United States: More Risks To Consider When Using Contract Attorneys

Our previous article,  "What to do When Hiring a Contract Attorney" (Daily Report, June 15, 2015), discussed some of the rewards and risks of using contract attorneys.

Based on the response from readers, one thing is clear: The use of contract attorneys is on the rise, with law firms eager to learn more about the steps they can take to safely and securely use contract attorneys.

The previous article identified four risks associated with hiring contract attorneys: the duty to supervise, exclusive vs. non-exclusive contract attorneys, contract attorneys and overtime, and documenting relationships. Those risks materialize in various ways, ranging from ethical challenges and undetected conflicts of interest to wage and overtime claims.

Wage and overtime claims are increasingly of interest to law firms. Some firms are finding themselves on the receiving end of wage and overtime claims by contract attorneys, and other law firms, such as Sidley Austin, have been hired to defend overtime cases.

In addition to the risks already identified, there are myriad other issues arising out of law firms' use of contract attorneys. This article discusses 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. But the risks involved are unique and merit a different kind of attention. Here are more suggestions for addressing them.

Insurance Coverage

While some legal malpractice insurers specifically ask about the use of contract attorneys, not every insurer does. Some applications do not even distinguish between partners and associates, much less mention contract attorneys. Within this ambiguity lies the greatest risk for law firms using contract attorneys.

Unfortunately, many law firms do not focus on the issue until a legal malpractice claim arises involving services performed by a contract attorney. Contract attorneys themselves may fail to confirm whether any claim made against them is covered under the law firm's legal malpractice policy.

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 on one hand that an independent contractor attorney does not actually represent the law firm's client for conflict purposes, but does represent the client in order to qualify for coverage under the legal malpractice insurance policy.

For these reasons, it is especially important to precisely define the nature of the relationship between the law firm and the contract attorney, and confirm during the application process that the legal malpractice insurer will provide coverage should a claim arise.

The coverage can be confirmed by clarification to the law firm's policy or separate coverage purchased by the contract attorney. Either way, confirming coverage before a claim is critically important.

'Independent Contractors'

Equally worrisome is the question of whether the contract attorneys are agents of the law firm or truly independent contractors, incapable of binding either the law firm or the client. It is a highly fact-intensive analysis.

Typically, negligence committed by contract attorneys in the furtherance of their employment is likely attributable to the law firm. Even in an "independent contractor" scenario, there is a risk of a claim for negligent supervision or hiring of an independent contractor. As a result, it is critical that attorneys from the hiring firm supervise and train contract attorneys.

The ramifications of the distinction are serious and range from ethics issues to tax and employment considerations. To be an independent contractor for tax purposes, the contract attorney must meet the IRS definition, which is a complex analysis involving more than 20 factors identified by the IRS.

Assuring that an independent contractor meets the tax definition for an independent contractor typically does little to address the unrelated ethics issues. If the contract attorney is truly "independent," then ethics issues arise.

The most important step is to decide whether the contract attorneys will be independent, and if so, confirm they are independent for all purposes, including tax and employment as well as ethics purposes. For ethics issues, common interest agreements (to protect the privilege among counsel not in the same law firm) as well as enhanced conflicts checks might be required.

The key is consistency for all purposes. Anything else may subject both the law firm and the contract attorney to the worst of both worlds.

Documentation

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 will be left to the general recollections of the parties involved, as well as what reasonable third parties might have believed. This creates risk.

In assessing documentation for contract attorney relationships, the best practice is to divide the issues into four categories. First, for purposes of tax and employment statutes, determine whether the agreement with the contract attorney meets the criteria for an independent contractor or employee relationship. Regardless of which type of relationship is selected, does the contract match the reality of the relationship?

Second, for ethics purposes, determine whether the agreement includes provisions sufficient to satisfy the ethical obligations of the law firm. If the contract attorney is an employee, then the standard procedures for training and supervising employed attorneys should be sufficient. If the contract attorney is not an employee, then appropriate protocols should be included 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 must be revisited in the context of both issues.

Third, if the contract attorney is an independent contractor, determine and document the relationship to the client. If the contract attorney will represent the client, determine what kind of notice to provide to the client, and confirm consent. If the contract attorney will not have an attorney-client relationship with the client, consider either a common interest agreement or some other agreement providing protection to the client's confidences and secrets.

Fourth, confirm that legal malpractice insurance is in place to protect both the law firm and the contract attorney in the event of a claim. 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 no gaps exist in the coverage for professional services provided to the client.

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

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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