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Use of a Professional Employer Organization by a Law Firm: A City Bar Formal Ethics Opinion

The New York City Bar Association’s Committee on Professional Ethics has issued an Opinion (2015-1), stating that a New York law firm is ethically permitted to use the services of a professional employer organization (PEO), as long as 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.

Professional employer organizations 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 allow companies to offer benefits at a lower cost and, in some instances, benefits that law firms could not provide without the PEO relationship.

New York and other states have adopted statutes governing PEOs. The New York Professional Employer Organization (NYPEO) Act defines a PEO as a business that enters into a written contract with a client to “co-employ all or a majority of the employees providing services for the client” on an “on-going rather than temporary” basis, and requires that the PEO agreement expressly allocate between the PEO and the client “[e]mployer responsibilities for worksite employees, including those of hiring, firing and disciplining” employees.

The concern for New York lawyers is whether using a PEO is consistent with a lawyer’s ethical obligations under the New York Rules, including the following:

  • 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,” assuming the NYPEO Act allows for this.
  • 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 the committee states, “as long as the PEO is not interfering with the lawyers’ professional independence, controlling or supervising employees, or accessing confidential information, we believe 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 prohibited from sharing legal fees with nonlawyers, except in limited circumstances that do not apply here. See Rule 5.4(a).  Notes the committee, “in our opinion, 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.”

Additional issues may require consideration, notes the opinion, such as whether the arrangement with the PEO complies with relevant substantive laws and the professional conduct rules of other jurisdictions, but these fall outside the jurisdiction of the Committee, which is limited to interpreting the New York Rules of Professional Conduct.

The opinion can be read here: bit.ly/1B6DXwn