In this post, I cover the hiring lawyer’s options when billing clients for freelance legal services.
In the freelance law context, hiring lawyers can either pass the freelance lawyer’s invoice on to clients as legal fees or an expense. Neither the Model Rules nor the Colorado Rules of Professional Conduct address this choice and it “does not seem to be a matter of ethics.” American Bar Association Standing Committee on Ethics and Professional Responsibility, Formal Opinion 00-420, Surcharge to Client for Use of a Contract Lawyer, November 29, 2000. Although the choice isn’t a matter of ethics, there are ethical obligations associated with billing freelance legal services as either legal fees or expenses.
A hiring lawyer can bill clients for freelance legal services as legal fees. The guiding rule for legal fees is that they must be reasonable. C.R.P.C. 1.5(a). Notwithstanding this fundamental rule, lawyers can indeed make a profit from their legal services. Indeed, lawyers *attempt* to make a profit from practicing law. That is perfectly acceptable so long as the total legal fee is not unreasonable. American Bar Association, Opinion 00-420.
Under certain circumstances, the hiring lawyer can impose a surcharge on the freelance legal services. A ‘surcharge’ is applied when the hiring lawyer charges the client more for the freelance lawyer’s work than the cost incurred by the hiring lawyer for obtaining the freelance legal services. Id. The hiring lawyer can impose a surcharge when the freelance legal services are billed to the client as legal services. Id. The hiring lawyer can impose a surcharge whether or not the use of the freelance lawyer is disclosed to the client. Id.
The hiring lawyer does not have a duty to disclose the surcharge if the hiring lawyer either supervises the freelance lawyer or adopts the work of the freelance lawyer as their own. Id. If the hiring lawyer imposes a surcharge on the freelance lawyer’s work, the client’s reasonable expectation is that the hiring lawyer has supervised the freelance lawyer. Id. Essentially, if the hiring lawyer has taken the time to supervise the freelance lawyer or taken the risk of adopting the work of the freelance lawyer, the surcharge is compensation.
Many lawyers incorrectly assume that they must disclose to their clients the rate that they pay the freelance lawyer. Both the Colorado Bar Association and the American Bar Associations, however, expressly reject that notion. Both emphasize that the financial arrangement between the hiring lawyer and freelance lawyer does not need to be disclosed to the client. This financial arrangement is analogous to the one between a firm and an associate. The firm charges the client an hourly rate for the associate’s work. Part of the hourly rate paid by the client goes to cover the associate’s salary and benefits, part of it goes to cover the firm’s overhead, and part of it goes back to the firm as profit. The firm does not disclose this breakdown to the client. Likewise, the hiring firm “does not have a duty to disclose to the client the amount paid to the [freelance] lawyer or the profits made from using the [freelance] lawyer as long as the financial arrangement does not constitute fee-splitting under Colo. RPC 1.5(d)” and the total fee is reasonable. Colorado Bar Association, Formal Opinion 105, Opinion on Temporary Lawyers, May 22, 1999; American Bar Association Standing Committee on Ethics and Professional Responsibility, Formal Opinion 08-451, Lawyer’s Obligations When Outsourcing Legal and Nonlegal Support Services, August 5, 2008.
Thus, the hiring lawyer can markup the freelance lawyer’s work as it would with an associate of the firm. Freelance lawyers can be a profit source for the savvy freelance lawyer. Hiring lawyers can free up time to spend on client recruitment or retention, or focus on the ‘rainmaking’ portions of their practice.
A hiring lawyer can also choose to pass on the freelance lawyer’s invoice to the client as an expense. To avoid fee-splitting, many hiring lawyers agree to pay the freelance lawyer regardless of whether the client pays. In that circumstance, the freelance lawyer submits an invoice to the hiring lawyer and the hiring lawyer pays the freelance lawyers. As a cost incurred by the hiring lawyer, freelance legal services can be passed to the client as an expense if the hiring lawyer so chooses. When billed as an expense, the hiring lawyer cannot impose a surcharge and the bill to the client cannot exceed the cost incurred by the hiring lawyer. American Bar Association, Opinion 00-420. Because freelance lawyers often charge a much lower hourly rate than lawyers in a firm directly representing clients, hiring lawyers can use freelance legal service to give their clients cost-effective access to justice and representation. When serving a client of limited means, the hiring lawyer may wish to consider using freelance legal services.
In the next post, I will explore a hiring lawyer’s supervisory obligations.
Of course, rules and ethical obligations may vary by jurisdiction, and this post does not constitute legal advice.