A recent New York ethics opinion provides guidance for law firms that are considering using the services of a Professional Employer Organization (PEO). PEOs are designed to help small businesses provide employment benefits and human resource services to their employees, such as payroll, employee training, health insurance benefits and retirement plans. PEOs create economies of scale, which allow small businesses to offer benefits that they might not be able to provide without the PEO relationship.
The concern for New York lawyers is whether using a PEO is consistent with a lawyer’s ethical obligations under the New York Rules of Professional Conduct, including:
- The Duty to Exercise Independent Professional Judgment and Supervise Employees: “The duty to exercise professional independence is a core value of the legal profession,” notes the opinion. This value is reflected in multiple provisions of the New York Rules, including Rule 1.8(f), 2.2, 5.4(c), and 5.4(d)(3). Accordingly, “a PEO must not be allowed to influence decisions that would impact the lawyer’s ability to provide independent professional judgment to his or her clients.” Law firms are also ethically required to supervise the conduct of other lawyers and non-lawyers at the firm, as illustrated by Rule 5.1, 5.2 and 5.3. Thus, an agreement with a PEO must be tailored so that “the PEO does not have the authority to hire, terminate, or discipline employees or otherwise have control over law firm employees in connection with any aspect of the practice of law."
- The Duty to Preserve Confidential Information: Rule 1.6 requires a lawyer to preserve confidential information belonging to a client and to “exercise reasonable care to prevent the lawyer’s employees, associates, and others whose services are utilized by the lawyer from disclosing or using confidential information of a client,” absent an exception. Additionally, under Rule 5.1, law firms are required to make reasonable efforts to ensure that lawyers working through the PEO do not share with them clients’ confidential information, and in order to comply, the opinion notes, PEO arrangements with law firms must include reasonable safeguards to prevent this.
- The Duty to Identify and Avoid Conflicts of Interest: Lawyers and law firms have an obligation to avoid conflicts of interest arising from current or former client relationships, as noted in Rules 1.7, 1.9 and 1.10. And given the PEO business model, it is foreseeable that a single PEO would enter into agreements with multiple law firms. But, “as long as the PEO is not interfering with the lawyers’ professional independence, controlling or supervising employees, or accessing confidential information," the Committee concluded that "there is no ethical prohibition against the PEO providing similar administrative services to other law firms that represent adverse clients.”
- The Prohibition against Sharing Fees with Nonlawyers: Lawyers are generally prohibited from sharing legal fees with nonlawyers, under Rule 5.4(a). The Committee concluded that, "a law firm is ethically permitted to compensate a PEO based on a percentage of total payroll, flat fee, or fee per employee or service. As long as these payment arrangements are not based on the fees paid by the law firm’s clients, they do not violate Rule 5.4(a)’s prohibition against fee-sharing.”
The Committee approved the use of PEOs by law firms, provided the firm: (1) does not allow the PEO to interfere with the lawyers’ ethical obligations to exercise independent professional judgment or to supervise other lawyers and nonlawyers; (2) does not allow the PEO to access confidential information relating to the firm’s clients; (3) complies with the obligation to avoid conflicts of interest; and (4) does not compensate the PEO in a manner that violates rules against sharing fees with nonlawyers.
Disclosure: I am Chair of the NY City Bar Ethics Committee, which issued the opinion.