Summary: It would be improper for a law firm to pay a non-lawyer office administrator a percentage of profits in addition to his regular salary as an incentive to increase the firm's profits.
Facts: A law firm employs a non-lawyer office administrator to implement the policies of the firm with respect to non-professional business matters, including financial management and personnel administration with respect to non-lawyers. Believing that the administrator has the potential to increase the firm's ultimate profitability through efficient and economical management, the firm inquires whether it may pay the administrator a percentage of net profits in addition to his fixed, predetermined annual salary.
Discussion: The committee assumes that the purpose of the proposed arrangement is to compensate the administrator solely for his ability to increase the firm's profitability through efficient mechanisms of cost control and it further assumes that the arrangement has no connection with solicitation of business by the administrator or compensation therefor. The relevant provisions of the code in answering this inquiry are DR 3-103(A), which states that "[a] lawyer shall not form a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law," and DR 3-102(A), which provides that "[a] lawyer or law firm shall not share legal fees with a non-lawyer, except that ... (3) ... A lawyer or law firm may include non-lawyer employees in a retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement."
It is the opinion of the committee that the proposed arrangement violates DR 3-102(A). While the arrangement to pay the administrator a percentage of net profits does not by itself constitute the administrator a partner for purposes of DR 3-103(A) because he takes no part in the professional decisions of the firm, contributes no capital, and does not share in losses, it does, in our opinion, constitute a sharing of legal fees. The income of the firm consists of legal fees and it does not seem any less a sharing of such fees that the division is of net fees and not of gross fees. Our determination is fortified by the language of exception (3), quoted above. Profit-sharing is equated with a sharing of legal fees, and the only profit-sharing with a non-lawyer that is permitted is in the context of a retirement plan.
It is true that the ABA Committee on Ethics and Professional Responsibility reached a contrary conclusion in Informal Opinion 1440 (1979), on the basis that an arrangement like that described here "relates to the net profits and business performance of the firm and not to the receipt of particular fees" and the fact that the source of all payments to employees "will be fees for legal services rendered." We disagree. It is not the fact that all payments to employees find their source in the legal fees that comprise the income of the firm that presents the problem. It is the fact that compensation is based in part on a percentage of net fees, which seems to us to be the essence of a partnership, or a sharing of legal fees, arrangement. Moreover, it does not seem any less a sharing when the percentage is applied to all net legal fees and not just to one particular fee. See Va. Informal Opinion 383 (1980), agreeing with our opinion. We find it interesting that notwithstanding Informal Opinion 1400, the ABA found it advisable to amend DR 3-102(A)(3) the following year by providing an additional exception for non-lawyer employees in a "compensation or retirement plan." [Emphasis added.] That amendment has not been adopted in Massachusetts. Whatever the desirability of the result reached by Informal Opinion 1440, we believe it too much of a strain on the language of DR 3-102(A) to interpret it as the ABA committee does. Such an interpretation would permit lawyers to engage in associations with accountants, brokers, business consultants, and the like, through employment arrangements when partnership arrangements with such non-lawyers are forbidden by DR 3-103(A). That result, we believe, should be accomplished only by careful amendment of the rules.
Permission to publish granted by the Board of Delegates on May 18, 1984.
As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without official governmental status.