Can a personal injury lawyer pay a nonlawyer marketing and settlement employee a bonus based on a percentage of the settlements that person brings in or negotiates?

Plain-English summary

The inquirer, a personal injury lawyer, employed a nonlawyer to handle marketing and personal injury settlement and negotiation, plus some office administration. The employee worked directly with insurance adjusters, received offers, consulted the client, and could conclude a settlement once the client approved; if negotiations failed, the lawyer took over the litigation. The lawyer asked whether the employee could be paid an incentive bonus based on a percentage of negotiated settlements, and described several variations: a fixed percentage of the gross of each settlement the employee brought in or negotiated; the same based on net proceeds of an individual settlement; a fixed percentage of all settlements received in a period (a form of office profit-sharing); and a bonus to all employees based on office profitability and individual contribution.

The committee concluded that compensation based on a percentage of negotiated settlements violates RPC 5.4, under which a lawyer may not share legal fees with a nonlawyer. It cited its Informal Opinion 1816, which found improper fee-splitting where a paralegal was paid case-by-case based on the size of recovery or hourly with bonuses for significant recoveries. The committee noted RPC 5.4(a)(3)'s exception allowing nonlawyer employees in a compensation or retirement plan based in whole or part on profit-sharing, but stressed that any such arrangement must be based on the firm's overall profits, not a particular referral. It found that the net-based variations (Examples 2 and 3) still directly share fees, merely subtracting overhead, while Example 4 might qualify as an office profit-sharing plan depending on what "contribution" meant; if the marketing employee got the lion's share of "merit pay" while others were ineligible or eligible only for a disproportionately small amount regardless of performance, it would not be true profit-sharing. The committee added that the inquiry raised supervision concerns under RPC 5.3 and pointed to RPC 7.3 (direct solicitation) and RPC 8.4 (a lawyer cannot induce a nonlawyer assistant to do what the lawyer ethically cannot).

In practice

Under this opinion, and under RPC 5.4 as it stood in 2006, the dividing line is between sharing legal fees and sharing firm profits. The opinion holds that a bonus keyed to a percentage of particular settlements, whether gross or net, is prohibited fee-splitting with a nonlawyer under RPC 5.4. The opinion permits a nonlawyer to be included only in a profit-sharing plan based on the firm's overall profits (RPC 5.4(a)(3)), and warns that a "merit" plan that effectively channels the bulk of the payout to one nonlawyer based on case production, rather than genuine firm-wide profit-sharing, is not a true exception. The committee also flagged, without deciding, supervision duties under RPC 5.3 and the related concerns of RPC 7.3 and 8.4.

Common questions

Q: Can a nonlawyer employee be paid a percentage of the settlements they negotiate?

A: No. The committee concluded that compensation based on a percentage of negotiated settlements, gross or net, is improper fee-splitting with a nonlawyer under RPC 5.4.

Q: Does basing the bonus on net rather than gross fix the problem?

A: No. The committee said the net-based variations still directly share fees, merely subtracting overhead in some manner.

Q: What kind of nonlawyer bonus is allowed?

A: Under RPC 5.4(a)(3), a nonlawyer may be included in a compensation or retirement plan based on profit-sharing, but the plan must be based on the firm's overall profits, not a particular case or referral.

Q: What other rules did the committee flag?

A: It pointed to RPC 5.3 (supervision of nonlawyer assistants), RPC 7.3 (direct solicitation), and RPC 8.4 (a lawyer cannot induce a nonlawyer to do what the lawyer ethically cannot), without resolving them on the facts.

Background and rules framework

The opinion interprets Washington RPC 5.4 (professional independence; the counterpart to Model Rule 5.4), which prohibits sharing legal fees with a nonlawyer, and its exception RPC 5.4(a)(3) permitting nonlawyer participation in a profit-sharing compensation or retirement plan. The committee relied on its Informal Opinions 1816 and 1644 and referenced RPC 5.3 (supervision), 7.3 (solicitation), and 8.4 (misconduct).

Citations and references

Rules of Professional Conduct:

• Model Rule 5.4 / Washington RPC 5.4, 5.4(a)(3) (sharing legal fees with a nonlawyer; profit-sharing exception)
• Washington RPC 5.3 (supervision of nonlawyer assistants); RPC 7.3 (solicitation); RPC 8.4 (misconduct)

Other opinions cited:

• WSBA Informal Opinion 1816 (paralegal compensation tied to recovery is improper fee-splitting)
• WSBA Informal Opinion 1644 (example of an appropriate profit-sharing plan)

See also

• WSBA Ethics Op. 1143: Salaried Lawyer at a Nonprofit
• WSBA Ethics Op. 1184: Lawyer as a Corporate Consultant
• ABA Formal Op. 464: Fee Division With Nonlawyers

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1568

Original opinion text

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

Advisory Opinion: 2126
Year Issued: 2006
RPC(s): RPC 5.4
Subject: Compensating a non-attorney for production based on a percentage of negotiated settlements

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).