Some law firms or solos searching for efficiency and ways to trim overhead have considered arrangements with a “professional employer organization,” or PEO.  A PEO, which some states permit by statute, is a separate company to which an organization allocates some or all of its human resources functions.  The PEO sometimes acts as a co-employer of the organization’s employees.

PEO’s typically offer a range of HR functions, including payroll, attendance and time-keeping, employment taxes, health and life insurance benefits, retirement plans and workers’ compensation claims.

PEO ethics issues for lawyers

PEO’s were not constituted with the professional responsibilities of lawyers in mind, and they raise some significant ethics issues that lawyers must consider before deciding to enter into an arrangement with a PEO.

Ethics committees in several jurisdictions have weighed in with guidance, including the Association of the Bar of the City of New York, which issued its opinion earlier this month.

The ABCNY pointed to New York’s PEO Act, defining the PEO as a business that enters into a written contract with a client organization to “co-employ all or a majority of the employees” of the organization and to share in the right to direct and control employees.

The ABCNY identified several ethics issues for law firms or solos who might find a PEO to be attractive:

  • Duty to exercise independent judgment — several New York Rules of Professional Conduct require that lawyers exercise independent judgment on behalf of their clients, and prohibit any interference by third parties, including non-lawyers.  See NYRPC 1.8(f), 5.4(c), 5.4(d)(3).  At a minimum, the PEO must not have the authority to hire, terminate, discipline or otherwise control employees in connection with any aspect of the practice of law.
  • Duty of confidentiality — to comply with NYRPC 1.6, arrangements with a PEO must include reasonable safeguards to prevent confidential information from being shared with the PEO or accessed by the PEO.
  • Duty to avoid conflicts — PEO’s provide services to many different organizations simultaneously, and given this business model, they might service law firms with clients adverse to each other.  The ABCNY concluded that this did not present any conflict problem, as long as the PEO did not access client confidential information.
  • Prohibition against sharing fees with non-lawyers — any payment arrangement with a PEO must be structured so that it does not constitute fee-sharing, as barred by NYRPC 5.4(a).  Most PEO’s charge a fee based on a percentage of total payroll, although other arrangements also exist, such as flat fees or fees per employee.  As long as the PEO’s compensation is not based on the fees paid by the law firm’s clients, it does not violate the prohibition against fee-sharing.

Other state ethics opinions on PEO’s

Several other state ethics opinions point to similar concerns and ethical constraints.  See Ohio St. Bar Ass’n Legal Ethics & Prof’l Cond. Comm. Inf. Adv. Op. 2011-02 (Dec. 2, 2011); D.C. Bar Ass’n Ethics Comm. Op. 304 ( Feb. 20, 2011); Conn. Bar Ass’n Comm. on Prof’l Ethics Op. 02-08 (June 24, 2002); N.H. Bar Ass’n Ethics Comm. Formal Op. 1989-90/9 (July 25, 1990); Colo. Bar Ass’n Ethics Comm. Abs. 2007-9 (2007); N.C. State Bar Ass’n Ethics Comm. Formal Op. 6 (July 25, 2003); Tex. St. Ct. Prof’l Ethics Comm. Op. 560 (Aug. 2005).

If a PEO seems like it might be an option for you or your firm, check your state’s statutes, and your state’s ethics opinions.  The National Association for Professional Employer Organizations also might be a useful resource.