BAR ASSOCIATION OF NASSAU COUNTY
COMMITTEE ON PROFESSIONAL ETHICS
Opinion No. 2002-3
(Inquiry No. 694 )
Supervision and compensation of paralegals or other non-lawyer employees in real estate closings.
(1) A lawyer or law firm may utilize paralegals or other non-lawyer personnel to perform real estate closings under the guidance and supervision of an attorney, even though the attorney is not physically present at the closings, provided the attorney maintains a direct relationship with the client, properly supervises the delegated work, and has complete responsibility for the work product.
(2) Compensation to paralegals or other non-lawyer personnel for such closings may be paid on a piece-meal basis, paying a specified amount for each closing performed. The compensation may not be directly related to the fees to be paid to the lawyer or law firm by the client for such closing services.
(3) A lawyer or law firm may not pay a paralegal or other non-lawyer personnel, a percentage of the revenue and/or profit derived from its real estate closing practice in lieu of a salary, or as a bonus in addition to a salary or other compensation.
DR 1-104(C) [22 NYCRR §1200.5]
DR 3-102(A)(3) [22 NYCRR §1200.l7]
EC 3-5, EC 3-6
Judiciary Law § 491
Facts and Questions Presented:
This inquiry is from a law firm that represents financial institutions. Part of the law firm’s practice involves real estate closings on behalf of its institutional lenders. The law firm requests an opinion whether it may conduct this portion of its practice in the following manner:
(1) the law firm would utilize paralegals to perform real estate closings under the guidance and supervision of attorneys. This would include a paralegal appearing at a closing without an attorney present, but available by telephone. The attorney would have reviewed the closing file with the paralegal prior to the closing;
(2) the law firm would pay its paralegals on a per closing basis. The law firm proposes to determine an annual salary for such work, and, by dividing that amount by an estimate of the number of closings to be performed by a paralegal in a year, arrive at an average salary per closing. Thus, an employee who elected to perform more than the estimated number of closings per year, presumably working more hours than anticipated, would thereby receive greater compensation than an employee who elected to perform fewer closings than the estimated amount; and
(3) the law firm would pay a paralegal or other non-lawyer employee who managed its closing department a percentage of revenue and/or profit derived from its closing practice in lieu of a salary. This is suggested by the law firm to be compensation to an employee based, in whole or in part, on a profit sharing arrangement under DR 3-1 02(A)(3).
Proposals (I) and (2) are permissible. Proposal (3) is not.
The analysis will take each proposal in turn.
Proposal (1), dealing with the supervised services of a paralegal, implicates the integrity and competence of the legal profession, which, in the circumstances of the present inquiry, is governed directly by DR 1-104(C), as follows:
DR 1-104 [22 NYCRR §100.5]
Responsibilities of a Partner or Supervisory Lawyer and Subordinate Lawyers
C. A law firm shall adequately supervise, as appropriate, the work of partners, associates and non-lawyers who work at the firm. The degree of supervision required is that which is reasonable under the circumstances, taking into account factors such as the experience of a person whose work is being supervised, the amount of work involved in a particular matter, and the likelihood that ethical problems might arise in the course of working on the matter.
Although not binding, as are the Disciplinary Rules, Ethical Considerations EC 3-5 and EC 3-6 provide guidance to the implementation of the above Rule. They explain that the essence of the rendition oflegal services by a lawyer is the exercise of professional judgment. Where professional judgment is not involved, non-lawyers may perform many tasks in legal practice even though that performance may require special knowledge of law in certain areas. A lawyer may delegate such tasks to non-lawyers provided the lawyer maintains a direct relationship with the client, properly supervises the delegated work and has complete responsibility for the work produced.
Here, the inquiring firm makes it clear that supervision of the closing paralegal begins before the closing with a review of the file with the closer. Thereafter, the supervising lawyer is available by telephone while the closing progresses. It appears, therefore, that such procedure allows for a varying degree of supervision. Supervision can be tailored to the needs of each paralegal. Thus it allows for supervision which is reasonable under the circumstances taking into consideration the factors enumerated and referred to in DR-l-104 above. As with most responsibilities oflawyering, much depends on the diligence, foresight and competency of the lawyer. Necessarily a supervising lawyer of the inquiring firm must make up for the lack of legal training and professional judgment of the paralegal. This does not mean thatthe proposed arrangement would violate DR 1-104. Indeed, such type arrangements were approved under similar conditions in N Y. State Bar Op. 677 (1995) and N Y. City Bar Op. 1995-11 (1995).
Proposal (2) and (3)
Proposals (2) and (3) involve the compensation of non-lawyers for closing services delegated to them by the employer law firm. Necessarily, the compensation paid is from funds earned by the law firm for the rendition of legal services, including the closings referred to in the present inquiry. The manner in which this compensation will be determined and paid goes to the heart of the questions presented by these two proposals. The underlying question in each case is whether the firm proposes to share legal fees with a non-lawyer, which is also a misdemeanor under Judiciary Law § 491. The applicable disciplinary rule is DR 3-102, which states in relevant part as follows:
DR 3-102. [22 NYCRR 1200.17] Dividing Legal Fees With a Non-lawyer
A. A lawyer or law firm shall not share legal fees with a non-lawyer, except that:
3. A lawyer or law firm may compensate a non-lawyer employee, or include a nonlawyer in a retirement plan, based in whole or in part on a profit sharing arrangement.
In proposal (2) the amount paid per closing is proposed to be calculated on the basis of an over-all budgeted cost for the closing services needed in this branch of the law practice, divided by the average number of closings expected to be performed. On its face, there does not appear to be any relationship to the amount of the fee to be paid to the law firm for these services. Even assuming a per closing fee arrangement has been made with the client, this creates only a coincidental congruency with the per closing arrangement made with the non-lawyer employee. The crucial factor is that the amount due such employee for each closing is determined without regard to the fee received by the law firm. Rather it is determined by the amount of the annual budgeted overhead for such services with a mechanism employed to determine a per closing amount of compensation for the non-lawyer employee.
It is also clear that the amount of compensation will vary depending on the number of closings performed by the employee. There is no indication whether this will result in a change of net profit (or loss) for the law firm. It is entirely possible that the law firm may elect to operate this portion of its practice at a break-even point or even at a loss, for the sake of other business from the same clients. Thus, the proposed method of compensation, which is otherwise related to the amount of compensation reasonably payable for such services in the marketplace, does not appear to be sufficiently related to the fees paid to the law firm for the closing services, and thus may not be said to represent a division of fees with a non-lawyer.
In proposal (3), however, a different result is mandated by the manner in which the supervising paralegal’s compensation is to be determined. While it is true that DR 3-1 02(A)(3) was amended in 1999 to allow a lawyer or law firm to now pay compensation to an employee based in whole or in part on a profit-sharing arrangement, and while it is also the case that the phrase “profitsharing arrangement” is not defined in the Code of Professional Responsibility, the history, background, and commentaries reflect that it still does not encompass a share in the revenue or profit from a particular segment of the practice of a lawyer or law firm. Rather, the profit-sharing salary or bonus is to be based on the entire annual revenue or profitability of the lawyer or law firm. To do otherwise would make a direct correlation between the compensation or profit of the lawyer in specific instances and the compensation payable to the employee, thus creating an impermissible sharing of the lawyer’s or law firm’s fees. To this same effect, see N Y. State Bar Op. 733 (2000). Moreover, the language of Judiciary Law §491, which prohibits a lawyer from agreeing to divide a fee with a non-lawyer, or for a non-lawyer to agree to receive a portion of any fee or compensation paid to a lawyer, clearly indicates that earmarking particular legal matters or particular revenue as the basis of fixing non-lawyer compensation is absolutely prohibited.
For the reasons stated above, Proposals (I) and (2) are approved, and Proposal (3) is disapproved.
[Approved by the Executive Committee on October 22,2002; approved by the Full Committee, subject to Executive Committee editing, on December 20, 2002]