City of New York Opines on the Ethics of Outsourcing

In Formal Opinion 2015-1, the Association of the Bar of the City of New York Committee on Professional Ethics answered “a question of first impression in New York” concerning law firms’ use of professional employer organizations (“PEOs”), which “help small businesses provide employment benefits and human resource services to their employees.” The Committee opined that a law firm may use a PEO’s services, despite the triggering of several New York Rules of Professional Conduct (“Rules”), as long as four requirements are met:

(1) The firm does not allow the PEO to interfere with lawyers’ duty to exercise independent professional judgment and supervise lawyers and nonlawyers.

The Committee noted the value of a lawyer’s professional independence, stating that a PEO “must not be allowed to influence decisions that would impact a lawyer’s ability to provide independent professional judgment. Additionally, the PEO must not have control over law firm employees in connection with the practice of law and thus interfere with law firm’s supervisory responsibilities. See Rules 1.8(f), 2.2, 5.4(c), 5.4(d)(3) as to the interference with independent professional judgment. See Rules 5.1, 5.2 and 5.3 as to supervision.

(2) The firm does not allow the PEO to access confidential client information.

Law firms can comply with confidentiality rules by including in PEO arrangements “reasonable safeguards to prevent” breaches of confidentiality. See Rules 1.6 and 5.1.

(3) The firm complies with the rules regarding conflicts of interest.

PEO employees should be subject to the same conflict-checking procedures as firm employees would also appropriately be subject to. However, the PEO itself is not required to be subject to these procedures. The PEO may provide similar services to one firm as it does “to other law firms that represent adverse clients,” as long as the PEO does not interfere with lawyers’ professional independence, control or supervise employees, or access confidential information. See Rules 1.7, 1.9, and 1.10.

(4) The firm, in compensating the PEO, does not violate prohibitions against sharing fees with nonlawyers.

Payment arrangements with PEOs may not be based on fees paid by clients to the law firm. However, law firms may compensate PEOs based on “a percentage of total payroll, flat fee, or fee per employee or service.” See Rule 5.4(a).

To read the full opinion, click here. Click here, for the New York Rules of Professional Conduct.

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