NEW YORK COUNTY LAWYERS’ ASSOCIATION
Committee on Professional Ethics
QUESTION NO. 687
TOPIC: TAX ACCOUNTANT EMPLOYED BY ATTORNEY.
DIGEST: A lawyer may employ a tax accountant to work with clients in accounting and tax matters and may pay such an employee a bonus over and above the employee’s salary, as long as the bonus is not based on the billings of the accountant but rather is a fixed amount, a percentage of the employee’s salary or is based on the profits of the firm.
CODE: EC 3-5, EC 3-6, EC 3-8, DR 3-101 (A), DR 3-102(A), DR 3- 103(A), DR 5-107(C).
May an attorney employ a tax accountant to work with clients in tax planning, and pay the accountant a salary plus a bonus related to the accountant’s personal billings?
In the twentieth century, legal work has become increasingly connected to work performed by other professionals, especially accountants. For example, many lawyers employ trust and estates accountants to assist in preparing tax returns and estate accountings. Lawyers may also find useful the services of tax accountants in assisting both individual and corporate clients to deal with the requirements of the tax laws. Whether the relationship between a lawyer and a non-legal professional is ethically proper depends in great part on the nature of the relationship.
Applicable Code Provisions
On the one hand, the Code generally prohibits a lawyer from forming a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law. DR 3-103(A); see also DR 5- 107(C) (A lawyer may not practice as a for-profit professional corporation if a non-lawyer owns any interest therein, is a director or officer thereof, or has the right to direct or control the professional judgment of a lawyer.) The Code also prohibits a lawyer from sharing legal fees with a non-lawyer. DR 3-102(A). Finally, it enjoins lawyers from aiding any non-lawyer in the unauthorized practice of law. DR 3-101 (A). On the other hand, EC 3-6 recognizes that lawyers may employ the services of non-lawyers in rendering services to clients:
A lawyer often delegates tasks to clerks . . . and other lay persons. Such delegation is proper if the lawyer maintains a direct relationship with the client, supervises the delegated work, and has complete professional responsibility for the work product. This delegation enables the lawyer to render legal service more economically and efficiently.
The distinction made by the Code is that, where professional judgment is involved, the work must be performed by a lawyer. However, where professional judgment is not involved, non-lawyers may engage in occupations that require knowledge of particular areas of law. EC 3-5. For this purpose, “professional judgment” means the educated ability to relate the general body and philosophy of law to a specific legal problem of a client. EC 3-5.
It has long been held that, although a particular activity may be open to both lawyers and non-lawyers, such activity constitutes the practice of law when engaged in by a lawyer. Thus, if a lawyer provides tax planning services to a client, the fees of the lawyer in connection with such services are legal fees and may not be shared with a non-lawyer. See ABA 297 (1961). We believe that this principle is true whether the services are billed as legal fees or as disbursements.
We believe there are three principal reasons for the prohibitions set forth above: (1) to avoid the possibility of a non-lawyer being able to interfere with the exercise of a lawyer’s independent professional judgment in representing a client; (2) to insure that the total fee paid by the client is not unreasonably high; and (3) to ensure that a non-lawyer is not encouraged to act as a “runner” or otherwise to solicit legal business in a manner that would violate the Code if engaged in by a lawyer. Consequently, all compensation plans must be judged in light of these concerns.
Compensation of Non-lawyer Employees
A lawyer may not enter into a partnership with an accountant where one of the purposes of the relationship is to provide legal services to clients. DR 3-103(A). See N.Y. State 557 (1984); ABA 297 (1961). However, the question posed here involves an employee of the law firm, and not a partner.
It is clear that a law firm may hire an accountant as an employee to do accounting work for the firm in its law practice, and may pay the accountant a regular salary computed without regard to fees collected for legal services. See ABA 297 (1961). The payment of a bonus is more problematical.
A non-lawyer employee may not be paid, in addition to his or her salary, a percentage of the business brought into the firm, since such an arrangement would constitute sharing legal fees with a non-lawyer in contravention of DR 3-102 and EC 3-8. See N.Y. State 302 (1973)(unadmitted law school graduate). Such a practice would also directly implicate the rationale of discouraging non-lawyers from acting as “runners” or otherwise soliciting legal business. For the same reason, a non-lawyer may not be paid extra compensation for bringing in business that is fixed at an arbitrary amount to avoid the prohibition against fee-splitting. See N.Y. State 302, supra. See also N.Y. County 80 (1915), N.Y. County 666 (1985), N.Y. State 302 (1973).
Nevertheless, a law firm’s compensation arrangement may include payment of a percentage of the net profits of the law firm, since such compensation is related to the business performance of the entire firm, and not to the receipt of particular fees. See ABA Inf. Opin. 1440 (1979)(payment to non-lawyer office administrator). It therefore does not implicate any of the dangers set forth above. Similarly, we believe the non-lawyer employee could be paid a bonus calculated as a percentage of his or her salary without implicating DR 3-102. Cf. ABA 88-356 (1988), in which the ABA approved an arrangement under which law firm paid a placement agency a fee based upon a percentage of the compensation of temporary lawyers placed by the agency.
In 1980, the ABA amended DR 3-102(A)(3) of the Model Code to clarify that lawyers may include non-lawyer employees in compensation plans, as well as retirement plans, based wholly or partially on a profit-sharing arrangement. This extension to compensation plans is also reflected in Rule 5.4(a)(3) of the ABA Model Rules of Professional Conduct. Although the Code in New York does not include this change, it includes the same language that ABA Informal Opinion 1440 interpreted to permit a compensation arrangement based on the net profits of the firm.
We agree with the rationale of ABA Informal Opinion 1440. Where the non-lawyer employee is paid a bonus based on the profitability of the firm or calculated as a fixed amount or a percentage of the employee’s salary, rather than being based on billings attributed directly to the non-lawyer employee, fees to the client are likely to be reasonable, there is no incentive to the employee to influence the lawyer’s professional judgment on behalf of the client, and the possibility that the non-lawyer employee will engage in prohibited solicitation in order to increase his or her total billings is minimized.
For these reasons, we believe a law firm may employ a tax accountant to work with clients in accounting and tax matters as long as the tax accountant is an employee and does not have an ownership interest in the firm. The firm may pay such an employee a bonus over and above the employee’s salary, as long as the bonus is not based on the individual billings of the accountant, but rather is a fixed amount or is based on the profits of the firm or calculated as a percentage of the employee’s salary.
November 11, 1991