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Abstract 00/01-02

Summary of Facts Provided

To increase productivity, a law firm wishes to pay bonuses to non-attorney staff members based on the law firm's net income. The bonus program would involve the payment of a bonus to each employee based on the amount by which the firm's income or net profits exceed predetermined levels. The proposed bonus program would not be a deferred compensation profit-sharing arrangement, such as a pension and profit sharing plan or 401(k) plan, but would involve current compensation to the firm's employees.

Issues and Conclusions

Does the payment of compensation to non-attorney staff members based on the income, or net profits, of a law firm constitute an impermissible fee splitting or fee sharing arrangement?

Rule 5.4(a)(4) of the Colorado Rules of Professional Conduct, provides that a lawyer or law firm shall not share legal fees with a non-lawyer, except that a lawyer or law firm may include non-lawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement. Rule 5.4(a)(4) suggests that it is permissible to base current compensation for non-lawyer employees, as well as deferred retirement plan compensation, in whole or in part on a profit-sharing arrangement, but does not indicate whether there are any limitations on such compensation plans.

C.R.C.P. 265 II, E, concerning legal professional service companies, establishes those limitations. It provides that a professional company may adopt retirement, pension, profit-sharing (whether cash or deferred), health and accident insurance, or welfare plans for all or some of its employees, including lay employees, provided that such plans do not require or result in the sharing of specific or identifiable fees with any lay employees, and provided that any payments made to lay employees or into any such plan on behalf of lay employees are based upon their compensation or length of service or both rather than upon the amount of fees or income received.

Accordingly, the Committee believes that a lawyer or law firm may ethically pay bonuses, or similar cash profit-sharing payments, to layperson staff members as current compensation based upon the lawyer or firm's exceeding predetermined income or net profit levels, provided the bonus or other profit sharing compensation is based upon the staff members' regular compensation or length of service, or both, and is not based on a percentage of the fees, income or revenues of the lawyer or law firm, or any specific or identifiable fees. For example, in the Committee's opinion, it is permissible for a law firm to allocate a certain percentage of the firm's profits as a fund from which bonuses will be paid to layperson staff members, and then to distribute bonuses from the allocated percentage to individual staff members based upon each staff person's regular compensation, position, length of service or similar factors. It is also permissible to pay a layperson staff member a bonus equal to a certain percentage of his or her regular compensation, or a specific amount. It is not permissible, however, to pay an individual layperson staff member a bonus or other current compensation based upon fee revenue from a specific case or cases.