ETHICS OPINION 512-1963 PROFIT SHARING

NUMBER 512

QUESTION.

 

Will an attorney violate the Canons of Ethics if he adopts a retirement plan for himself and his employees meeting the requirements of the Self-Employed Individuals Tax Retirement act of 1962 and providing for annual contributions for the benefit of non-lawyer employees as well as lawyer employees and employers based upon a percentage of compensation, the annual contribution to be subject to reduction, however, if the attorney’s net profits fail to reach certain specified levels?

 

AMENDED ANSWER

 

The foregoing question was presented for consideration to the Committees on Professional Ethics of the New York State Bar Association, the Association of the Bar of the City of New York, and the New York County Lawyers’ Association.

 

This Committee concurs in the following answer as revised by the Committee of the New York State Bar Association.

 

Canon 34 of the Canons of Professional Ethics reads:

 

“Division of Fees.”

 

“No division of fees for legal services is proper, except with another lawyer, based upon a division of service or responsibility.”

 

The payment of regular salaries by a lawyer to his non-lawyer employees does not represent a division of fees in violation of Canon 34, even though the payments are necessarily dependent upon the lawyer’s income from his legal services [See ABA Op. 303 (1961)]. As held in the last-cited opinion, however, a profit-sharing plan or an agreement — with non-lawyer employees providing for compensation based on a percentage of the employing lawyer’s net profits would constitute fee-splitting in contravention of Canon 34 [See also N.Y. Co. Op. 122 (1917)].

 

In the opinion of the Committee, a clear distinction is observable between a plan contemplating payment of specified percentages of a lawyer’s net income to his lay employees as their compensation and a plan incorporating the features referred to in the present inquiry. A basic characteristic of the projected retirement plan is the provision for payment of deferred compensation to an employee in an amount determined by reference to the amount of the employee’s regular compensation rather than to the income of the employer which, in the case of a non-lawyer employee, would involve an improper division of fees. The requirement of the Internal Revenue Code that the rate of contribution for the benefit of the employee must be at least equal to the rate of contribution for the employer’s own benefit serves only to designate the minimum percentage of the lay employee’s compensation which may be used in computing the contribution for his benefit. Likewise, a proviso making liability for contributions to the retirement plan for a given year dependent upon the lawyer’s net income operates to limit the extent of the lawyer’s obligation but does not affect the essential nature of the plan which is to provide for deferred compensation based upon the employee’s current salary.

 

The Committee is, therefore, of the opinion that the adoption by an attorney of a retirement plan of the type described in the inquiry would be proper under the Canons of Professional Ethics.

 

July 30, 1963