Still the Boss

It has become common practice for law firms to outsource many aspects of their business operations, from secretarial services to accounting to information management. But some firms have gone a step further by contracting out all of their human resources functions.

Farming out such administrative tasks as payroll, employee benefits and workers’ compensation to employee leasing companies commonly known as professional employer organizations—is a tantalizing option for law firms. The firm relieves itself of the burden of administering human resources matters while being able to offer employees a wider variety of health insurance and other benefits at reduced rates as part of a larger pool of employees represented by the outsource company.

But certain ethics considerations come into play when a law firm’s personnel, including lawyers, technically become employees of another entity.

Virtually all the states that have issued ethics opinions on this topic conclude that it is permissible for law firms to outsource their human resources functions as long as appropriate ethics safeguards are in place.

Professional independence for lawyers is the primary ethics principle that comes into play. Accordingly, the nature of the relationship between the professional employer organization and the law firm is of paramount importance.

An opinion issued by the District of Columbia Bar states that an outsourcing arrangement violates ethics rules when the PEO retains “actual” authority rather than “legal” authority over the law firm’s employees. Opinion 304 (2001).

Other state ethics authorities reached similar conclusions in Texas Opinion 560 (2005), North Carolina Formal Opinion 6 (2003) and Connecticut Informal Opinion 02-08 (2002).

The principle of professional independence is set forth in Rule 5.4 of the ABA Model Rules of Professional Conduct, which are the basis for rules of professional conduct for lawyers in most states.

Law firms must exercise strict management and control over all employees—lawyers and nonlawyers alike—to comply with Model Rule 5.4(d), which prohibits lawyers from allowing nonlawyers to interfere with their professional judgment.

Model Rule 5.4(a) prohibits a law firm from splitting legal fees with nonlawyers, meaning that payments to the employee leasing company may not be a function of fees earned by the law firm. Instead, it is generally permissible for the firm to reimburse the company for payroll expenses, supplemented by an administrative fee.

Under Model Rule 5.1, partners and other lawyers with management or supervisory authority “shall make reasonable efforts to ensure” that lawyers at the firm “conform” to professional conduct rules. Model Rule 5.3 imposes a similar obligation on lawyers to ensure that the work of nonlawyer employees is “compatible” with lawyer ethics rules.

The Ethics Checklist

Under Model Rule 1.6 (confidentiality of information), lawyers must ensure that the employee leasing company does not have access to confidential client information. Rule 1.15 (Safekeeping Property) imposes a similar obligation on lawyers to safeguard client property.

Conflicts issues may arise under Model Rule 1.7 (Conflict of Interest: Current Clients) and Model Rule 1.9 (Duties to Former Clients). The Illinois State Bar Association’s Committee on Professional Ethics concluded that it would be improper for a lawyer “employed” by a PEO to continue working for the company if the interests of his client are adverse to those of a client of another lawyer employed by the same leasing company. Opinion 90-23 (1991).

Both Illinois and the District of Columbia have concluded that it may be necessary for a law firm to disclose employee leasing arrangements to clients.

As more firms consider launching employee leasing arrangements, they must be sure that they’ve carefully gone over their “preflight” ethics checklist.

Kathryn A. Thomspon is research counsel for the ABA Center for Professional Responsibility.

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