Attorney Employment Agreements Explained
An integral part of operating a legal practice is the relationship between a law firm and its lawyers. This relationship is called an attorney employment agreement. Without such an agreement, it will be unclear how much control a firm has over a lawyer’s work and how much recourse a lawyer will have should it not like the arrangement. There are several key provisions that should be addressed in an attorney employment agreement for both the law firm and the attorneys who work there:
Firms are well-advised to require binding arbitration for employment disputes. A lawyer who is let go from a firm can sabotage client relationships. They could take their clients to their new firm or solicit employees to come work for their new firm. Also , if a lawyer is let go, they might feel entitled to the client relationships, and that can jeopardize the firm’s client relationships.
An attorney employment contract protects both the law firm and the attorneys. It defines the following, including: job description; scope of authority; at-will or cause termination; the right to list and use clients; the right of a lawyer to leave with their clients; post-employment obligations; settlements authority; attorney-client privilege; and the duty of confidentiality. In the end, it clarifies the obligations of both parties if and when a dispute occurs.
Essentials of an Effective Attorney Employment Agreement
At the very heart of a law firm’s ability to create policies and procedures resulting in a consistent and replicable business model is the law firm’s (or business entity’s) attorney employment agreement. The employment agreement lays out the terms that both the law firm and the attorney will be bound to during the course of their employment. In addition, the manner in which the employment agreement is drafted can prevent the need for costly business divorces when their relationship goes south. Here are some of the key elements of an employment agreement:
Salary and Benefits: For the attorney, this represents consistent income, paid time off, sick leave, fringe benefits and other standard employment related items. Naturally, this is the top priority of attorneys. However, too often the employment agreement skews too much in the attorney’s favor and fails to take the broader picture into consideration.
To the law firm, the employment agreement represents the costs of having someone come work there. It needs to provide them control over their budget. It also needs to provide for a swift and efficient exit strategy should things not work out – for both the attorney and the law firm. It needs to cover certain fixed costs that the law firm will obviously incur in exchange for bringing the attorney on board, while also providing flexibility to modify or change one area over another. In my practice, I have seen any number of compensation arrangements, from a fixed salary, to a fixed salary plus bonuses, to a straight commission-based system. Whatever arrangement is decided upon, the issue of how the attorney will be compensated should be tastefully addressed and accurately reflect the value of that attorney to the firm.
Job Description and Responsibilities: Here, the employment agreement creates the job description and/or duty statement of the position. Naturally, the more detailed, the better. Given the number of things that an attorney does in the course of a day, the employment agreement should define the scope of the attorney’s duties to provide protection in the event that the law firm must seek to enforce the terms of the employment agreement (litigation). Generally, the duties should be organized and specific.
Traditionally, when drafting an employment agreement, the scope of work for the attorney’s application for admission to the bar will generally be broader than the attorney’s actual job duties (especially if requested under Federal Rule 11 motion as a pro hac vice application). That is changing in the 21st century. Increasingly, applications for admission to the bar request information for anything clients, to bookkeeping to trust account handling.
Confidentiality Clauses: Naturally, the employment agreement should address the confidential nature of the attorney-client relationship, and the confidentiality of the law firm’s client list. After all, the investment in a client relationship is a major asset of a law firm, and this asset needs to be protected. In this regard, your law firm will want to be sensitive to the issues of privacy and especially the lawyer’s ethical obligations. This section of the employment agreement should balance the need to protect the firm’s assets with the lawyer’s ethical obligations to prospective clients – which presents a challenge in ethical recovery programs.
Termination Conditions and "Covenants of Good Faith and Fair Dealing": The employment agreement should be able to address the conditions under which the employment agreement can be terminated. It may seem counterintuitive, but the law firm and the attorney should have a shared understanding of the triggers for termination of the employment agreement. Otherwise, the employment agreement becomes a soft target for litigation later on down the road when things go sour. Naturally, the employment agreement should state that it cannot be modified except in writing by mutual consent of the parties. It should also provide that a party who breaches the terms and conditions of the employment agreement is in violation of the agreement and is therefore liable to compensate the other for any damages sustained as a result of the breach.
Common Mistakes in Attorney Employment Agreements
In practice, I see many attorney employment agreements that are drafted without a thorough understanding by the employer on what is being agreed to, what is being given up, how the document will be interpreted by others, and whether or not the essential terms of the agreement are spelled out correctly.
One mistake I see all the time is that the dollar amount specified for the compensation in an attorney employment agreement (whether salary or commission compensation based on a percentage of billings and contributions to firm overhead) can be much lower than what the employer expects to pay for that class of employees. It must be stressed that under best practices, the compensation should always specify a dollar amount, as opposed to leaving that calculation to the reader. The employee should be paid what he/she is promised. Otherwise, not only will the employee resent you, you may find yourself in a situation where a judge or arbitrator must sort out the correct compensation amount and loser will be required to pay both parties’ attorneys fees and costs.
I commonly see "self-serving language" in attorney employment agreements that is not for the employee’s benefit and "impossible pay practices." There are provisions that specify that a terminated employee must immediately repay a significant percentage of his/her last year of compensation or that "if the employee is terminated for cause, then the employee must pay us a lump sum equal to half of the employee’s salary for the previous year, plus additional amounts exceeding that figure." Such provisions are void under the Corporations Code. If your current attorney employment agreement specifies that, I would suggest a rewrite.
I see many attorney employment agreements that suggest that disputes under the employment agreement are to be resolved by a local arbitrator. This is short sighted, as disputes under the attorney employment agreement can be resolved at the same time and in the same arbitrability setting as the legal dispute between the departing attorney and the local clients of the law firm, thus saving time and money. I am finding that the number of local arbitration firms that have the competence and availability to handle a large case has shrunk, making arbitrability very difficult and fraught with the risk of disputes over arbitrability. This magnitude of Local Bar disputes over attorney employment agreements are especially true for the larger law firms.
Another serious issue I see in some attorney employment agreements is that the agreement is written so that if the attorney leaves at any time, the attorney cannot take his/her clue of clients for the entire duration of the attorney employment agreement. One such clause read as follows: "Employee agrees that for the duration of the employment and continuing for two years after the termination of the employment, Employee will not solicit, induce or accept work from prior clients of the Firm that Employee has worked with during the last 5 years of employment." The intent of this clause is clear, to increase the value of the client at the top of the food chain by not allowing a departing employee to take his/her closing clients. However, such a provision could prohibit the departing attorney from referring an attorney at a firm with which the exiting attorney had an exclusive arrangement, resulting in the departing attorney loosing a portion of his or her collection compensation. While a well drafted attorney employment agreement can prevent RAFA, or Referral Agreement Falling Apart at the Client collective action lawsuit, it must allow for the departing attorney to refer that client elsewhere.
By drafting an attorney employment agreement that is equipped to realistically allow the departing attorney to pick up his or her client or clients, you will be able to not only attract and retain good talent, you will make it easier to legally deal with departing attorneys.
Legal Duties and Legal Compliance
Both employers and attorneys are obligated to comply with other legal requirements of an employment agreement. For employers, these obligations may include adhering to various state and federal laws, such as wage and hour requirements, the Fair Labor Standards Act, the Affordable Care Act, and the National Labor Relations Act (NLRA). There are also industry regulations that are specific to a particular practice area that must be followed. For example, attorneys working for financial institutions must comply with regulations promulgated by the Securities and Exchange Commission (SEC) and attorneys who practice in the area of healthcare must comply with the Health Insurance Portability and Accountability Act (HIPAA).
Attorneys are also obligated to comply with various legal and ethical obligations. For example, attorneys who contract with collection agencies must comply with the Fair Debt Collection Practices Act (FDCPA), a common regulatory requirement in the debt collection, consumer rights, and bankruptcy practice areas. Most states also have a counterpart law to the FDCPA. In addition, attorneys must also comply with attorney advertising requirements, such as rules related to misleading advertising and solicitation, establishing effective client intake processes, and conflict of interest disclosures.
Failure to comply with any of these requirements can lead to civil liability, fines, loss of attorney licensure, or loss of the ability to conduct business in particular industry areas.
Negotiating Your Attorney Employment Agreement
It should come as no surprise that the CLEs on attorney employment agreements are packed. I recently attended one of those CLEs. The speaker, a highly experienced, and well-respected attorney in the attorney placement business, stated emphatically, that an attorney should always negotiate their offer of employment. Don’t just leave money on the table. You should also understand the terms of your employment agreement. If something looks strange to you in your employment agreement, find out what it means. Do you know, for instance, what the term "per billable hour credit" means? You certainly should find out.
If the employment offer is from a firm, always remember that they too are trying to put the best face possible on the offer. They live in a competitive world. You are a service is they are the big firm. You are the service that they are selling to other clients. So, the benefits that they are offering you, are designed to make you look good to clients and to help them sell you.
The average attorney may not know what their peers in their geographic area are making, so the firm must make an attractive offer to secure the attorney’s services. Larger firms may have more flexibility in what they can offer, since their revenue streams may be larger.
What does all that mean? It means that you should not be afraid to ask for what you want to have in the agreement. If you don’t ask, you are not going to get much, if anything at all. Tell the firm you are going to be profitable for them, that you are going to bring in work. That’s a true statement. Tell them you believe that the employment agreement should have a guaranteed minimum salary. That’s reasonable. Tell them that all other attorneys of similar seniority make a guaranteed minimum of $X and, therefore, you want a guaranteed minimum of $X.
Put the burden back on the firm. The term "per billable hour credit," simply means that the firm will pay you a dollar amount, say $100, for each hour you bill to a client. The speaker at the CLE also said to be cautious of "free legal secretary time , " since that means that the attorney has to pay for their own legal secretary’s time out of whatever that hourly billing credit is "worth." Remind the firm to look at the economics of the deal. Remind them that you want them to make money off your billables. Make them want YOU to come to work for them.
I previously mentioned that the agreement should have a guaranteed minimum salary. It should also have a maximum. You don’t want the firm to cap your income. Just like the firm wants you to bring in work, you want to be able to bill as many hours as you can. Have at least two goals in negotiating the agreement. First, that you want as high a gorge as possible in your guaranteed minimum salary. Second, you do not want the firm to cap your earnings.
Attorneys and partners often want guaranteed minimum salaries and bonuses based on productivity and originations. What are those? A guaranteed minimum salary means the firm pays the attorney that amount, even if no money comes in. That happens because the firm believes the attorney will bring in more money than the firm will pay. So, the minimum earns the firm additional revenue. A bonus based on productivity and originations means that the firm pays the attorney based on how productive the attorney is and how much they have brought into the firm.
Tell the firm that you believe that since you are bringing in business, you should be rewarded with a guaranteed salary, perhaps based on your originations and productivity for a period of time. The key again to the agreement is that the firm will make money from the attorney, not the other way around.
It should also be stated that although the attorney is fully responsible for their own expenses, no matter where they are during the work day, be careful in accepting agreement provisions that allow the firm to take up to 50 percent of the attorney’s expenses. The most that they should ever take from the attorney’s expenses is 25 percent.
It would also be helpful for incoming associatesto have technology training provided for them by the firm. They may not understand the technology they need to succeed in their jobs. The larger firms have expansive technology for all their attorneys. Therefore, a new attorney should have that technology training offered to them in their employment agreements.
Attorney Employment Agreement Clauses to Look For
This section provides some sample clauses that are commonly used in attorney employment agreements. You may want to consider whether these clauses would be appropriate or necessary in your office.
Compensation. The Associate Attorney is expected to bill clients for all time and expenses reasonably related to the performance of legal work for clients of the Firm. Compensation is based on an hourly rate multiplied by the number of hours billed, less any credits or other reductions as noted herein.
Compensation and Ownership Interest. The parties anticipate that the Associate Attorney will become a shareholder of and/or have an ownership interest in the Firm. On the first day of the month that Partner is deemed to have earned a share of the Firm’s profits under the terms of the Firm’s Compensation Plan, the Associate Attorney shall become a shareholder in the Firm and an employee at the then-current Partner compensation rate.
Compliance with Commonwealth of Virginia Rule of Professional Conduct 5.4(e). Nothing in this Agreement requires, or in any way may be construed to require, the Associate Attorney to share the Associate Attorney’s compensation with any person or entity not permitted by the Rules of Professional Conduct or with clients or prospective clients.
Non-Discrimination and Anti-Harassment Policy. The Firm is committed to making employment decisions based on one’s qualifications and abilities and in protecting them from discrimination and harassment. All candidates and Associates are treated without regard to race, color, sex, age, national origin, religion or disability. The Firm is committed to providing a workplace free of harassment based on race, color, sex, age, national origin, religion or disability. The Firm will apply reasonable efforts to prevent and promptly correct behavior that is inconsistent with this policy.
Substance Abuse Policy. The Firm is committed to making employment decisions based on one’s qualifications and abilities and in protecting them from drug and alcohol abuse. All candidates and Associates are treated without regard to race, color, sex, age, national origin, religion or disability. The Firm is committed to providing a workplace free of substance abuse and addiction. The Firm will apply reasonable efforts to prevent and promptly correct behavior that is inconsistent with this policy.
Non-Solicitation of Clients and Employees. The Associate Attorney acknowledges and recognizes the highly competitive nature of the Firm’s business and further acknowledges that, during the course of the Associate Attorney’s employment, the Associate Attorney will be exposed to and become acquainted with the "Confidential Information" of the Firm, its clients, and the practice of law generally. As such, the Associate Attorney recognizes that it may be damaging to the Firm and unfair to the Firm’s clients, if the Firm allows competitors of the Firm to benefit from the good will clientele developed by the Firm through their specialized knowledge and the expenditure of considerable time and money. Furthermore, as the Associate Attorney may develop friendships and camaraderie with the Firm’s employees, it may be damaging to the Firm and to the remaining employees if the Firm allows a departing employee to recruit the remaining employees. As demonstrated above, the Firm has spent much time and money to recruit and train its employees. For these reasons, the parties wish to establish reasonable restrictions to protect the good will and other valuable Confidential Information of the Firm.
When to Hire a Lawyer
When it comes to constructing or negotiating an employment agreement, it is important to consult a legal professional to ensure that the contract is legally valid and enforceable. Let’s delve into some scenarios that may require such counsel:
Do You Have the Right Terms?
– If you don’t have a clear understand of the terms of the agreement-what is expected of you as an employee, what compensation you will receive and when, and how long the agreement lasts-it is crucial to have an attorney review the terms to ensure that they are fair and appropriate.
Are You Confident the Language is Appropriate?
– Legal jargon is not nearly as important as the meaning behind the words, so even if you understand the text in an employment agreement, don’t be afraid to consult with a legal professional to make sure that the language is not too vague, overly broad, inconsistent in definition and interpretation or otherwise not subject to the correct protections.
Does Your Agreement Offer Enough Protection?
– If your agreement does not offer sufficient protection for you or for your practice , consult with a lawyer who can determine the exact type of coverage you need and work to ensure the agreement does not go overboard when including these terms. For instance, you shouldn’t be punished for routinely attending CLE classes or conferences outside of work, no matter how they may benefit you and the firm in the long-run.
Is Your Covenant Not to Compete Enforceable?
– Even if you understand and appreciate that the firm needs protection from competitors, covenants not to compete can be overly prohibitive. It is important to have an attorney look at this type of article and ensure that it is fair and provides sufficient coverage for those involved. In addition, be wary of the time and distance issues that can be included in these often-overreaching articles.
In addition to the above terms and others, there are various instances in which you may require legal counsel to review or construct an employment agreement-these are just a few. It is particularly important to consider when there is conflict over the terms of the agreement, so you understand what is reasonable.