Can a law firm share confidential client information with a collection agency's employees if they sign on as 'borrowed employees' of the firm to collect the firm's past-due fees?

Plain-English summary

A law firm proposed to retain an independently owned and operated collection agency to help collect receivables owed by the firm's own clients. The agency's employees would stay on the agency's payroll but sign agreements to work as the firm's "borrowed employees," with the firm directing the manner and details of their work and paying the agency (not the employees) for the services; the firm would retain ownership of the receivables. The question was whether the firm could share confidential client information with these borrowed employees.

The Committee analyzes Rule 1.05(b), which bars knowingly revealing confidential client information except to the client, the client's representatives, or the members, associates, or employees of the lawyer's firm. It draws on two prior opinions: Opinion 495 (a firm's use of a collection agency for firm-owned receivables) and Opinion 464 (sale of a firm's receivables to a factoring company), both of which required client consent before disclosure of confidential information to the outside party.

The Committee concludes that the "borrowed employee" designation does not change the fact that these are agency employees, not regular firm employees, and the rules of professional conduct do not apply to them. Without the safeguards of a law firm environment and the ability to discipline that comes with a standard employer-employee relationship, the firm cannot rely on the Rule 1.05(c)(3) permission to share information with firm members, associates, and employees. No other provision of Rule 1.05(c) through (f) permits the disclosure here except client consent under Rule 1.05(c)(2). So, absent each affected client's prior informed consent, the firm may not reveal confidential client information to the collection-agency employees even when they are designated borrowed employees.

In practice

Under this opinion, and under the Texas rule as it stood at the time, a firm cannot route confidential client information to a collection agency's employees by recasting them as the firm's "borrowed employees" in order to collect the firm's fees. The Committee holds that the label does not make them firm employees under Rule 1.05(c)(3), so the only path to disclosure is each affected client's prior informed consent under Rule 1.05(c)(2).

Common questions

Q: Can my firm use a collection agency to chase down unpaid fees if the agency's staff sign on as our "borrowed employees"?

A: Per Opinion 556, not without each affected client's prior consent. The Committee concludes the borrowed-employee label does not make the agency's staff firm employees under Rule 1.05(c)(3), so sharing confidential client information with them is not permitted absent client consent under Rule 1.05(c)(2).

Q: Why doesn't the "borrowed employee" arrangement count as sharing within the firm?

A: The Committee says the designation does not change the fact that the workers are agency employees to whom the rules of professional conduct do not apply, and the firm lacks the law-firm safeguards and ordinary employer discipline that the Rule 1.05(c)(3) permission assumes.

Q: Is there any way to make the arrangement work?

A: The Committee identifies only one: the affected clients' informed consent under Rule 1.05(c)(2), which permits revealing confidential information when the client consents after consultation.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.05 (confidentiality of information, corresponding to ABA Model Rule 1.6). Rule 1.05(b) bars knowingly revealing confidential client information except to the client, the client's representatives, or the members, associates, or employees of the lawyer's firm; Rule 1.05(c)(3) permits sharing with firm members, associates, and employees unless the client instructs otherwise; and Rule 1.05(c)(2) permits revealing confidential information when the client consents after consultation. The analysis turns on whether borrowed collection-agency employees are "employees of the lawyer's firm" for purposes of Rule 1.05(c)(3).

Citations and references

Rules of Professional Conduct:

• MR 1.6 (confidentiality of information)
• Texas Disciplinary Rule 1.05(b), 1.05(c)(2), and 1.05(c)(3)

Other opinions cited:

• Texas Ethics Opinion 495 (March 1994): a firm's use of a collection agency for firm-owned receivables requires client consent before disclosure
• Texas Ethics Opinion 464 (August 1989): sale of a firm's receivables to a factoring company requires prior client consent to incident disclosure

See also

• TX Ethics Op. 572: Delivering Privileged Materials to an Independent Contractor
• TX Ethics Op. 595: Using a Former Client's Public-Record Information to Collect a Fee

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-556/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_556.pdf

Original opinion text

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

QUESTION PRESENTED

May a law firm provide client information to employees of a collection agency who act as borrowed employees of the law firm in assisting it in collection of past due receivables?

STATEMENT OF FACTS

A law firm proposes to retain an independently owned and operated collection agency to assist the law firm in collecting receivables from clients for whom the firm has provided legal services. The collection agency employees involved in collection work for the law firm will remain on the payroll of the collection agency. Each employee will sign an agreement that the employee will work for the law firm as a borrowed employee, and the law firm will direct the manner and all details of the employees' work. The law firm will compensate the collection agency, and not the borrowed employees, for the employees' services. The law firm will retain ownership of the accounts receivable.

DISCUSSION

Rule 1.05(b) of the Texas Disciplinary Rules of Professional Conduct provides:
Except as permitted by paragraphs (c) and (d), or as required by paragraphs (e), and (f), a lawyer shall not knowingly:
(1) Reveal confidential information of a client or a former client to:
(i) a person that the client has instructed is not to receive the information; or
(ii) anyone else, other than the client, the client's representatives, or the members,
associates, or employees of the lawyer's law firm.
(2) Use confidential information of a client to the disadvantage of the client unless the
client consents after consultations.
(3) Use confidential information of a former client to the disadvantage of the former
client after the representation is concluded unless the former client consents after consultation or the confidential information has become generally known.
(4) Use privileged information of a client for the advantage of the lawyer or of a third person, unless the client consents after consultation.

This committee has addressed in two prior opinions the application of Rule 1.05 with respect to a law firm's attempts to use outside parties to collect fees from clients. See Professional Ethics Committee Opinion 495 (March 1994) and Opinion 464 (August 1989).

Opinion 495 considered a law firm's use of a collection agency to collect accounts receivable that continued to be owned by the law firm. The opinion concludes that, if the client does not give effective consent, none of the exceptions set forth in Rule 1.05(b) would apply to permit or require a law firm to disclose confidential client information to a collection agency in order to assist the collection agency in collecting amounts due to the law firm.

Opinion 464 dealt with a proposed sale of a law firm's accounts receivable to a factoring company. The committee concluded that the sale of a law firm's accounts receivable necessarily entails disclosure of confidential client information and is not permitted "unless each client involved has previously given consent, after consultation with the lawyer, to the disclosure of confidential information incident to such sale of accounts receivable."

In the arrangement addressed by this opinion, persons normally employed by the collection agency would be designated "borrowed employees" of the law firm. This designation would not change the fact that such employees are not regular employees of the law firm but instead are employees of the collection agency to which the rules of professional conduct do not apply. Without the safeguards inherent in a law firm environment and the ability to discipline which is a part of the standard employer/employee relationship, a law firm may compromise the requirement and the expectation of confidentiality imposed by Rule 1.05. Hence, the permission granted in Rule 1.05(c)(3) for a lawyer to share client information with "the members, associates, and employees of the lawyer's firm, except when otherwise instructed by the client" should not be interpreted to include revealing confidential client information to employees of a collection agency who are temporarily borrowed by the law firm to collect fees.

No other provision of paragraphs (c), (d), (e), and (f) of Rule 1.05 would permit or require a lawyer to reveal confidential information in the circumstances here considered except when the affected clients give informed consent within the scope of Rule 1.05(c)(2), which permits a lawyer to reveal confidential information "[w]hen the client consents after consultation."

The protection of confidential client information is at the heart of Rule 1.05 and Opinions 495 and 464. The protection afforded by Rule 1.05 would be compromised by the use of collection agency employees to work as borrowed employees of the law firm for collection work. Accordingly, absent prior informed consent of each affected client, a lawyer may not reveal confidential client information to collection agency employees even though these employees are designated as borrowed employees of the law firm.

CONCLUSION

It is not permissible under the Texas Disciplinary Rules of Professional Conduct for a law firm, without the prior consent of each affected client, to provide confidential client information to employees of a collection agency who are treated as borrowed employees of the law firm while assisting the law firm in collection matters.

Tex. Comm. On Professional Ethics, Op. 556 (2005)