Many law firms, faced with clients who want to reduce their legal spend, utilize contract attorneys to provide legal services at a reduced rate. As previously discussed, there are risks associated with hiring contract attorneys that implicate issues like the duty to supervise, the exclusivity of contract attorneys, overtime, and documentation of the employment arrangement. Those risks materialize in various ways, from ethical challenges and undetected conflicts of interest to wage and overtime claims.

In addition to the risks already identified, there are myriad other issues that arise out of law firms' use of contract attorneys. This article discusses those other risks that law firms should consider when using contract attorneys.

Make no mistake: there is nothing inherently wrong, unethical, or unprofessional about using contract attorneys. Still, the risks involved are unique and require a different kind of attention.

Here are more tips for addressing the issues that arise with contract attorneys:

Confirm malpractice insurance coverage

While some legal malpractice insurers specifically ask about the use of contract attorneys in writing coverage for law firms, many do not. This type of ambiguity creates one of the greatest malpractice risks for law firms using contract attorneys.

Contract attorneys themselves may fail to confirm whether any claim made against them would be covered under the law firm's legal malpractice policy. Unfortunately, many law firms do not even consider insurance coverage until a legal malpractice claim arises involving services performed by a contract attorney.

Many policies require that, for coverage to exist, the services performed must arise out of an attorney-client relationship. For those law firms who retain contract attorneys as independent contractors (subject to IRS standards), this can be especially complicated. The law firm may find itself arguing that, on one hand, an independent contractor attorney does not represent the law firm's client for conflict purposes, but, on the other hand, does represent the client enough to fall within the firm's legal malpractice insurance coverage.

Because of this potential struggle, it is recommended that law firms define their relationships with any contract attorneys and to confirm during the insurance application process that the legal malpractice insurer will provide coverage should a claim arise.

Law firms can consider confirming the scope of coverage by either seeking clarification of the firm's policy directly from the insurer or broker or even requiring that separate coverage be purchased for the contract attorney.

Determine status as "independent" contractor

Another question that sometimes arises is whether contract attorneys are agents of the law firm or true independent contractors incapable of binding either the law firm or the client. This question requires a highly fact-intensive analysis.

Typically, negligence committed by contract attorneys in the furtherance of their employment will be attributable to the law firm. Even in an "independent contractor" scenario, there is a risk of a claim for negligent hiring, supervision, or retention. That is why attorneys from the hiring firm generally supervise and train contract attorneys to reduce that risk.

The distinction between being an agent and being independent is serious, with implications ranging from professional and ethical obligations to tax and employment requirements. To be an independent contractor for tax purposes, the contract attorney generally must meet the IRS definition, which is a complex analysis involving more than 20 factors identified by the IRS.

Best practices dictate that the law firms should decide whether, based on the unique facts and circumstances, the contract attorneys are independent and, if so, confirming whether they are independent for all purposes, including tax, employment, and ethics. For ethical issues, common interest agreements (to protect the privilege among counsel not in the same law firm) as well as enhanced conflicts checks may be helpful.

Generally, the key is consistency. Anything else may subject both the law firm and the contract attorney to increased scrutiny.

Document the arrangement

One thing is certain: If a legal malpractice claim arises out of work performed by a contract attorney, everyone will focus on the nature of the relationship between the contract attorney and the law firm. In the absence of documentation, such determination could be left to the general recollections of the parties involved and to the reasonable beliefs of third parties. This creates substantial risks.

In assessing documentation needs for contract attorney relationships, the best practice is to divide the issues up for consideration into four categories. First, for purposes of tax and employment statutes, law firms should consider whether the agreement with the contract attorney meets the criteria for an independent contractor or employee relationship. Regardless of which type of relationship is desired, the law firm is usually better off by ensuring that the written agreement matches the reality of the relationship.

Second, for ethics purposes, it is recommended that law firms determine whether the agreement includes provisions that satisfy the firm's professional obligations. If the contract attorney is an employee, then the standard procedures for training and supervising attorneys should be sufficient. If the contract attorney is not an employee, however, firms should consider including in an agreement the appropriate protocols to address conflicts of interest, confidences and secrets, compliance with ethics rules, and performance of ordinarily skillful services. If the control necessary to address these issues exceeds the criteria for an independent contractor under the IRS guidelines, the relationship can be revisited in the context of both issues.

Third, for contract attorneys that are independent contractors, law firms should consider determining and documenting the relationship to the client. If the contract attorney will represent the client, the law firm should consider what kind of notice should be provided to the client. If the contract attorney will not have an attorney-client relationship with the client, the law firm may consider either a common interest agreement or some other written agreement to protect the client's confidences and secrets.

Fourth, the law firm should confirm that legal malpractice insurance is in place to protect both the law firm and the contract attorney in the event of a claim. As discussed above, this can be either confirmation of coverage from the firm's legal malpractice insurer or separate coverage purchased and maintained by the contract attorney. The most important thing is to make sure that there are no gaps in the coverage for professional services provided to the client.

Law firms working with contract attorneys should take steps to avoid these risks and should analyze whether such risks can be managed. By being aware of the risks, law firms will be in a better position to avoid unnecessary complications or liability and to reap the rewards of using contract attorneys.

As published by The Recorder