Can a law firm pay a non-lawyer employee a percentage of the fees from matters the employee referred, now that the rule allows profit-sharing compensation?

Plain-English summary

A 1999 amendment to DR 3-102(A)(3) expanded the circumstances in which a non-lawyer employee may be compensated on a profit-sharing arrangement, beyond the prior limit to retirement plans, to allow compensation "based in whole or in part on a profit-sharing arrangement." The committee was asked whether that change would let a firm pay a non-lawyer employee a percentage of the fees from matters the employee referred. It concluded that it would not.

The committee explained that the amendment, which incorporated the substance of Model Rule 5.4(a)(3), permits compensation tied to the lawyer's or firm's overall business performance or profitability. It does not depart from the general prohibition on fee-sharing with non-lawyers, which exists because fee-splitting risks lay control over a matter for the non-lawyer's own profit rather than the client's interest. Permitting profit-sharing simply identifies a situation where that risk of interference with the lawyer's independent judgment is not present.

The committee tied its conclusion to two specific bars. DR 2-103(B) prohibits compensating a person for recommending or obtaining employment by a client, and N.Y. State 731 (2000) had applied that bar to paying employees to make referrals. And Judiciary Law section 491 makes it unlawful to divide a lawyer's fee as an inducement or reward for placing a claim. So while a non-lawyer may be paid based on the firm's profitability, the employee may not be paid a percentage of fees from matters the employee referred; other profit-sharing arrangements are permitted only if not designed to reward the employee for a referral. The committee expressly left open whether a non-lawyer may be compensated based on a particular client matter's profitability where the payment is not a referral reward.

Currency note

This opinion was issued in 2000, under New York's former Code of Professional Responsibility, which New York replaced with the Rules of Professional Conduct in 2009. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a firm pay a non-lawyer employee a cut of fees from matters the employee referred?

A: The opinion concluded no. That is a prohibited reward for a referral under DR 2-103(B) and would conflict with Judiciary Law section 491, and the profit-sharing amendment does not authorize it.

Q: What profit-sharing of non-lawyer pay is allowed?

A: The committee concluded a firm may compensate non-lawyer employees based on the firm's overall profitability or business performance, so long as the arrangement is not designed to reward the employee for a referral or recommendation.

Q: Did the amendment loosen the general fee-sharing prohibition?

A: No. The committee held the amendment did not depart from the general bar on sharing legal fees with non-lawyers; it identified a specific situation where the usual risk of lay interference is absent.

Background and rules framework

The opinion interpreted DR 3-102(A)(3) (compensating non-lawyer employees, as amended in 1999) and DR 2-103(B) (giving value to obtain or reward a referral) of New York's former Code of Professional Responsibility, together with EC 3-8 and Judiciary Law section 491. The Model Rule analogues are Rule 5.4(a) (sharing legal fees with non-lawyers, with its profit-sharing exception) and Rule 7.2(b) (not paying for a recommendation). New York replaced the Code with the Rules of Professional Conduct in 2009; the DR numbers cited here are historical.

Citations and references

Rules of Professional Conduct:

• MR 5.4(a) (sharing fees with non-lawyers; profit-sharing exception); MR 7.2(b) (no payment for a recommendation)
• NY DR 3-102(A)(3); DR 2-103(B)

Statutes:

• N.Y. Judiciary Law section 491 (unlawful sharing of a lawyer's compensation as an inducement to place a claim)

Other opinions cited:

• N.Y. State 731 (2000): a lawyer may not compensate employees for referring clients to a lawyer-owned title company

See also

• NY State Bar Op. 1082: Providing legal services through a nonlawyer-owned company
• NY State Bar Op. 1068: Claims-recovery firm referrals, UPL, and fee splitting
• NY State Bar Op. 1252: Referral fees for nonlegal services

Source

• Landing page: https://nysba.org/opinion-733/