Opinion 2126

The question asked is whether there are ethical problems with compensating a non-attorney on production based on a percentage of negotiated settlements.

The inquirer is an attorney employing a non-attorney to do marketing and personal injury settlement and negotiation. This person has done work for prior employers under various compensation packages including salary and production bonuses. The Inquirer ("S") has a personal injury practice. He hired X to do marketing and personal injury negotiation and settlement, as well as some office administration functions. She had worked previously in a number of personal injury offices. She had a reputation of being an aggressive marketer, and evidently has significant contacts with medical providers who are also a source of business. In at least one of her prior employments, she was paid an incentive bonus based on the net proceeds of individual settlements. S is not clear how the net was determined, but believes it included a component for overhead. X works directly with insurance claims adjusters, receives offers, consults with the client and concludes the settlement. X has authority to agree to a settlement if the client has approved. If the negotiations are not successful, the attorney takes over to handle the litigation. If the claim thereafter is resolved, either by negotiation or judgment, X receives a bonus.

S indicates that a number of personal injury practices had similar arrangements in which incentive bonuses are paid to lay persons. S discussed several variations in the handling of personal injury claims, in which a lay person who is engaged in the marketing and negotiation of claims, is paid a bonus, such as the following:

1. The lay person is paid a fixed percentage of the gross amount of each settlement of a claim which he or she has either brought in or successfully negotiated.

2. The same facts as #1 above, except the percentage is based on the net proceeds of an individual settlement.

3. A fixed percentage is applied to all settlements/payments received within a specified period; i.e., a form of sharing of the profits generated by the office.

4. A bonus is paid to all employees based on the profitability of the office, with the amount received by each individual dependent on his or her contributions (i.e., a merit based bonus).

The proposed compensation based upon a percentage of negotiated settlements violates RPC 5.4. Under that rule, an attorney may not share legal fees with a nonlawyer. This Committee’s Informal Opinion 1816 is instructive. In that inquiry, concerning a compensation plan for a paralegal which included either pay on a case by case basis depending on the size of recovery, or on an hourly basis with bonuses for significant or successful recoveries, this Committee opined that the compensation plans were improper fee splitting under RPC 5.4.

RPC 5.4 does include an exception for profit-sharing arrangements. RPC 5.4(a)(3) states “a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement”. Any profit sharing arrangement that includes nonlawyers must be based on the firm’s over-all profits and not on a particular referral. Examples 2, 3 and 4 above attempt to address this issue by basing the compensation to the paralegal on net rather than gross profits. However, these plans, especially 2 and 3, still apparently directly share fees received, only subtracting overhead in some manner.

Example 4 might qualify as an office profit sharing plan, depending on what is meant by payment based upon contribution. Informal Opinion 1644 covers

an example of an appropriate profit sharing plan, in which the nonlawyers receive a percentage of income after monthly overhead and guarantees to partners. Clearly if the paralegal gets the lion’s share of any “merit pay”, and other employees are simply not eligible, or eligible only for a disproportionately small amount, because of their role in the office regardless of how well they perform, then the compensation is not a true profit sharing, and could run afoul of the rule.

The Committee notes additional concerns are raised by this inquiry relating to the supervision of non-attorney assistants under RPC 5.3. Although there are insufficient facts provided to address these issues, the Inquirer is encouraged to refer to that rule, as well as RPC 7.3 (regarding direct solicitation) and RPC 8.4 (an attorney cannot assist or induce a non-attorney assistant to do what the attorney ethically cannot).