Oregon State Bar Bulletin — OCTOBER 2002
| Contract Lawyers |
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.
CONFIDENTIALITY
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.
FEE ARRANGEMENTS
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.
CONCLUSION
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