Can a North Carolina law firm hire an outside management company to run its administration and employ its non-lawyer staff?

Plain-English summary

A firm proposed to contract with a management company that would handle day-to-day administration, employ all of the firm's non-lawyer staff, and provide accounting, marketing, human resources, and information-technology systems, with confidentiality agreements signed by the company and its employees. The firm's only employees would be the lawyers. The committee concluded that nothing in the Revised Rules prohibits this kind of relationship as such, but it identified three limits.

First, under Rule 5.4 the firm may not relinquish control in a way that gives a non-lawyer the power to direct or control the lawyers' professional activities. Second, delegating administration does not relieve the lawyers of their duties under Rules 1.6 and 1.15 to maintain client confidences and safekeep client property, and the opinion noted those duties may be harder to fulfill when the non-lawyers are the management firm's employees; the lawyers must also ensure the arrangement does not compromise the client's ability to assert the attorney-client privilege.

Third, the lawyers may not split legal fees with the management company under Rule 5.4(a). The opinion warned that compensation tied to a percentage of firm revenue could give the company an incentive to maximize earnings to the detriment of clients (citing Restatement (Third) of the Law Governing Lawyers section 10), but it added that a flat fee or other payment not tied to profits is permitted, consistent with the Restatement's caution against blocking useful new ways of providing legal services where there is no significant risk of harm.

Currency note

This opinion was issued in 2001, before North Carolina's adoption of the 2003 revisions to the Rules of Professional Conduct, and it cites the rule numbering then in effect. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a law firm outsource its administration to a management company?

A: Yes. The opinion concluded the arrangement is not prohibited per se under the Revised Rules, subject to limits on control, confidentiality, and fee sharing.

Q: Can the management company direct how the lawyers practice?

A: No. Under Rule 5.4, the opinion held the firm may not relinquish control in a way that lets a non-lawyer direct or control the lawyers' professional activities.

Q: Can the firm pay the company a percentage of its fees?

A: No. The opinion held that splitting legal fees with the company violates Rule 5.4(a); a flat fee or other payment not tied to firm profits is permitted instead.

Q: Who is responsible for client confidentiality if the staff work for the company?

A: The lawyers. The opinion held that delegating administration does not relieve the lawyers of their Rule 1.6 and Rule 1.15 duties, and noted those duties may be harder to meet in this arrangement.

Background and rules framework

The opinion interpreted North Carolina Rule 5.4 (professional independence of a lawyer, including the bar on fee sharing with non-lawyers), the analogue to Model Rule 5.4, together with Rule 1.6 (confidentiality) and Rule 1.15 (safekeeping property), the analogues to Model Rules 1.6 and 1.15. It drew on Restatement (Third) of the Law Governing Lawyers section 10.

Citations and references

Rules of Professional Conduct:

• MR 5.4 (professional independence; fee sharing with non-lawyers) / NC Rule 5.4 and 5.4(a)
• MR 1.6 (confidentiality of information) / NC Rule 1.6
• MR 1.15 (safekeeping property) / NC Rule 1.15

Other authorities:

• Restatement (Third) of the Law Governing Lawyers section 10, Comment b

See also

• NC State Bar 2003 FEO 6: Outsourcing to a PEO
• ABA Formal Op. 95-392: Sharing Fees With Employer
• ABA Formal Op. 91-360: Nonlawyer Partnerships Across States

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2001-formal-ethics-opinion-2/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry:

Law Firm wants to enter into a contract with a management company that will oversee the day-to-day administration of the firm. Among other things, the company will employ all of the non-lawyer employees of the firm. The company will be responsible for the hiring and training of employees. The company will also provide all accounting, marketing, human resources, and information-technology systems for the firm. The firm's only employees will be the lawyers. The company will execute confidentiality agreements with the law firm and all employees of the company will also sign confidentiality agreements.

May Law Firm enter into this business relationship?

Opinion:

There is nothing in the Revised Rules of Professional Conduct that prohibits such a business relationship per se. However, a law firm may not relinquish control of the firm in a manner that gives a nonlawyer the power or authority to direct or control the professional activities of the lawyers in the firm. See Rule 5.4. Moreover, the delegation of administration of the firm to an outside company does not relieve the lawyers in the firm from their professional responsibilities to maintain the confidences of clients and to safe-keep the property of clients. See Rules 1.6 and 1.15. These duties may be more difficult to fulfill when using an independent management firm and when the nonlawyers in the firm are employees of the management firm and not the law firm. With regard to client confidences, the lawyers also have a duty to insure that the use of an outside management firm does not compromise a client's right to assert the attorney-client privilege to prevent the disclosure of confidential client information in a court proceeding.

Maintaining independent professional judgment also means that the lawyers in the firm may not split legal fees with the management company. See Rule 5.4(a). If the management company is allowed to share in the fees of the firm, especially by compensation based upon a percentage of the revenue of the firm, the management company may attempt to maximize its earnings to the detriment of the representation of clients. Restatement (Third) of the Law Governing Lawyers section 10 Com. b. Nevertheless, if a financial arrangement can be worked out with the management company for a flat fee or other means of payment that is not tied to profits, the rules are not intended to prevent, as stated in the Restatement, "new and useful ways of providing legal services or [make] sure that nonlawyers do not profit indirectly from legal services in circumstances and under arrangements presenting no significant risk of harm to clients or third persons." Id.