Can a law firm use a professional employer organization (PEO) to handle payroll and HR for its staff?

Plain-English summary

The committee addresses, as a question of first impression in New York, whether a law firm may use a PEO, an arrangement in which the firm and the PEO "co-employ" the firm's staff and the PEO provides payroll, benefits, tax, and other HR services. Drawing on opinions from Connecticut, the District of Columbia, and other states, and on its own prior opinions on temporary lawyers and overseas outsourcing, the committee concludes there is no per se ethical bar, but identifies four areas of concern that a PEO arrangement must address.

First, independence and supervision: Rules 1.8(f), 2.1, 5.4(c), and 5.4(d)(3) protect lawyers' independent professional judgment, and Rules 5.1, 5.2, and 5.3 require firms to supervise their lawyers and nonlawyers. The committee notes a tension with the New York PEO Act, which requires PEO agreements to state that the PEO reserves a right of direction and control and retains authority to hire, terminate, and discipline worksite employees, against a statutory carve-out preserving the client's necessary control. Disclaiming any view on how to interpret the statute, the committee concludes that, at a minimum, the PEO must not have authority to hire, terminate, discipline, or otherwise control employees in connection with any aspect of the practice of law.

Second, confidentiality: under Rule 1.6 (and Rule 5.1), the firm must use reasonable safeguards so the PEO has no right to access client confidential information, and must instruct staff not to share client confidences with the PEO. Third, conflicts: under Rules 1.7, 1.9, and 1.10, PEO employees must be run through the same conflict-checking procedures as directly hired employees, but the committee concludes the firm need not conflict-check the PEO itself, and a single PEO may serve multiple firms with adverse clients so long as it does not interfere with independence, control staff, or access confidences. Fourth, fee sharing: under Rule 5.4(a), the PEO may be paid by a percentage of total payroll, a flat fee, or a per-employee or per-service fee, but its compensation may not be based on the legal fees the firm's clients pay, which would be impermissible fee sharing.

In practice

The opinion holds that, under the New York rules as they stood at the time, a firm may contract with a PEO if the arrangement is structured to preserve independence and supervision (the PEO cannot control hiring, firing, or discipline as to the practice of law), to bar PEO access to client confidences (Rule 1.6), to keep the firm's conflict-checking intact (Rules 1.7, 1.9, 1.10), and to base PEO compensation on payroll or services rather than on client legal fees (Rule 5.4(a)). Per the opinion, the firm also bears responsibility for substantive-law and other-jurisdiction questions the committee does not reach.

Common questions

Q: Can my firm outsource payroll and HR to a PEO at all?

A: Yes. The opinion concludes there is no per se ethical prohibition on a New York firm using a PEO, provided the four conditions on independence/supervision, confidentiality, conflicts, and fee sharing are met.

Q: Can the PEO have authority to hire or fire our lawyers and staff?

A: Per the opinion, the PEO must not have authority to hire, terminate, discipline, or otherwise control employees in connection with any aspect of the practice of law, because that would interfere with the firm's supervisory duties and the lawyers' independent professional judgment.

Q: Can the PEO see our client information?

A: No. The opinion concludes the firm must use reasonable safeguards so the PEO has no right to access client confidential information under Rule 1.6, and must instruct lawyers and nonlawyers not to share client confidences with the PEO.

Q: How can we pay the PEO without violating the fee-sharing rule?

A: The opinion concludes the firm may pay a percentage of total payroll, a flat fee, or a per-employee or per-service fee. What it may not do is base the PEO's compensation on the legal fees clients pay, which would be impermissible fee sharing under Rule 5.4(a).

Background and rules framework

The opinion interprets New York Rule 5.4 (professional independence; fee sharing with nonlawyers; Model Rule 5.4) and Rule 1.6 (confidentiality; Model Rule 1.6) together with the supervisory rules 5.1, 5.2, and 5.3 (Model Rules 5.1-5.3), the independence provisions of Rules 1.8(f) and 2.1, and the conflicts rules 1.7, 1.9, and 1.10. It reads these against the New York Professional Employer Organization Act (Labor Law art. 31), while disclaiming jurisdiction to interpret that statute.

Citations and references

Rules of Professional Conduct:

• Model Rule 5.4 / NY RPC 5.4(a), (c), (d)(3) (independence; nonlawyer fee sharing)
• Model Rule 1.6 / NY RPC 1.6 (confidentiality)
• Model Rules 5.1-5.3 / NY RPC 5.1, 5.2, 5.3 (supervision of lawyers and nonlawyers)
• Model Rules 1.7, 1.9, 1.10 / NY RPC 1.7, 1.9, 1.10 (conflicts of interest)
• Model Rule 2.1 / NY RPC 2.1, 1.8(f) (independent professional judgment)

Statutes:

• N.Y. Labor Law §§ 915 et seq. (New York Professional Employer Organization Act)
• N.Y. Judiciary Law § 491(1) (prohibition on fee sharing with nonlawyers)

Other opinions cited:

• Connecticut Bar Informal Op. 2002-08 (2002): no per se bar to leasing employees through a PEO
• D.C. Bar Op. 304 (2001): PEO permissible if firm keeps control over hiring/firing and legal services
• North Carolina State Bar Formal Op. 6 (2003): percentage-of-payroll PEO fee permissible

See also

• NYC Bar Ethics Op. 2006-3: Outsourcing legal support services overseas
• ABA Formal Op. 506: Responsibilities regarding nonlawyer assistants
• ABA Formal Op. 08-451: Outsourcing legal and nonlegal services

Source

• Landing page: https://www.nycbar.org/reports/formal-opinion-2015-1-professional-employer-organization-use-by-a-law-firm-of-a-professional-employer-organization/
• Original PDF: https://www.nycbar.org/wp-content/uploads/2023/05/formalOpinion2015-1EthicalGuidanceforLawFirmsConsideringtheUseofaProfessionalEmployerOrganization.pdf