much business they bring to the firm, why not likewise motivate and reward a nonlawyer employee? 

Bonus based on fees in cases worked on by nonlawyer

It is a longstanding tenet of legal ethics that lawyers may not share legal fees with nonlawyers.  See, ABA Model Rule 5.4 Professional Independence of a LawyerThe reason for this prohibition is set forth in Comment (1) to the rule that states, “The provisions of this rule express traditional limitations on sharing fees.  These limitations are to protect the lawyer’s professional independence of judgment….”

However, nonlawyers are allowed to be compensated in part through a general bonus plan based on how well the firm did in a given time period.  See ABA Informal Opinion 1440 Compensation of Lay Office Administrator (1979) (Compensation proposed for office administrator relates to the net profits and business performance of the firm and not to the receipt of particular fees and so does not violate the rules.)  Subpart (a)(3) of Rule 5.4 acknowledges this exception to the Rule stating that:  

“A lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit sharing arrangement…”

Several state bar opinions address the circumstances under which nonlawyers can participate in such plans.  See, e.g. New York State Bar Association Ethics Opinion 887 (2011)  (a law firm may pay a marketing employee a bonus based on the firm’s profits, or those of a particular department, or a percentage of the marketer's salary).  The bonus  may not be based on referrals of specific legal matters, or on firm profits that come from cases that the marketer brought to the firm); District of Columbia Ethics Opinion 322 (2004) stated that a nonlawyer employee may not be paid a bonus based on fees the firm receives from a specific case or series of related cases, but may be paid a bonus contingent upon the firm’s overall profitability.  

However, in what is arguably a departure from earlier precedent on this issue, the Wisconsin Supreme Court in In re Weigel, 342 Wis.2d 129, 817 N.W.2d 835 Wis. (2012) found that a bonus program that is based on a percentage of the revenues derived from a distinct area of the firm’s practice in which the nonlawyer works does not violate the rule so long as it does not interfere with the lawyer’s independent professional judgment:

“…We do not have specifics about the number of cases this paralegal works on, but the record indicates this is a high volume legal practice. Based on the evidence presented we find no indication that the paralegal would be interfering with the lawyer's independent judgment. We emphasize that the law firm has a general duty, and the paralegal's lawyer-supervisor has a specific duty, to ensure that the paralegal's conduct is compatible with the ethical obligations of lawyers. However, we conclude that the rule, as drafted, does not preclude the bonus structure described in this case.” In Re Weigel at 846.

The court, quoting from D.C. Bar Opinion 322 (2004) noted that “the line between the prohibited sharing of legal fees with a nonlawyer and a permissible compensation plan based on profit-sharing is not clearly demarcated.”

Bonuses based on referrals to the firm

Unless one of the exceptions to subpart (b) of Rule 7.2 Advertising applies, nonlawyers may not be awarded a bonus based on the referral of specific clients to the firm.  Rule 7.2(b) states:

…(b) A lawyer shall not give anything of value to a person for recommending the lawyer’s services except that a lawyer may
(1) pay the reasonable costs of advertisements or communications permitted by this Rule;
(2) pay the usual charges of a legal service plan or a not-for-profit or qualified lawyer referral service. A qualified lawyer referral service is a lawyer referral service that has been approved by an appropriate regulatory authority;
(3) pay for a law practice in accordance with Rule 1.17; and
(4) refer clients to another lawyer or a nonlawyer professional pursuant to an agreement not otherwise prohibited under these Rules that provides for the other person to refer clients or customers to the lawyer, if
(i) the reciprocal referral agreement is not exclusive, and
(ii) the client is informed of the existence and nature of the agreement.

State bar ethics opinions on this issue include New York State Bar Association Opinions 902 (A lawyer who contracts with a marketing firm to introduce the lawyer to its network of doctors as prospective clients may not compensate the firm with a fee for each introduction and meeting with one of the doctors, nor with a fee if and when a doctor retains the attorney in a certain number of collection cases) and  917 (2012)  (If  marketing by nonlawyer employee is advertising as opposed to solicitation, a law firm may pay a nonlawyer marketing employee a bonus based on the number of clients he obtains, but may not base the bonus on the fees the clients pay or on the referral of a specific client).

Are gifts or other items in exchange for a referral permitted?

Gifts, perks or other items are not a way around the Rule and may be considered to be “something of value” under Rule 7.2(b) and thus are prohibited as well. See Pennsylvania Bar Association in Opinion 2005-81 (undated) (lawyer may not give a nonlawyer employee a paid day off for referring a new client to the firm), Connecticut Informal Ethics Op. 92-24 (1992) (lawyer may not give indirect benefits, including gifts, to client who referred business to lawyer) and Maryland Ethics Op. 2000-35 (2001) (lawyers who participate as panelists in seminars offered by accounting and financial services company, in exchange for referrals, could be interpreted as giving “something of value” to accounting firm).

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For further information on this topic, consult the ethics rules, ethics opinions and case law in your jurisdiction.  Secondary sources such as the ABA/BNA Lawyers’ Manual on Professional Conduct and the eighth edition of the ABA Annotated Model Rules of Professional Conduct provide useful research and analysis for questions like this.  Finally, your state or local bar association may also be able to help.

This column originally ran in the October 2014 issue of YourABA.

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