Oregon State Bar Bulletin — OCTOBER 2002
By Steven D. Hallock
Lawyers are busy, sometimes too busy. One solution
to the problem of having too much work and not enough time is to
hire temporary or “contract” lawyers.
Contract lawyers are already at work in some of Oregon’s busiest and best law firms. But many lawyers still have questions about the legal, ethical and practical issues. This article analyzes the major concerns about contract lawyers.
THE TYPICAL ARRANGEMENT
Contract lawyers are typically independent contractors, selling their services by the hour to one or more law firms. Some work through temporary placement agencies, while others market themselves. Many are experienced and highly qualified.
The precise arrangement between a contract lawyer and any given law firm depends on the needs and wishes of the parties. The law firm might require the contractor to work on site, or go to remote locations for depositions, court hearings, mediations and the like. Many contractors have their own offices and perform legal research on their own computers or at the local law library.
Contract lawyers are usually called upon to work on particular projects or tasks, such as researching, drafting motions and memoranda, preparing pleadings, taking depositions, attending court hearings, participating in arbitrations and mediations or working on special discovery projects. This requires some direction from a lawyer in the firm.
Contract lawyers generally are not listed on a firm’s letterhead or website; they may or may not be allowed to draft letters for their own signature on firm letterhead. A good practice in many situations is for the contract lawyer to prepare correspondence and pleadings in draft for the supervising lawyer’s review and signature.
As true independent contractors, contract lawyers pay their own bar dues and PLF assessments. They attend continuing legal education programs on their own time and pay their own MCLE expenses. Unless they work through an agency, they receive IRS Forms 1099, pay quarterly estimated taxes and file a Schedule C to report income from self-employment. They buy their own life, health and other insurance, and they fund their own retirement plans. Those who work from their own offices furnish their own office equipment, such as computers, phones and fax machines, as well as and office supplies, such as pens and paper.
Contract lawyers generally submit detailed invoices to the firm. The firm may bill the contractor’s time to the client at the same hourly rate charged by its own associates or partners, a rate that is typically higher than what the contractor charges the law firm (just as partner and associate rates are typically higher than the actual cost of the partner or associate).
CONCERNS ABOUT CONTRACT LAWYERS
Scholars and commentators have raised five areas of concern over the use of contract lawyers:
Independent Contractor Status. Are contract lawyers independent contractors for purposes of payroll withholding, employee benefits, unemployment compensation, workers compensation and vicarious liability?
Confidentiality. Do contract lawyers compromise client confidentiality?
Conflicts of Interest. When can the use of contract lawyers put a firm in jeopardy of being disqualified from representing certain clients or taking certain cases?
Fee Arrangements. Is a firm allowed to charge a client a higher hourly rate than what it pays for the contract lawyer’s services?
Disclosures to Clients. Does a firm have to tell a client that it plans to use a contract lawyer on a particular legal matter? Or disclose the fee arrangement with the contractor?
INDEPENDENT CONTRACTOR STATUS
Payroll withholdings (federal). In determining whether someone is an employee for purposes of the Internal Revenue Code, the Ninth Circuit has applied the common law “control” test. The primary issue is whether the employer retains the right to control the manner and means of the performance of the work, regardless of whether that right is actually exercised. Other factors include the skill required, who provides the instrumentalities and tools, the location of the work, the duration of the relationship, whether the hiring party has the right to assign additional projects to the hired party, the extent of the hired party’s discretion over when and how long to work, the method of payment, the hired party’s role in hiring and paying assistants, whether the work is part of the regular business of the hiring party, whether the hiring party is in business, the provision of employee benefits, and the tax treatment of the hired party. It seems fairly clear that, in the typical arrangement, contract lawyers will be regarded as independent contractors, while associate lawyers will be regarded as employees — exactly what one would expect.
Payroll withholdings (state). For purposes of payroll withholding, Oregon limits independent contractor status to those who satisfy all the criteria enumerated in ORS 670.600. Those criteria include satisfying the control test; they also require the contractor to: obtain his or her own assumed business registration, professional occupational license and local business license; furnish his or her own tools or equipment; be paid either upon completion of the project or on the basis of periodic retainer; file tax returns as a business; and, operate an independently established business, according to a list of factors.
While these criteria may be easy to satisfy in most situations, the statute contains one more that seems to present a problem: the contractor must also have the authority to hire and fire employees to perform the work. ORS 670.600(4). But contract lawyers, who are hired to provide personal services, and whose duties are probably non-delegable, are obviously precluded from hiring employees without express permission from the firm. Could the legislature have intended that no person who performs personal services should ever qualify as an independent contractor for purposes of state payroll tax withholdings? There is no published court decision to provide guidance on this question. Courts must give literal interpretation to a statute unless it would produce an absurd or unreasonable result.
Employee Benefits. For federal legislation that doesn’t contain its own statutory definition of independent contractor, the common law control test applies. This appears to be the test under ERISA, TEFRA and COBRA. Applying that test, contract lawyers appear not to be employees for purposes of federally mandated employee benefits.
Unemployment Compensation. A worker is not an employee for purposes of unemployment compensation if the worker is an independent contractor under the control test and is also customarily engaged in an independently established business of the same nature as that involved in the contract of service. With respect to professional contract lawyers, this standard seems fairly easy to satisfy.
Workers’ Compensation. Any sole proprietor who qualifies as an independent contractor under ORS 670.600 is expressly exempt from the Workers’ Compensation Act. But a 1994 court decision, S-W Floor Cover v. Nat’l Council on Compensation Ins., seems to extend the exemption to include anyone who qualifies as an independent contractor, even under the common law control test.
Vicarious Liability — Torts. The well-known general rule is that an employer is vicariously liable for the tortious acts of its employees in the performance of their job duties, but except in certain situations, is not vicariously liable for the conduct of its independent contractors. And since contract lawyers are usually independent contractors under the common law control test, law firms generally should not be vicariously liable to third parties for the negligence of a contract lawyer.
Vicarious Liability — Malpractice. Claims for professional negligence include at least a theoretical breach of the firm’s implied contractual duty of competence and due care to the client. Since the contract lawyer isn’t privy to that contract, liability for breach falls upon the law firm, not the contractor. A firm’s best protection against the malpractice of a contractor is to hire reputable contract lawyers, supervise them appropriately, exercise reasonable care in reviewing their work and make sure they are in good standing with the PLF.
The Oregon Code of Professional Responsibility requires a lawyer to “exercise reasonable care to prevent the lawyer’s employees, associates and others whose services are utilized by the lawyer in connection with the performance of legal services from disclosing or using confidences or secrets of a client . . ..” DR 4-101(D). There is no reason why temporary lawyers should be more likely to disclose client confidences than other lawyers.
To be safe, law firms should ensure that confidential client information is not made available to anyone who doesn’t have a “need to know.”
CONFLICTS OF INTEREST
Just as no lawyer may represent multiple clients whose interests are adverse, neither may a contract lawyer work simultaneously for more than one law firm on matters in which the clients have conflicting interests. Any competent contract lawyer can be expected to see and avoid such an obvious conflict.
The practical concern about contract lawyers arises from the Code’s two vicarious disqualification provisions. The first is DR 5-105(G), which provides that, in general, when a lawyer is required to decline employment or to withdraw from employment because of a conflict, “no other member of the lawyer’s firm may accept or continue such employment.” This has been held to mean that, when a single lawyer is a member of two firms, the two firms are considered as a single unit for conflict of interest purposes. But this rule appears not to apply to contract lawyers.
The clause “no other member of the lawyer’s firm” presumes that the personally disqualified lawyer is a member of the firm. Under DR 10-101(A), a contract lawyer is not a member of a firm “absent indicia sufficient to establish a de facto law firm.”
The ABA, applying very different ethical rules, takes a similar view: a contract lawyer can vicariously disqualify a law firm if the contract lawyer is sufficiently associated with the firm. The more the relationship resembles a de facto law firm, the more likely the contract lawyer’s conflicts will be imputed to the firm.
There is good reason for this. Assuming basic principles of confidentiality are honored, most contract lawyers will rarely be in a position to know about other cases pending in the firm. Nor should they.
The second provision for vicarious disqualification is found in DR 5-105(H): “When a lawyer terminates the lawyer’s association in a firm, neither the lawyer nor any firm member with which the terminating lawyer subsequently becomes affiliated shall accept or continue employment” prohibited because of a conflict. Assuming a contract lawyer “becomes affiliated” with every firm for which he or she works, this prohibition cannot be avoided on the ground that the contractor isn’t a member of the firm. It means that the contract lawyer brings to the law firm all his or her current and former client conflicts, subject to three major limitations.
The first limitation is that there is no conflict unless the former client representation was “in the same or a significantly related matter.” If the contract lawyer formerly represented a client who is now adverse to a firm client in an unrelated matter, there is no per se conflict. Importantly, a matter is considered “significantly related” where the representation provided the lawyer with sensitive confidential information.
The second limitation on the rule of vicarious disqualification is that the contract lawyer brings to the law firm only his or her own personal conflicts, not the imputed conflicts of former colleagues. That’s because the rule applies only when the lawyer coming to a new firm actually worked on a matter, or acquired confidences or secrets relating to that matter, while at the old firm. Thus, if the contract lawyer once worked at a law firm in which some other lawyer represented a now adverse client “in the same or a significantly related matter,” and the contractor neither worked on that matter nor acquired confidences or secrets, there would be no disqualification.
Third, there is no vicarious disqualification if the personally disqualified contract lawyer and the members of the law firm never know about the other “conflicting” matter in the first place. This does not mean the firm can take a “head in the sand” approach to conflicts. But it does mean the firm can respect the privacy of its clients by divulging no more to the contract lawyer than is necessary for the particular project at hand. And the contract lawyer can be expected to make an intelligent appraisal of his or her potential conflicts of interest without having to examine the firm’s entire client matter database.
Because of these limitations, true conflicts would seem rare indeed. Even then, the firm can avoid vicarious disqualification by employing a fairly simple “screening procedure” (sometimes called a “Chinese wall”). This procedure does not require client notification or consent.
To be safe, law firms should provide confidential client information to contract lawyers on a “need to know” basis only. Contract lawyers should conduct their own conflict searches and report immediately if they discover a possible conflict. A firm might be well advised to obtain a simple statement from a contract lawyer whenever the contractor works on a particular matter, to the effect that the contractor has checked and found no known conflicts. The statement could then go in the file, along with documentation pertaining to the firm’s own conflict check. Finally, if a firm discovers that a contract lawyer’s former representation might disqualify it from working on a particular matter, it should set up the proper screening procedure.
The Oregon Code of Professional Responsibility contains no express restriction on the practice of passing a contract lawyer’s charges along to the client, even at a profit. However, some commentators have questioned whether the payment of compensation to a contract lawyer, who is not a member of the firm under Oregon law, constitutes impermissible fee splitting under DR 2-107(A):
“ A lawyer shall not divide a fee for legal services with another lawyer who is not a member of the lawyer’s law firm or law office, unless: (1) The client consents to employment of the other lawyer after full disclosure that a division of fees will be made; and (2) The total fee of the lawyers does not clearly exceed reasonable compensation for all legal services they rendered the client.”
The State Bar of California, applying a similar rule, concluded that compensation paid to a contract lawyer isn’t really the division of a fee at all. The California rule was intended to address concerns related to forwarding or referral fees, not concerns related to payment for contract services. Therefore, the fee-splitting prohibition was found inapplicable where (1) the amount paid to the contract lawyer was compensation for work performed and must be paid whether or not the firm was paid by the client; (2) the amount paid to the contract lawyer was unrelated to fees that had been paid to the firm by the client; and (3) the contract lawyer did not receive a percentage fee.
The same reasoning would seem to apply in Oregon. Where a law firm compensates a contract lawyer by the hour, supervises the contract lawyer as a partner might supervise an associate, vouches for the contract lawyer’s work, and remains bound to pay the contract lawyer’s fee whether or not the client ultimately pays the law firm’s bill, it seems difficult to argue that there is really any fee-splitting going on at all.
There are special considerations when the firm’s fee is contingent. If the contract lawyer is paid an hourly rate, then the firm would be well advised to treat the contractor’s fee as an internal operating expense, as it would the salary of an associate or paralegal. On the other hand, if the contract lawyer receives a percentage of the total fee, the firm must comply with the requirements for fee splitting under DR 2-107(A).
DISCLOSURES TO CLIENTS
Some commentators have wondered whether a law firm has a duty to inform its clients either of the fact that contract lawyers are being used or the nature of the contract lawyer’s fee arrangement.
That a Contract Lawyer is Working on a Matter. Apart from the requirement of client disclosure in conjunction with fee splitting, the Oregon Code of Professional Responsibility does not expressly impose a duty on a law firm to disclose that a contract lawyer is working on a particular matter. It does, however, prohibit a lawyer from making any materially misleading statement about his or her firm.
The ABA believes that, when a contract lawyer works under the direct supervision of a firm member, “the fact that a temporary lawyer will work on the client’s matter will not ordinarily have to be disclosed to the client.” ABA Comm. on Ethics and Professional Responsibility, Formal Op. 88-356, “Temporary Lawyers” (Dec. 16, 1988). On the other hand, where the contract lawyer performs “independent work” for a client without the close supervision of a firm member, the client must be advised. However, these opinions are based on the ABA’s Model Rules, which Oregon has not adopted.
In the absence of any express obligation in the Oregon Code of Professional Responsibility, a lawyer’s duty to inform the client about the use of a contract lawyer who is supervised like an associate would seem to be analogous to the duty to inform the client about the use of an associate. Normally, there is no such duty: “when the client retains the law firm, the client can be reasonably assumed to consent to services performed by various persons under the direct supervision of the firm.” Alaska Bar Association Ethics Opinion No. 96-1 (1996).
Of the Contract Lawyer’s Compensation Arrangement. Apart from fee splitting, the Oregon Code of Professional Responsibility contains no requirement for a law firm to inform a client about the compensation arrangement with a contract lawyer.
The ABA says there generally is no such duty. “Assuming that a law firm simply pays the temporary lawyer reasonable compensation for the services performed for the firm and does not charge the payments thereafter to the client as a disbursement, the firm has no obligation to reveal to the client the compensation arrangement with the temporary lawyer.” ABA Comm. on Ethics and Professional Responsibility, Formal Op. 88-356, “Temporary Lawyers” (Dec. 16, 1988).
Even the California bar, which believes that there may be an obligation to notify the client about the use of a contract lawyer under certain circumstances, concludes that there is no duty to disclose the compensation arrangement: “Assuming there is no division of fees, and that the law office does not charge the outside lawyer’s compensation to the client as a disbursement, the law office has no obligation to reveal to the client the compensation arrangement with the outside lawyer whether that attorney is paid by salary or on an hourly basis.” State Bar of California Standing Committee on Professional Responsibility and Conduct, Formal Opinion No. 1994-138.
The use of contract lawyers in Oregon ought to create few, if any practical problems. A basic understanding of the issues and rules should enable most law firms to take advantage of the convenience and productivity associated with contract lawyer services.
ABOUT THE AUTHOR
Steve Hallock has practiced as a contract lawyer in the Portland area for the past two years. Before that he practiced in the firm of Moscato & Hallock.
© 2002 Steve Hallock