NCSB October 21, 2005

Can a North Carolina law firm base a nonlawyer employee's pay on the fees that employee earns representing Social Security disability claimants, and refer clients to her after she leaves?

Short answer: Yes. Because federal law lets nonlawyers represent claimants before the Social Security Administration and earn fees for it, those fees are not 'legal fees' subject to Rule 5.4(a)'s ban on fee sharing, so a firm may set a nonlawyer's salary based on the SSA fees she generates. The lawyer may also refer claimants to a competent former-employee representative, accept reimbursement for prior work, and agree in advance how such fees are split.

Apply this to your situation

This page answers the general question as of 2005. Ezel answers yours: whether it's allowed on your facts, under the current North Carolina Rules of Professional Conduct, with citations.

Disclaimer: Advisory only. Not binding precedent.

About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official ethics opinion. The original opinion (linked on this page) is the authoritative source for any reliance.

Plain-English summary

A firm employs a nonlawyer legal assistant who, because federal law allows nonlawyer representation before the Social Security Administration (42 U.S.C. § 406), often represents disability claimants at SSA hearings without the lawyer's involvement, with prospective clients advised of the arrangement and the lawyer handling any federal-court appeal. The assistant plans to leave and become an independent claimant's representative.

On referrals after departure, the opinion concludes the lawyer may refer claimants (including current ones) to the former assistant if he believes she is competent and that the referral is in the client's best interest (Rule 1.1). On reimbursement, the opinion concludes the former assistant may, from an SSA-awarded fee, reimburse the firm for work done while the matter was still with the firm, because nothing in the Rules prohibits accepting such compensation if it is otherwise lawful (citing 03 FEO 10).

On compensation tied to fees, the opinion concludes a firm may base a nonlawyer employee's salary on the income generated by her SSA representations. Rule 5.4(a) bars sharing "legal fees" with a nonlawyer (and RPC 147 bars paying a paralegal a percentage of firm income from legal matters), but the opinion reasons that rule governs fees that, due to the unauthorized-practice prohibition, only a lawyer may earn. Because nonlawyers may lawfully represent SSA claimants and be awarded fees, a fee generated by the nonlawyer as authorized by law is not a "legal fee" subject to Rule 5.4(a), and the nonlawyer's participation in the fee does not impair the lawyer's independent judgment when she may represent the claimant without the lawyer's supervision. The opinion also concludes the firm and the assistant may agree in advance how such fees will be distributed if she leaves.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the analysis turns on whether the fee is one only a lawyer could earn. The opinion holds that SSA representation fees a nonlawyer may lawfully earn are outside Rule 5.4(a), so a firm may key a nonlawyer's pay to those fees and may agree on a distribution if the nonlawyer departs.

Per the opinion, the lawyer may refer claimants to a competent former-employee representative when it serves the client's best interest under Rule 1.1, and may accept lawful reimbursement for work the firm performed before the referral.

Common questions

Q: Can a firm pay a nonlawyer employee based on the Social Security fees the employee generates?

A: Yes. The opinion concludes those fees are not "legal fees" under Rule 5.4(a) because federal law lets nonlawyers earn them, so compensation may take the generated income into account.

Q: Does this conflict with the rule against splitting fees with nonlawyers?

A: No. The opinion distinguishes Rule 5.4(a) and RPC 147 as governing fees only a lawyer may earn; SSA fees a nonlawyer may lawfully earn fall outside that prohibition.

Q: Can a lawyer refer a current client to a nonlawyer who has left to represent SSA claimants independently?

A: Yes, if the lawyer believes the representative is competent and the referral is in the client's best interest under Rule 1.1.

Q: Can the departed representative reimburse the firm out of an awarded SSA fee for earlier work?

A: Yes. The opinion concludes nothing in the Rules prohibits accepting such compensation if it is otherwise lawful.

Background and rules framework

The opinion interprets Rule 5.4(a) (sharing legal fees with a nonlawyer, corresponding to Model Rule 5.4) and Rule 1.1 (competence, corresponding to Model Rule 1.1), against the federal authorization for nonlawyer SSA representation (42 U.S.C. § 406). It relies on RPC 147 (limits on paralegal productivity bonuses), 03 FEO 10, and 05 FEO 2.

Citations and references

Rules of Professional Conduct:

MR 5.4 / NC Rule 5.4(a) (sharing legal fees with a nonlawyer; cmt [1])
MR 1.1 / NC Rule 1.1 (competence)

Statutes:

42 U.S.C. § 406 (nonlawyer representation of Social Security claimants)

Other opinions cited:

RPC 147 (paralegal productivity bonus may not be a percentage of firm legal income)
03 Formal Ethics Opinion 10 (compensating a nonlawyer SSA representative)
05 Formal Ethics Opinion 2 (disclosure of nonlawyer SSA representation arrangement)

Source

Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2005-formal-ethics-opinion-6/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Inquiry #1:

Law Firm employs Legal Assistant, a nonlawyer, to assist Attorney with the representation of disability claimants before the Social Security Administration (SSA). Because nonlawyer representation of claimants before the SSA is allowed by the Social Security Act, see 42 U.S.C. §406, and Attorney believes that Legal Assistant is competent, Legal Assistant frequently represents the claimant in the hearing before the SSA Administrative Law Judge (ALJ) without the involvement of Attorney. Prospective clients are advised of this arrangement as required by 05 FEO 2 and Attorney represents any claimant who files an appeal to federal district court. Legal Assistant is currently paid a salary and bonuses.

Legal Assistant has informed Attorney that she is leaving the firm to become an independent claimant's representative on Social Security disability claims. After Legal Assistant establishes her separate business, may Attorney refer disability claimants to her, including claimants that he was representing when Legal Assistant was still employed by the firm?

Opinion #1:

Yes. If Attorney believes that Legal Assistant is competent to represent claimants before the SSA and that it is in the best interest of a client to be represented before the SSA by Legal Assistant, he may refer clients to her. See Rule 1.1.

Inquiry #2:

Attorney and Legal Assistant work on a client's disability claim before Legal Assistant leaves the firm to establish her own practice. After she leaves the firm, Attorney refers the client to Legal Assistant for representation before the SSA. Disability benefits are awarded to the client and the ALJ also awards a fee for the representation to Legal Assistant. From that fee, may Legal Assistant reimburse Law Firm for the work performed by Legal Assistant and/or Attorney while the matter was still with Law Firm?

Opinion #2:

Yes. There is nothing in the Rules of Professional Conduct that prohibits a lawyer or a law firm from accepting such compensation provided it is otherwise lawful. Cf. 03 FEO 10 (Social Security lawyer may agree to compensate a non-lawyer/claimant's representative for the prior representation of a claimant).

Inquiry #3:

Legal Assistant wants to remain an employee of Law Firm but she would like her salary to be based upon the fees that she generates from the representation of claimants before the SSA. May the compensation a law firm pays to a nonlawyer employee who represents claimants before the SSA take into consideration the income generated from the representations?

Opinion #3:

Yes.

Rule 5.4(a) specifically prohibits a lawyer or a law firm from sharing "legal fees" with a nonlawyer except in certain specific situations that are not relevant to this inquiry. As noted in comment [1] to the rule, "The provisions of this Rule express traditional limitations on sharing fees. These limitations are to protect the lawyer's professional independence of judgment." In reliance upon this prohibition, RPC 147 holds that a lawyer may pay a paralegal a bonus for productivity but the bonus may not be a percentage of the income the firm derives from legal matters upon which the paralegal has worked.

The present inquiry is distinguishable. Rule 5.4(a) regulates the distribution of fees that, because of the prohibition on the unauthorized practice of law, may only be earned by a lawyer. However, nonlawyers are legally permitted to represent disability claimants before the SSA and to be awarded fees for such representation. When generated by a nonlawyer as authorized by law, such a fee cannot be designated a "legal fee" subject to the limitations of Rule 5.4(a). See e.g., 03 FEO 10. Moreover, the nonlawyer's participation in the fee does not impair a lawyer's independent professional judgment when the nonlawyer may, by law, represent the claimant without the supervision or participation of the lawyer.

Inquiry #4:

May Legal Assistant and Law Firm enter into an agreement clarifying how fees from Legal Assistant's representation of Social Security disability claimants will be distributed between Legal Assistant and Law Firm in the event Legal Assistant leaves the firm?

Opinion #4: