Management of a Law Firm’s Human Resources Functions by an Employee Management Company

A law firm may contract out its human resources functions (even to the extent that the firm’s employees are considered, for certain purposes, employees of an unrelated company), but only if the arrangement does not prevent or inhibit any lawyer from abiding by the applicable Rules of Professional Conduct and does not attempt to insulate any lawyer from liability for her own malpractice.

Applicable Rules

• Rule 1.8(g)(1) (Conflict of Interest; Malpractice Liability)
• Rule 5.1 (Responsibilities of a Partner or Supervisory Lawyer)
• Rule 5.3 (Responsibilities Regarding Nonlawyer Assistants)
• Rule 5.4 (Professional Independence of a Lawyer)
• Rule 5.5(b) (Unauthorized Practice of Law)

Inquiry
The Legal Ethics Committee has been asked whether the Rules of Professional Conduct permit a law firm to have all its workers—lawyers as well as non-lawyers—employed by an unrelated employment management company. The inquirer’s firm includes two lawyers, one of whom is the owner of the firm. Both would become employed by the employee management company along with the approximately sixteen nonlawyer employees. The employee management company would be responsible for payroll services, employee benefits, withholding and similar tax payments, compliance with employment laws (e.g., Fair Labor Standards Act, immigration, Family and Medical Leave Act, Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA)), personnel recordkeeping, unemployment compensation, workers’ compensation, and the like.
     The inquirer advises that regardless of whether the law firm’s workers are considered employees of the law firm, of the employee management company, or of both for purposes of the laws governing labor and employment, the law firm (in the person of its single owner) would retain, full management and supervisory authority (e.g., hiring, firing, promotion, setting of compensation, assignment and supervision of work). Moreover, the law firm would have custody and control of all client files, firm accounting information (other than employment-related information) information, and the like.
     Put differently, the management company would not be an owner of the firm in lay terms, would not share in the profits of the law firm, would have no authority to make employment decisions, and would have no say in directing lawyers or legal assistants what duties to perform or how to carry out those duties. The management company would perform functions unrelated to the provision of legal services in much the same way that a cleaning service, messenger service, or photocopying company may assist a law firm.
     The employee management company might provide similar services to other companies, including other law firms. Although the employee management company might in some cases be considered the employer or co-employer of the employees of all these firms from the standpoint of human resources law, these individuals would work at their separate law firms just as if they were employees of those firms. Indeed, the individual law firms will not necessarily even know the identities of the other firms doing business with the employee management company, and there would be no contact between the firms by virtue of their use of the same employee management company.

Discussion
In recent years, an increasing number of businesses have engaged unrelated companies to perform one or more human resources functions. In some cases the employee management company acts as a co-employer (as opposed to merely performing human resources functions). The principal advantage of such contracting out is that the business does not have to handle the administrative functions. Additional benefits of a co-employment arrangement include the creation of larger employee groups for purposes of purchasing health and other benefits and the coverage of the employee management company by the workers’ compensation laws.
     The relationship between a business—in this instance, a law firm—and an employee management company can take many forms. Two of these are the “professional employer organization,” or PEO, and the administrative service organization, or ASO. A PEO is “a company which contractually assumes and manages . . . human resource and personnel responsibilities . . . for . . . small to mid-sized businesses.” National Ass’n of Professional Employer Organizations, Common Questions About PEOs Answered, at 1 (downloaded from http://www.napeo.org/ind-questions.htm, Aug. 28, 2000). In some forms, a PEO can assume the role of the employer or co-employer of the work force of its client business (in this case, the law firm). Seventeen states currently require registration or licensing of PEOs, id., though the District of Columbia is not one of them. A typical PEO client is a small business with about sixteen employees. Id. at 2. For the reasons discussed below, at least some PEOs appear to have policies and practices that are impermissible under the Rules of Professional Conduct.
     Another form of employee management arrangement, called the ASO, administers a “client’s” (in this case, the law firm’s) human resource functions, payroll, employee benefits, workers’ compensation, and government compliance, but does not “rely upon or assume an employment relationship with the employees, leaving the [law firm] as the sole employer.” Rufus E. Wolff, “Client Service Agreements for ASO Clients,” PEO Insider, Oct. 2000, at 6. The ASO provides its services as an administrative agent and advisor rather than as a co-employer, and hence ordinarily exercises no legal authority over the employees themselves. Id. at 6-7. Thus wages and employment taxes are paid under the Employer Identification Number of the client business, the client business remains the sponsor of employee benefit programs, and any workers’ compensation claims are made under a policy issued to the client business. Id. at 6. Unlike a PEO, an ASO ordinarily is not liable for payment of employee wages or taxes. Id. at 7. Finally, an ASO is not subject to the state licensing requirements that apply to PEOs. Id.at 6.
     A lawyer in this jurisdiction may practice alone, be a partner, associate or of-counsel in a private firm, work “in house” as a corporate or labor union counsel, toil in an accounting firm, labor in a public interest position, serve as a government lawyer, teach the law, or engage in any of a host of other activities. Whatever the nature of a lawyer’s employment, however, she must abide by the Rules of Professional Conduct. Put differently, the Rules forbid employment arrangements that may impair such responsibilities of a lawyer as the duties to exercise independent professional judgment on behalf of her client, D.C. R. Prof. Conduct 2.1; see id. 1.8(e)(2), to maintain the confidentiality of information gained during the course of a representation, id. 1.6, 1.8(e)(1), to act zealously on behalf of her client’s interests, id. 1.3(a), to avoid situations in which her client’s interests conflict with those of another client or of the lawyer herself, id. 1.7, and to supervise adequately the conduct of her organization’s other lawyers, id. 5.1, and nonlawyers, id. 5.3.
     Note that the supervisory responsibilities imposed by Rule 5.1 are not limited to employees of the supervising lawyer but extend to all lawyers over whom the lawyer has “direct supervisory authority.” D.C. R. Prof. Conduct 5.1(b). In the case of nonlawyers, the responsibility covers those “employed or retained by or associated with” the lawyer, id. 5.3 (emphasis added), “whether employees or independent contractors,” id. 5.3 comment [1]. “The key is supervision, and that supervision must occur regardless of whether the [nonlawyer] is employed by the attorney or retained by the attorney.” In re Opinion No. 24, 128 N.J. 114, 127, 607 A.2d 962 (1992). Thus even if a lawyer or nonlawyer at the firm technically is the employee of the management company, the lawyers retain their full supervisory responsibilities under the Rules of Professional Conduct.1

The only practical difference between the proposed arrangement and the situation in a typical private law firm is that the mechanical aspects of employment will be handled by an entity other than the law firm. The employee management company will have no supervisory authority over any lawyer or nonlawyer in the firm, will play no role in employment decisions, will have no access to client confidences, and will occasion no conflicts by virtue of its presence. The supervisory lawyers in the firm will retain their responsibilities under Rules 5.1 and 5.3 to oversee the work of the other lawyers, and the nonlawyers, in the firm. Cf. Florida Bar v. Flowers, 672 So.2d 526 (Fla. 1996) (disciplining lawyer who allowed independent consultant to hold himself out as being employed by lawyer).
     The involvement of the employee management company will not result in the sharing of any individual employees working on client matters—lawyers or nonlawyers—among firms that use the services of the employee management company. Because there will be no sharing of employees between law firms, and the various firms using the employee management company will not thereby have access to one another’s files or offices, we see no client confidentiality or conflict of interest problems.2
     We said in permitting the use of temporary lawyers that such individuals “and their employing lawyers each have an obligation to ensure that the appropriate standards and requirements are met.” D.C. Ethics Op. 284 (1998). These include the ethical obligations of competence, independent professional judgment, undivided loyalty, and preservation of a client’s confidences and secrets. Id. The same holds here: The management company may not exercise any control—formal or informal, direct or indirect—that would affect these or any other ethical obligations attendant upon the provision of legal services. This extends to decisions about the hiring, firing, promotion, compensation, and work assignments of lawyers and legal assistants (though such control may be permissible where only clerical or secretarial employees are involved and the control exercised is unrelated to the provision of legal services). Moreover, the management company may not take over, wholly or partly, any of the lawyer’s responsibilities outlined above.
     The inquiry does not indicate the basis on which the management company will be compensated for its work. So long as the employee management company’s compensation is not a function of the fees earned by the law firm, however, the arrangement will not implicate the fee-splitting prohibition of Rule 5.4. D.C. Ethics Op. 284 (1998) (payment of fee to agency providing temporary lawyers not fee splitting); ABA Formal Op. 88-356 (1988) (payment of fee to agency providing temporary lawyers not fee splitting, even where cost passed on to client); Ill. Op. 90-23 (1991); Mich. Informal Op. RI-310 (1998) (permitting fee based upon hours worked by leased lawyer but not upon fees collected for such work); Va. Legal Ethics Op. 1712 (1998); N.C. Op. RPC 104 (1991); N.J. Op. 631 (1989); cf. Nat’l Treasury Employees Union v. U.S. Dep’t of the Treasury, 656 F.2d 848 (D.C. Cir. 1981) (prohibiting union that employed—and had supervisory control over—lawyers from receiving attorney fees above union’s actual costs). Unlike the consulting firm whose “loans” of its lawyer-employees were disapproved in our Opinion 182 (1987), the employee management firm here will not—and may not— exercise supervisory authority over the lawyers or legal assistants. That the employee management firm presumably will realize a profit from its services to the law firm does not alter our position. See D.C. Ethics Op. 284 (1998) (permitting, by implication, agencies to profit from making lawyers employed by them available to law firms on a temporary basis); ABA Formal Op. 88-356 (1988) (expressly permitting same).
     Moreover, we do not believe that the employee management agency would be engaged in the unauthorized practice of law because the agency would not be holding the lawyers out to clients (and indeed would not be dealing with clients at all), would have no control over the selection of lawyers to work for the firm, and would not supervise the practice of law by such lawyers. See D.C. Unauth. Prac. of Law Op. 6-99 (1999) (holding that activities of temporary lawyer placement agencies do not constitute unauthorized practice); ABA Formal Op. 88-356 n. 12 (1988) (furnishing temporary lawyers directly to clients would constitute unauthorized practice of law); Ill. Op. 90-23 (1991). As with the engagement of a temporary lawyer, the arrangement should be disclosed to clients if it is “material to the representation.” See D.C. Ethics Op. 284 (1998) (establishing materiality threshold); ABA Formal Op. 88-356 (1988) (disclosure that lawyer is employed on temporary basis not required where she is working under direct supervision of regular firm lawyer). Because the hiring, firing, and conditions of employment are to be under the control of the lawyer-owner of the firm, we have little concern that the employee management arrangement will be used (and stress that it may not be used) to avoid the prohibition against invidious discrimination by lawyers in conditions of employment. See D.C. R. Prof. Conduct 9.1.
     A lawyer may not limit prospectively her liability for her own malpractice, D.C. R. Prof. Conduct 1.8(g)(1); D.C. Ethics Op. 235 (1993), and a lawyer who did so using the device of an employee management company would violate Rule 1.8(g)(1). We note, though, that lawyers may in some instances avoid liability for the malpractice of their partners by practicing in a limited liability partnership or limited liability company, D.C. Ethics Op. 235 (1993); see D.C. Code §§ 29-1314 (1996) (professional limited liability corporations), 41-153.6(c) (1998) (limited liability partnerships). We normally do not address issues of law outside the Rules of Professional Conduct, D.C. Legal Ethics Comm. R. C-4, and accordingly offer no view on whether the proposed arrangement would affect the malpractice liability of the lawyer-owner for errors and omissions of the other lawyers and nonlawyers working at the firm. “Whether a lawyer may be civilly or criminally liable for another lawyer’s conduct is a question of law beyond the scope of [the Rules of Professional Conduct].” D.C. R. Prof. Conduct 5.1, comment [7]. We do observe, however, that from a professional responsibility standpoint, the supervisory responsibilities of an owner-lawyer, id. 5.1, 5.3, are personal to her, extend to everyone acting under her direction regardless of whether such individuals are her “employees,” and would not be altered by the fact that the firm’s employees were co-employed by another entity. Thus we do not see how the arrangement would—or could, consistently with the requirements of Rule 1.8(g)(1)—avoid liability for the owner’s own errors and omissions, including whatever liability may result from inadequate supervision of others in the firm, and we offer no view on whether the arrangement would affect the liability of the owner under the respondeat superior doctrine.
     We note that a number of other jurisdictions have approved similar arrangements, subject to the limitation that the lawyer-owner(s) of the firm, rather than the employee management agency, maintain exclusive control over hiring, firing, and other aspects of the lawyer’s employment. E.g., Ill. Op. 90-23 (1991); Mich. Informal Op. RI-310 (1998); Mo. Informal Op. 990019 (disapproving employee management where lawyer would not have unilateral right to discipline or terminate leased nonlawyer employee); N.C. Op. RPC 104 (1991); N.J. Op. 631 (1989).
     Finally, some PEOs adhere to published standards of a trade organization known as the Employer Services Assurance Corporation (“ESAC”). ESAC requires that a PEO share with the “client” (i.e., the law firm), and in some instances exercise exclusively, the power to hire and fire employees (who here would include lawyers and legal assistants as well as clerical and secretarial staff), that the PEO have at least a shared right to direct and control the work of the employees, and that ESAC have access to client (i.e., law firm) work sites and records. A lawyer owner who permitted the removal of these rights and responsibilities wholly or partly from the management of the law firm would violate the Rules of Professional Conduct. Hence the use of a PEO by law firms in this jurisdiction is prohibited if the arrangement gives the PEO actual (as opposed to merely legal) authority over the hiring or firing of lawyers or legal assistants, or authorizes the PEO to direct or control the provision of legal services by any employee of the law firm. The responsibilities in question include the duties to exercise independent judgment on behalf of clients, see D.C. R. Prof. Conduct 2.1, 1.8(e)(2), maintain client confidences and secrets, see id. 1.6, 1.8(e)(1), act zealously on behalf of the client’s interests, see id. 1.3(a), avoid conflicts, see id. 1.7, and supervise the conduct of the others working for the firm, see id. 5.1, 5.3. By contrast, the ASO form, or the PEO form without such objectionable attributes, does not appear to raise any of these concerns.
     Thus we answer the inquiry in the affirmative, subject to the limitations and concerns noted above. Use of an employee management company by a law firm is permissible only if it does not affect the firm’s provision of legal services and does not limit or infringe any of the duties and responsibilities of lawyers set out in the D.C. Rules of Professional Conduct.

Inquiry No. 99-6-21
Adopted: February 20, 2001

1. This is consistent with our prior ruling permitting the employment of temporary lawyers—a ruling that made no distinction based on whether the temporary lawyer is an employee of the employment agency or the law firm. See D.C. Bar Ethics Op. 284 (1998).
2. In particular, the special concerns about disqualification that may arise in respect of a temporary lawyer who works for more than one firm at a time, see ABA Formal Op. 88-356 (1988); D.C. Bar Ethics Op. 284 (1998), do not obtain here. Of course the normal conflicts requirements for lateral lawyers, see D.C. Ethics Op. 279 (1988), and nonlawyers, see id. § 4; D.C. Ethics Op. 227 (1992), will apply even where an individual moves between two law firms that use the same employee management company.