Legal Ethics and Outsourcing: Just Because It’s Outsourced, Doesn’t Mean You Can Bill for It

At some time or another, law firms of all sizes have outsourced legal support services such as legal research and writing, e-discovery or document review.  There’s no question that law firms can bill clients for legal support services and even charge a markup, at least under ABA Ethics Opinion 08-451 and the majority of jurisdictions.

But what happens when law firms outsource back-office functions traditionally classified as overhead – like receptionist and secretarial services or administrative support?  Are those fees likewise chargeable to clients? A recent ethics decision out of Michigan, RI-363  (June 28, 2013) says no. Given the increased trend towards outsourcing of administrative functions by lawyers, the Michigan decision will have consequences – I just can’t completely figure out what they are because the Opinion is so confusing that it raises far more questions than it answers.

Michigan RI-363

The Michigan opinion responded to an inquiry from a personal injury firm which, in an effort to “control costs and increase efficiency,”  had set up a Clearspire-esque separate entity owned by one of the firm’s shareholders to which the firm would outsource tasks such as medical research, billing from medical treatment providers, editing and duplicating photos and videos, scanning and storing medical records and performing clerical labor to support creation and assembly of case evaluation and demand letter packages. The firm sought guidance on whether the proposed arrangement was ethically permissible (it is) and whether the firm could treat the provision of these basic administrative services as case costs covered by the client’s share of proceeds from personal injury awards or settlements.

To determine whether the firm could charge the proposed costs to clients, the Committee analyzed whether the services sought to be charged were actually “law related services.”

The inquiring lawyer’s question appears to assume that routine administrative tasks performed by a law firm’s non-lawyer personnel are services that are or can potentially come within the term “law-related services” as defined in the rule. MRPC 5.7(b) defines “law-related services” as:

• services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a non-lawyer.

As explained in the Comments to the rule, the term “law-related services” applies to professional activities that at times overlap with the practice of law but constitute the practice of a separate profession or trade. Law-related services,” as defined in MRPC 5.7, do not include the provision of basic administrative services traditionally associated with supporting the practice of law.

The Committeee went on to explain that traditionally, lawyers (whether or not with a client’s consent) have been barred from charging administrative costs to clients. Citing ABA Ethics Op. 93-379, the Committee elaborated that:

• When a client has engaged a lawyer to provide professional services for a fee (whether calculated on the basis of the number of hours expended, a flat fee, a contingent percentage of the amount recovered or otherwise) the client would be justifiably disturbed if the lawyer submitted a bill to the client which included, beyond the professional fee, additional charges for general office overhead.

• The Committee recognized that there may be times “when it is difficult to identify the line between administrative support services, which may not be billed to the client, and specialized outside services, which may reasonably be treated as case costs. ” But this case was not a close call:  the Michigan Opinion quickly and summarily determined that all of the proposed costs, save for the photo editing and medical research were “appropriately deemed to be administrative services provided by a law firm as part of its overhead.”
• Thus, the Committee concluded that the firm could not seek to circumvent the bar on billing for administrative costs by “transferring the work to a separate entity whether or not that entity is wholly owned by a shareholder in the law firm.”  The Committee further noted that its opinion applied not just to personal injury cases but to all situations where “lawyers seek to outsource basic administrative services that have traditionally been performed by the law firm to an entity owned or controlled by a member of the firm in order to bill those costs to the client

My Questions

In general, I agree with the underlying premise of the ethics opinion: that lawyers can’t do indirectly through outsourcing what they can’t otherwise do directly. So if BigGiant Firm can’t bill clients for the costs of a secretary, a solo shouldn’t be able to pass those costs on if they’re provided by an outside company or virtual assistant. Fair enough.

But what happens if lawyers are handling the functions that the Michigan Opinion classified as administrative. For example, if a lawyer handles the clerical labor related to a case – such as compiling exhibits or filing and labeling documents. Does this decision mean that lawyers can’t charge for those tasks or they manage them on their own? Or does it permit lawyers to bill for this work at their usual hourly rate? The opinion just isn’t clear.  And of course, if lawyers are permitted to bill for clients for administrative tasks that lawyers perform, but not those performed by outside entities, then the Opinion would encourages a result that is more costly and less efficient.

The other aspect of the Opinion that I don’t understand is whether the bar on billing for outsourced administrative services applies only when the entity carrying out back-office functions is owned/controlled by the firm – or whether it applies to any third party vendor.  The last paragraph of the Opinion specifically refers to entities owned or controlled by the firm but I’m not sure why that makes a difference one way or another.

In any event, one thing is clear: before you start billing clerical charges for your virtual assistant or reception to clients, check your jurisdiction’s rules and see if it’s permissible. The Michigan Opinion may not be a model of clarity, but it’s enough of a red flag to justify added due diligence.