Opinion #31. Profit-Sharing Plan for Law Firm Employees

Issued by the Professional Ethics Commission

Date Issued: September 22, 1982

Question

A law firm partnership inquires if a proposed profit-sharing compensation arrangement is prohibited by the Maine Bar Rules. Specifically, the firm proposes to make quarterly distributions out of the profits of the partnership directly to secretaries employed by the firm. Those distributions would be made in addition to the regular salaries of the secretaries and would most likely vary considerably in amount depending upon the business situation.

Opinion

Subject to the provisos stated herein, it is the Commission’s opinion that this type of employee compensation arrangement is not prohibited by the Maine Bar Rules. Maine Bar Rule 3.3(e) provides:

Dividing Fees with Non-Lawyers. A lawyer or law firm shall not share legal fees with a non-lawyer, except that:

(1) An agreement by a lawyer with his firm, partner, or associate may provide for the payment of money, over a reasonable period of time after his death, to his estate or to one or more specified persons.

(2) A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer.

(3) A lawyer or law firm may include non-lawyer employees in a retirement plan, even though the plan is based in whole or in part upon a profit‑sharing arrangement.

Maine Bar Rule 3.3(e)(1)‑(3) is identical to the original version of ABA DR 3‑102(A)(1)‑(3). Prior to the January 1, 1970 effective date of DR 3‑102 (A)(1)‑(3), the subject of dividing fees with non-lawyers was governed by Canon 34 of the ABA Canons of Professional Ethics, which provided that “[n]o division of fees for legal services is proper, except with another lawyer, based upon a division of service or responsibility.”

In 1961, the ABA Committee on Professional Ethics held that Canon 34 prohibited a law firm structured as a professional association or corporation from including non-lawyers as beneficiaries of the firm’s profit-sharing plan. ABA Formal Opinion No. 303, (November 27, 1961). In that Opinion, the ABA Committee concluded that while the use of fees to pay agreed salaries to non-lawyer employees was permissible, if the salary of a non-lawyer employee were to be based on a percentage of the firm’s net profits, a division of legal fees would be involved and Canon 34 would prohibit it.

In a 1964 opinion, the ABA Committee implied that similarly a retirement plan covering lawyers and their lay employees under the Self-Employed Individual Tax Retirement Act of 1962 would be unethical under Canon 34 if benefits for lay employees under the plan were measured by the profits of the law firm. ABA Formal Opinion 311 (April 8, 1964). Relying on Canon 34 as interpreted in ABA Formal Opinion No. 303, the ABA Committee also concluded that it would be improper for a lawyer to make a commitment in advance to pay a lay employee an end-of-the year bonus based upon a percentage of net or gross profits, and that it would be "highly questionable” for a lawyer to give such bonuses without a commitment in advance. ABA Informal Opinion No. 792, (October 26, 1964).

After the January 1, 1970 effective date of DR 3-102(A)(1)-(3), the ABA Committee held that in view of subsection 3 of that Disciplinary Rule, a law firm, whether it is structured as a professional corporation or as a partnership, may ethically adopt a retirement plan that includes non-lawyer employees as beneficiaries even though contributions to the plan constitute profit-sharing. In so holding, the ABA Committee expressly overruled Formal Opinions Nos. 303 and 311 to the extent those opinions were in conflict with DR 3-102(A)(3). ABA Formal Opinion No. 325, (August 9, 1970).[1]

Finally, in 1979, the ABA Committee concluded that DR 3-102 did not prohibit a compensation arrangement whereby a law firm’s lay office administrator would receive a fixed predetermined annual salary and in addition a percentage of net profits which might represent one-fourth to one-third of the administrator’s total compensation. ABA Informal Opinion No. 1440 (August 12, 1979). In reaching that result, the ABA Committee reasoned that this arrangement did not constitute dividing legal fees with a non-lawyer under DR 3-102, “because the compensation relates to net profits and business performance of the firm and not to the receipt of particular fees.” In this Informal Opinion, the ABA Committee indicated no concern with the fact that while DR 3-102(A)(3) by express exception permitted the inclusion of lay employees in a law firm’s profit-sharing retirement plan, that Disciplinary Rule contained no similar exception that would expressly permit the inclusion of lay employees in a profit-sharing compensation plan. Rather, the ABA Committee interpreted DR 3‑102 in a pragmatic manner to allow the profit-sharing compensation arrangement, concluding that “[w]ith the development of professional business management within law firms, and given the fact that a fixed salary plus incentive compensation is not an uncommon form of compensation, we do not believe that such compensation structure is proscribed by the Model Code.” [2]

The Grievance Commission concurs generally with the opinion of the ABA Committee on Professional Ethics as expressed in its Informal Opinion No. 1440. In our view, the incentive compensation arrangement under consideration here does not constitute an ethically improper “sharing of legal fees” within the meaning of Maine Bar Rule 3.3(e), provided that the amounts paid to lay employees in addition to fixed salary (1) are not based upon business brought to the law firm by such employees; (2) are not based upon services performed by such employees in a particular case; and (3) do not constitute the greater part of the total remuneration of such employees. The purpose of Maine Bar Rule 3.3(e)’s prohibition against sharing legal fees with lay persons is to prevent and discourage lay persons from engaging in the unauthorized practice of law, and that prohibition should be construed in a manner consistent with its purpose. Assuming that the incentive compensation arrangement under consideration here does not violate the three provisos stated above, we are satisfied that such a compensation arrangement would not aid or encourage lay employees to engage in the unauthorized practice of law, and thus we conclude that, subject to the provisos above-stated, this compensation arrangement does not constitute an ethically impermissible sharing of legal fees under Maine Bar Rule 3.3(e).


Footnotes

[1] ABA Formal Opinion 325 made no reference to ABA Informal Opinion No. 792, discussed above. (Back)

[2] Once again, in this Opinion as in Formal Opinion No. 325, the ABA Committee made no mention of its earlier Informal Opinion No. 792, discussed above. Subsequently, in 1980, DR 3-102(A)(3) was amended to expressly permit a lawyer or law firm to include non-lawyer employees in a profit-sharing compensation plan as well as in a profit-sharing retirement plan. As amended in 1980, DR 3-102(A)(3) now provides:

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 providing such plan does not circumvent another disciplinary rule. (words in italics signify new language).


Enduring Ethics Opinion