Paralegal Compensation: A Primer to Permissible and Impermissible Pay Structures
Jeannie Sapp Johnston | Jan 25, 2010 | Comments 0
Contributed by Peter G. Golden**
Last month, we highlighted the federal overtime law as it applies to paralegals, concluding that in most cases, paralegals are not exempt from the Fair Labor Standards Act’s overtime laws and must be appropriately compensated for any hours work in excess of 40 in a given week (1) . This month, we’ll tackle the ethical boundaries of creatively compensating paralegals for something other than the mere quality and quantity of the work performed.
Has your firm ever proposed to give you a cut of a contingency fee recovery on a case you’ve been assigned to? Ever been on a job interview where the lawyer promised you a referral fee for any case you brought to the firm as part of the overall compensation package? Well, these compensation arrangements can sure seem enticing, but do your state’s rules of professional responsibility allow for them? Probably not.
While the rules of professional conduct are not identical in every state, in virtually all states, general “fee splitting” or specific sharing of fees received from a particular matter is not allowed. Thus, lawyers may not, by advance agreement, make contingency payments to paralegals based on the outcome of a case. For example, your boss likely cannot, within the bounds of professional responsibility, promise to pay you a bonus equivalent to 5% of the amount of attorneys’ fees recovered in a particular matter. This, and similar fee splitting arrangements have been near universally rejected by state bar associations and boards of ethics. The rationale for prohibiting this conduct is to “protect the lawyer’s professional independence and judgment.” (2)
But to the contrary, attorneys may compensate paralegals based on the quantity and quality of their work and the value of that work to the law practice. (3) Thus, in addition to regular compensation, paralegals generally may also be paid discretionary merit based bonuses or bonuses based on the overall success of the firm or practice area. (4) Thus, a lawyer or law firm that has a profitable year may award a paralegal a bonus based on the overall success of the firm, or the paralegal’s contribution or extraordinary work on a particular case.
Separate from the fee splitting issue, is the issue of referral fee payments. In a nutshell, lawyers are prohibited from paying paralegals for referring legal work to the firm. The rationale for prohibiting an attorney from sharing a percentage of attorney’s fees with a paralegal is that it may lead to improper interference in a case by the paralegal. (5) In fact, it was referral fee payments to non-lawyers and charges of fee splitting that ultimately resulted in disciplinary action against attorneys in one highly successful New Jersey law firm. In 2000, Tomar Simonoff, a well known personal injury firm in New Jersey dissolved after allegations surfaced that it paid referral fees to paralegals, secretaries and other non-lawyers and that it conditioned the bonus of an office administrator on office revenue. During proceedings to determine whether the attorneys involved acted improperly, numerous firm employees came forward to claim that paralegals and secretary referral fees were a standard part of the compensation package. Ultimately, the New Jersey Disciplinary Review Board recommended that two attorneys in the firm have their license suspended for one year. Thus, for attorneys, the punishment for providing non-lawyers with improper forms of compensation can be significant.
Finally, what do you do if you were promised a fee-splitting or referral fee that your boss later decided not to pay? Can you still recover this compensation even though the payment structure may be unethical? Perhaps. At least one court has found that despite an attorney’s ethical violation by promising her paralegal a contingency fee bonus that violated the state’s ethical cannons, the bonus was still due and payable. In Patterson v. Law Office of Lauri J. Goldstein, P.A., 980 So.2d, 1234 (Fl. Ct. App. 2008), the attorney promised to pay her paralegal a bonus equal to 10% of the fees generated from matters on which the paralegal worked. When the attorney later refused to pay the bonus, the paralegal filed suit in Florida Circuit Court alleging breach of contract. On appeal, the Florida Court of Appeals held that even though this classic example of a fee splitting arrangement violated Florida’s Rules of Professional Conduct, the agreement was not void. The court pointed out that (1) the paralegal was not a member of the Florida Bar and thus not herself guilty of any wrongdoing and (2) she was not aware of the illegal fee splitting rules at the time the agreement was made, and thus, not aware that her boss was breaking those rules. (6) The Court concluded that:
“While we recognize generally that the Rules of Professional Conduct of the Rules Regulating the Florida Bar promote the public interest, we find that the public interest is not advanced if an attorney is permitted to promise a bonus arrangement that violates the fee-sharing rule, and then invoke the Rules as a shield from liability under that arrangement.”
Thus, the paralegal was entitled to payment of her bonus. Similarly, if you find that you have already gotten yourself into an impermissible fee-splitting arrangement that your firm now refuses to honor, depending on the state in which you live, you too, may be able to recover for the unkept promise.
In summary, law firms are generally prohibited from engaging in fee-splitting bonuses or referral fee arrangements with paralegals as they likely violate the lawyer’s ethical obligations under the applicable rules of professional conduct. Thus, be very wary if a prospective or current employer proposes such an agreement to you even if the potential bonus sounds lucrative. Better to take your money up front through a higher weekly wage then banking on the promise of something that is not within the ethical bounds of practice.
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1 See, Paralegals and Overtime: What Your Boss Doesn’t Know Might Hurt You, C. Andrew Head, Crowley Clarida & Head LLP, ahead@cchlawfirm.com; September 2008 GatewayParalegal.com.
2 Patterson v. Law Office of Lauri J. Goldstein, 980 So.2d 1234, 1237 (Fl. Ct. App. 2008).
3 See, Guideline 9 of the ABA Model Guidelines for the Utilization of Paralegal Services.
4 See, Rule 5.4(a)(4) of the Model Rules of Professional Conduct.
5 Patterson, 980 So.2d at 1237.
6 See, e.g. Fla. Rules of Professional Conduct 4-5.4(a)(4).
About the Author:
**If you have any questions regarding this article or law month’s article regarding unpaid overtime, you can contact the author, Peter G. Golden (licensed to practice in Georgia and Michigan) or C. Andrew Head (licensed to practice in Georgia). Mr. Golden and Mr. Head are partners with Crowley Clarida & Head LLP (www.cchlawfirm.com), 678-888-0036.
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About the Author: Jeannie S. Johnston has been a Paralegal for over 18 years, has spoken at National Paralegal Conferences and is the Founder and CEO of Paralegal Gateway, Inc. a/k/a www.ParalegalGateway.com – the world's oldest and largest online Paralegal portal on the world wide web.
