Can I pay my paralegal a bonus based partly on how many cases they help settle and how much in fees those cases generate?

Plain-English summary

The inquiring attorney manages several of a law firm's office locations and plans to hire a full-time "claims adjuster/paralegal" who will perform ordinary paralegal duties (tracking medical treatment, requesting medical bills and reports) and, under the attorney's direct supervision, will also communicate with insurance adjusters, draft demand letters, and negotiate settlements, though only the attorney will send demand letters, negotiate settlements, or review settlement offers with clients, and clients will make the ultimate settlement decisions. The firm proposes to pay the adjuster/paralegal a base salary plus a quarterly bonus based on four factors, including attitude toward staff and clients, the number of cases the employee helps settle, the attorney's fees generated by those settled cases, and general office-performance improvements.

The panel applied Rule 5.4(a), which bars a lawyer or law firm from sharing legal fees with a nonlawyer, subject to four narrow exceptions (payments to a deceased lawyer's estate, purchase of a deceased or disabled lawyer's practice, nonlawyer compensation or retirement plans based on profit-sharing, and certain tax-exempt referral-organization fee awards). The panel focused only on the second and third bonus factors (cases settled and fees generated), declining to comment on the subjective attitude and office-improvement factors as outside legal ethics. The inquiring attorney argued the arrangement fell within the third exception for nonlawyer profit-sharing plans, but the panel disagreed: citing the ABA Annotated Model Rules, the panel explained that exception permits sharing profits only when they are not tied to particular clients or particular matters. Because the adjuster's bonus would be calculated directly from the fees generated by specific settled cases, the panel found the compensation tied to particular matters and therefore a prohibited fee-sharing arrangement, citing New York State Ethics Opinion 733 (2000) and Utah Ethics Opinion 02-07 (2002) for the same distinction between permissible general profit-sharing and impermissible case-tied compensation.

In practice

The opinion holds that a nonlawyer employee's compensation may be based on the firm's general profits under Rule 5.4(a)(3), but not on the fees generated by the specific cases that employee works on or helps settle; tying a bonus to particular matters' fees, rather than to overall firm profitability, makes the arrangement a prohibited fee-sharing arrangement regardless of how the plan is labeled.

Common questions

Q: Can I include my paralegal in a firm profit-sharing plan?

A: Yes, the opinion recognizes Rule 5.4(a)(3) permits including nonlawyer employees in compensation or retirement plans based on profit-sharing, so long as the profits shared are not tied to particular clients or matters.

Q: What made this specific bonus plan improper?

A: The opinion holds the bonus was calculated directly from the number of cases the paralegal helped settle and the attorney's fees those specific cases generated, which ties the compensation to particular matters rather than to the firm's overall profits.

Q: Does it matter that the paralegal has no authority to send demand letters or negotiate settlements without the attorney's approval?

A: The opinion does not treat the paralegal's limited authority as curing the problem; the violation the panel identified is in how the bonus is calculated (tied to specific matters' fees), not in whether the paralegal has independent authority over client matters.

Background and rules framework

The opinion applies Rhode Island Rule 5.4(a) (Professional Independence of a Lawyer), which generally bars a lawyer or law firm from sharing legal fees with a nonlawyer, with four listed exceptions. The panel's analysis centers on the third exception, permitting nonlawyer inclusion in a compensation or retirement plan based on profit-sharing, and the requirement, drawn from the ABA Annotated Model Rules, that shared profits not be tied to particular clients or matters for that exception to apply.

Citations and references

Rules of Professional Conduct:

• MR 5.4(a) (bar on fee-sharing with a nonlawyer; exceptions including nonlawyer profit-sharing plans)

Statutes:

• None cited.

Cases:

• None cited.

Other opinions cited:

• ABA Annotated Model Rules of Professional Conduct, 7th ed. (2011), at 461 (profit-sharing exception requires profits not tied to particular clients or matters)
• N.Y. State Ethics Op. 733 (2000): a law firm may compensate a nonlawyer employee based on profit-sharing but not on a percentage of fees or profits attributable to particular matters.
• Utah Ethics Op. 02-07 (2002): a nonlawyer compensation plan may include legal fees if compensation is not tied to specific cases.

See also

• Alabama Ethics Op. 1993-20: Rule 5.4 prohibits fee-splitting with non-lawyer, but lawyer may pay a non-lawyer for services rendered to the lawyer
• ABA Formal Op. 464: Fee Division With Lawyers Who Share Fees With Nonlawyers

Source

• Landing page: https://www.courts.ri.gov/attorney-resources/Pages/Ethics-Advisory-Panel-default.aspx
• Original PDF: https://www.courts.ri.gov/Opinions/EAP%2013-01.pdf

Original opinion text

Final

Rhode Island Supreme Court
Ethics Advisory Panel Op. 2013-01
Issued February 14, 2013

FACTS:

The inquiring attorney manages several of his/her law firm's office locations.
The law firm plans to hire an experienced "claims adjuster/paralegal." The adjuster will be a full-time employee of the law firm. He or she would have normal paralegal duties, such as calling the firm's clients to track medical appointments and medical treatment, requesting medical bills and reports, and sending bills and reports to insurance companies. Under the inquiring attorney's direct supervision, the claims adjuster/paralegal also will communicate with insurance company adjusters about claims, draft demand letters, and negotiate settlements. The inquiring attorney states that the adjuster will have no authority to send out demand letters to insurance company claims adjusters, or to negotiate any settlement, without the inquiring attorney's authority. The inquiring attorney states that only the inquiring attorney will review settlement offers with clients. He/she further states that the inquiring attorney will make recommendations about settlement to clients and that the ultimate decisions about settlement will be made by the clients.

The law firm proposes to pay the adjuster/paralegal a base salary, plus a quarterly bonus. The bonus will be calculated on the basis of four factors, "including but not limited to things such as:

1.) Their attitude displayed toward my other staff and my clients;
2.) The number of cases they assist me in settling;
3.) The fees generated from said settled cases; and 4.) The improvement displayed in the [City X] office in a number of criteria including but not limited to a) getting the staff to obtain medical records in a more timely fashion, and b) getting the staff to get demand letters out to insurers."

The inquiring attorney asks whether the proposed compensation is permissible.

ISSUE PRESENTED:

May the inquiring attorney's law firm base the adjuster/paralegal's quarterly bonus on the number of cases that the adjuster/paralegal assists in settling, and on the attorney's fees generated from those cases? Final Op. 2013-01 Page |2

OPINION:

No. The proposed compensation arrangement is a fee-sharing arrangement with a nonlawyer, and violates Rule 5.4(a) of the Rules of Professional Conduct.

REASONING:

Rule 5.4 entitled "Professional independence of a lawyer" applies to this inquiry. In pertinent part the Rule states as follows:

Rule 5.4. Professional independence of a lawyer. (a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
(1) an agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons;
(2) a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of Rule 1.17, pay to the estate or other representative of that lawyer the agreed- upon purchase price;
(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement; and (4) a lawyer or law firm may agree to share a statutory or tribunal- approved fee award, or a settlement in a matter eligible for such an award, with an organization that referred the matter to the lawyer or law firm if: (i) the organization is one that is not for profit; (ii) the organization is taxexempt under federal law; (iii) the fee award or settlement is made in connection with a proceeding to advance one or more of the purposes by virtue of which the organization is tax-exempt; and (iv) the tribunal approves the fee-sharing arrangement.

With four narrow exceptions, Rule 5.4(a) prohibits a lawyer or law firm from paying a nonlawyer a portion of attorney's fees generated by a particular matter. The proscription against fee-sharing is intended to protect a lawyer's independent judgment.
The fee-sharing prohibition extends to all nonlawyers, including employees of a lawyer or law firm.

The inquiring attorney suggests in his/her inquiry that the proposed compensation falls under the third exception in Rule 5.4(a) which permits lawyers to include nonlawyer employees in a compensation plan, even though the plan is based on a profit-sharing arrangement. The Panel does not agree.
Final Op. 2013-01
Page |3

The inquiring attorney sets forth four factors that the law firm will consider in calculating the adjuster/paralegal's bonus. The Panel will not comment on the first and fourth factors which are subjective criteria that are outside the area of legal ethics. The Panel's focus is on the second and third factors, namely, the number of cases settled, and the fees generated by those settled cases.

Subparagraph (3) of Rule 5.4(a) permits a lawyer or law firm to include nonlawyer employees in profit-sharing arrangements, but only if the profits being shared are not tied to particular clients or particular matters. ABA Annotated Model Rules of Professional Conduct, 7th ed. (2011) at 461. The adjuster's quarterly bonus in this inquiry would be calculated on the basis of the attorney's fees generated by cases that the adjuster assists in settling. In the Panels view the adjuster's compensation is tied directly to particular matters. It is the Panel's opinion that the compensation proposal presented in this inquiry is a fee-sharing arrangement with a nonlawyer. See N.Y. State Ethics Op.
733 (2000) (law firm may compensate non lawyer employee based on profit-sharing arraignment, but may not pay employee percentage of fees or profits attributable to particular matters; Utah Ethics Op. 02-07 (2002) (compensation plan for nonlawyer may include legal fees if compensation is not tied to specific cases.)

The Panel concludes that the law firm's proposed compensation arrangement, which bases the adjuster/paralegal's bonus on attorney's fees that are generated by the particular cases that the adjuster/paralegal assists in settling, is a fee-sharing arrangement with a nonlawyer, and violates Rule 5.4(a).