Alternative Attorney Staffing

It is not breaking news that the attorney staffing of today's law firms has evolved significantly from the days of just equity partners and associates. Firms now often have two classes of partners ' non-equity and equity ' as well as attorneys with titles such as Counsel, Of Counsel, Senior Attorney, and Staff Attorney (each generally more refined and specific than just “permanent Associate”). This article focuses on employee benefits decisions and the flexibility of your firm with respect to direct hires of non-partner and non-associate attorneys, who, based on your facts, may be your employees or may be independent contractors.

When deciding to make hires (or changes in attorney classifications) beyond the traditional associate or partner scope, there are two general business decisions to be made: 1) whether the attorney will be an employee or independent contractor; and 2) what benefits, if any, the attorney will receive.

The focus of this article is not on temporary contract attorneys attained through a legal staffing agency, e.g., contract attorneys often used by firms in large litigation discovery document review (where it typically is pretty clear that such attorneys are employees of the staffing agencies). Also, this article does not focus on: 1) the leased employee rules of Internal Revenue Code (Code) Section 414(n) that may apply to a firm's benefit plans for compliance purposes when the firm leases workers from a leasing agency that employs the workers; or 2) professional employer organizations (PEOs) that take the position ' not generally recognized under ERISA and the Code ' that they are co-employers with their clients of the contract workers.

Employee vs. Independent Contractor

The classification of a hire ' whether an attorney or not ' as an employee or independent contractor historically has focused on a 20-factor common law employee test originally set forth by the IRS in a revenue ruling issued in 1987. See IRS Revenue Ruling 87-41. A general theme under this employee test is whether a company has the right to control a worker not only as to job requirements, but also as to how the job is to be accomplished. If you retain such right with respect to a worker, regardless of whether you exercise it, then the worker most likely is your employee (although this general rule just does not work so well in the case of professionals such as attorneys whose work primarily involves independent decision-making and is not generally, in any event, subject to substantial control).

Coverage Under Employee Benefit Plans

After you have determined whether your new attorney will be an employee or an independent contractor, the next question you should consider is whether, and to what extent, the attorney will be eligible for benefits under your firm's employee benefit plans. In fact, the cost of employee benefits likely will be the principal reason that you may prefer your new attorney to be an independent contractor, rather than an employee.

Employees

If your new attorney will be an employee and work full-time, then typically he or she will become eligible for employee welfare benefits (i.e., group medical, dental, vision, long-term disability, and life insurance) under your firm's employee welfare benefit plan or plans after expiration of the applicable eligibility waiting period (if any). For example, your firm's welfare benefit plan may provide for a 90-day waiting period prior to a full-time employee becoming eligible to participate in the plan. Usually, only employees who normally work 30 hours or more per week are considered full-time and are eligible for such benefits. Remember, though, that even if you hire an attorney (or other employee) with the intent that he or she will work less than 30 hours per week and be part-time, you should monitor the actual hours worked. It is not uncommon for the hours of an attorney whom you intended to work part-time to creep up so that he or she actually is full-time, which really can be a problem if something bad happens to the attorney when not covered by one of your insurance policies under which he or she should have been covered based on hours actually worked. (As a side note, the looming Patient Protection and Affordable Care Act (Affordable Care Act) year 2014 “employer-shared responsibility” health coverage provisions for employers with 50 or more full-time employees permit up to a 90-day eligibility waiting period and generally do not apply to employees who work on average less than 30 hours per week.)

You may choose, however, to exclude a class of attorneys from your benefit coverage, regardless of their full-time status. If these benefits are insured, and you wish to exclude, for example, your Of Counsel employee attorneys from coverage, there is no current legal restriction to such welfare benefit exclusion. You may exclude your Of Counsel attorneys from such coverage by clearly providing for such exclusion in your applicable welfare-benefit plan document, summary plan description, and employee handbook (if the handbook is ambiguous).

Note, however, that the Affordable Care Act requires, that for plan years beginning on or after Sept. 23, 2010, group health plans other than self-insured plans satisfy the nondiscrimination requirements applicable to self-insured plans (discussed below). The Treasury Department, the Department of Labor, and the Department of Health and Human Services, however, have announced that they will not require such compliance for insured group health plans (and will not impose the applicable financial sanctions for failure to comply) until future notice. See IRS Notice 2011-1. It also should be noted that if and when the Affordable Care Act's employer shared responsibility health coverage provisions come into play in 2014, then exclusion from coverage of a permissible class of full-time employees by an employer still will be permitted ' but the employer will have to pay the applicable penalties under such Act for the failure to cover. (Finally, note that generally beginning on or after Sept. 23, 2012, your firm will have to provide a summary of benefits and coverage (SBC), which generally will be prepared (based on a template) by your insurer if your group health plan is insured (or by you if your plan is self-insured), and if you make any material modification to your group health plan that affects the SBC information, then you must provide 60-days' advance notice of the modification.)

If your firm's medical plan is self-insured, and you wish to exclude, for example, your Of Counsel employee attorneys (or any other class of employees), then you should check in advance that your plan does not thereby discriminate in favor of highly compensated individuals in violation of Code Section 105(h). “Highly compensated individuals,” in this case, includes generally the highest paid 25% of all of your employees. Code Section 105(h) sets forth nondiscrimination requirements both for: 1) eligibility to participate; and 2) benefits provided to participants. If your self-insured medical plan does discriminate in favor of highly compensated individuals, then certain amounts payable to highly compensated individuals under the plan will be taxable to such individuals ' not a good result for them. (Note that Code Section 105(h) allows for the uniform exclusion from coverage of part-time or seasonal employees.)

To the extent your Of Counsel employee attorneys (or any other class of employees) are eligible to participate in your group medical, dental, vision, long-term disability, and life insurance benefits, then the terms of your Code Section 125 “cafeteria plan” (125 plan) should provide for the payment of the premiums for these benefits by such employees (as well as other participating employees) to be made pursuant to the 125 plan. In addition, in such case, if your 125 plan provides for health care flexible spending accounts or dependent care flexible spending accounts, then the 125 plan also should allow for participation by your Of Counsel attorneys. Note that, similar to a self-insured medical plan, your 125 plan cannot discriminate in favor of highly compensated individuals as to eligibility or as to contributions and benefits, and also cannot discriminate in favor of “key employees,” without adverse income tax consequences to such individuals. (In addition, your group life insurance and dependent care assistance benefits also have separate non-discrimination requirements.)

Focusing now on your 401(k) plan (or plans in the case of some firms), you actually have a fair amount of latitude regarding inclusion or exclusion of a class of attorney employees (such as Of Counsel attorneys). It is critical, however, that if such class of attorneys is to be ineligible to participate in the plan, then the plan document (as well as the summary plan description) must clearly provide for such exclusion. Similarly, if such attorneys are eligible to participate in the plan, the plan document (and summary plan description) should unambiguously provide for such eligibility. In addition, you should make sure that your employee handbook (and any offer letter) is not misleading, if it touches upon 401(k) plan participation. (Note also that you should take into account the potential impact on discrimination and coverage testing before excluding any class of employees from participation in your 401(k) plan.)

If your 401(k) plan more generally just excludes part-time, temporary or seasonal employees, your plan should limit such exclusion to individuals who work less than 1,000 hours in a year, or should provide that, notwithstanding any such classification exclusion, any employee who completes at least 1,000 hours of service will be an eligible employee. However, if your plan uses the “elapsed time” method of determining years of service, rather than hours of service, then you effectively are prevented from excluding part-time employees from your 401(k) plan on the basis of hours of service. (In addition, your 401(k) plan cannot have an indirect service requirement that violates the minimum service requirement applicable to your plan under the Code.)

If you inadvertently do not allow eligible attorney employees (or other eligible employees) to participate in your 401(k) plan, it is not necessarily the kiss of death for your plan, but the cost to fix the error can be pricey. Under IRS correction procedures, if you improperly exclude an eligible attorney (or other eligible employee) from participating in your 401(k) plan, then to correct such error you generally will have to make a corrective contribution to the plan for the employee for the period of exclusion equal to 50% of the plan's applicable actual deferral percentage for the year of the employee's missed deferral multiplied by the employee's compensation for such period, as well as a corrective contribution for any missed employer match based on the plan's applicable actual deferral percentage (not multiplied by 50%), and also adjust for earnings. Whether you will have to formally submit this plan operational correction (with a filing fee) to the IRS for its blessing will depend on the subjective significance of your exclusion error, and also how recent the error was. In short, you want to make sure that you follow the terms of your 401(k) plan for eligibility purposes (as well as for all other purposes, of course).

Independent Contractors

If your new attorney will not be an employee, but rather will be an independent contractor, then your ability to provide employee benefits to the attorney is much more limited.

While typically your firm's welfare benefit plans only would provide that employees (and partners and LLC members) are eligible to participate, you could extend eligibility to your independent contractor attorneys if your benefits are insured ' provided that your insurance policy coverage language is negotiated to expressly cover such independent contractor attorneys. In addition, your plan document and summary plan description should accurately describe any such class of non-employee attorneys who are eligible for coverage. Finally, before you open up your insured welfare benefits to any attorneys who are independent contractors, you should confirm that under applicable state law, your plan is not subject to any additional undesirable (or unacceptable) requirements, if your plan is considered a multiple employer welfare arrangement (a.k.a. a MEWA) under ERISA and state law as a result of covering the non-employees.

If your firm's welfare benefits are self-insured, you generally should steer clear of extending eligibility in your plan to any independent contractor attorneys, unless you have thoroughly vetted the matter as to applicable state law requirements if your plan would be considered a MEWA. State laws applicable to self-insured MEWAs can be onerous deal-breakers, including, e.g., licensing and minimum surplus and state deposit requirements. Note that any independent contractor attorneys covered under your health insurance cannot exclude from federal taxable income the value of the health insurance you provide to them.

As to your 401(k) plan, you cannot allow independent contractor attorneys (or other non-employees) to participate. While the Code does permit partners and LLC members to be covered under tax-qualified retirement plans maintained by their partnership or LLC (as the case may be), and treats such individuals as employees for qualified plan purposes, if you otherwise allow non-employees to participate in your 401(k) plan, it very well could be the end of your plan. Such non-employee 401(k) plan participation will
violate the “exclusive benefit rule” of Code Section 401(a)(2) ' i.e., that your plan only can provide benefits to your employees and their beneficiaries.

If your new independent contractor attorney is not eligible to participate in your employee benefit plan (be it welfare or 401(k)), then you should make sure that the terms of your plan document and summary plan description are not ambiguous as to such ineligibility. It also is important to include in your applicable plan document specific language that provides that if a governmental agency, such as the IRS, reclassifies the attorney (or any other independent contractor) as your common law employee (notwithstanding your classification of him or her as an independent contractor), then the attorney will not be entitled to retroactive benefits under the plan for periods prior to the reclassification. This provision hedging against liability for providing past benefits upon retroactive employee reclassification by the government often is referred to in the employee benefits legal community as “Microsoft” language, based upon the emergence of the use of such precautionary language following a class action lawsuit brought against Microsoft Corporation by former freelance workers following an IRS reclassification of Microsoft's freelancers as employees in an employment tax audit in late 1989.

Conclusion

If you are looking to, or already have, expanded your firm's attorney base to include less-traditional attorney positions, then you must: 1) properly classify any such attorney as an employee or independent contractor, as the case may be; and 2) provide the benefits, if any, to these attorneys that are called for under your applicable benefit plans. As to the benefits provided to these attorneys, there is room for planning, subject to applicable laws. It is critical, however, that your benefit plans, summary plan descriptions, and applicable insurance policies include the attorneys (and other employees) intended to be covered and that you follow the eligibility provisions of your benefit plans.

Douglas A. Smith is Of Counsel with the Atlanta office of Arnall Golden Gregory LLP, where he is a member of the firm's Employee Benefits and Executive Compensation Practice Teams. He can be reached at 404-873-8796 or [email protected].

It is not breaking news that the attorney staffing of today's law firms has evolved significantly from the days of just equity partners and associates. Firms now often have two classes of partners ' non-equity and equity ' as well as attorneys with titles such as Counsel, Of Counsel, Senior Attorney, and Staff Attorney (each generally more refined and specific than just “permanent Associate”). This article focuses on employee benefits decisions and the flexibility of your firm with respect to direct hires of non-partner and non-associate attorneys, who, based on your facts, may be your employees or may be independent contractors.

When deciding to make hires (or changes in attorney classifications) beyond the traditional associate or partner scope, there are two general business decisions to be made: 1) whether the attorney will be an employee or independent contractor; and 2) what benefits, if any, the attorney will receive.

The focus of this article is not on temporary contract attorneys attained through a legal staffing agency, e.g., contract attorneys often used by firms in large litigation discovery document review (where it typically is pretty clear that such attorneys are employees of the staffing agencies). Also, this article does not focus on: 1) the leased employee rules of Internal Revenue Code (Code) Section 414(n) that may apply to a firm's benefit plans for compliance purposes when the firm leases workers from a leasing agency that employs the workers; or 2) professional employer organizations (PEOs) that take the position ' not generally recognized under ERISA and the Code ' that they are co-employers with their clients of the contract workers.

Employee vs. Independent Contractor

The classification of a hire ' whether an attorney or not ' as an employee or independent contractor historically has focused on a 20-factor common law employee test originally set forth by the IRS in a revenue ruling issued in 1987. See IRS Revenue Ruling 87-41. A general theme under this employee test is whether a company has the right to control a worker not only as to job requirements, but also as to how the job is to be accomplished. If you retain such right with respect to a worker, regardless of whether you exercise it, then the worker most likely is your employee (although this general rule just does not work so well in the case of professionals such as attorneys whose work primarily involves independent decision-making and is not generally, in any event, subject to substantial control).

Coverage Under Employee Benefit Plans

After you have determined whether your new attorney will be an employee or an independent contractor, the next question you should consider is whether, and to what extent, the attorney will be eligible for benefits under your firm's employee benefit plans. In fact, the cost of employee benefits likely will be the principal reason that you may prefer your new attorney to be an independent contractor, rather than an employee.

Employees

If your new attorney will be an employee and work full-time, then typically he or she will become eligible for employee welfare benefits (i.e., group medical, dental, vision, long-term disability, and life insurance) under your firm's employee welfare benefit plan or plans after expiration of the applicable eligibility waiting period (if any). For example, your firm's welfare benefit plan may provide for a 90-day waiting period prior to a full-time employee becoming eligible to participate in the plan. Usually, only employees who normally work 30 hours or more per week are considered full-time and are eligible for such benefits. Remember, though, that even if you hire an attorney (or other employee) with the intent that he or she will work less than 30 hours per week and be part-time, you should monitor the actual hours worked. It is not uncommon for the hours of an attorney whom you intended to work part-time to creep up so that he or she actually is full-time, which really can be a problem if something bad happens to the attorney when not covered by one of your insurance policies under which he or she should have been covered based on hours actually worked. (As a side note, the looming Patient Protection and Affordable Care Act (Affordable Care Act) year 2014 “employer-shared responsibility” health coverage provisions for employers with 50 or more full-time employees permit up to a 90-day eligibility waiting period and generally do not apply to employees who work on average less than 30 hours per week.)

You may choose, however, to exclude a class of attorneys from your benefit coverage, regardless of their full-time status. If these benefits are insured, and you wish to exclude, for example, your Of Counsel employee attorneys from coverage, there is no current legal restriction to such welfare benefit exclusion. You may exclude your Of Counsel attorneys from such coverage by clearly providing for such exclusion in your applicable welfare-benefit plan document, summary plan description, and employee handbook (if the handbook is ambiguous).

Note, however, that the Affordable Care Act requires, that for plan years beginning on or after Sept. 23, 2010, group health plans other than self-insured plans satisfy the nondiscrimination requirements applicable to self-insured plans (discussed below). The Treasury Department, the Department of Labor, and the Department of Health and Human Services, however, have announced that they will not require such compliance for insured group health plans (and will not impose the applicable financial sanctions for failure to comply) until future notice. See IRS Notice 2011-1. It also should be noted that if and when the Affordable Care Act's employer shared responsibility health coverage provisions come into play in 2014, then exclusion from coverage of a permissible class of full-time employees by an employer still will be permitted ' but the employer will have to pay the applicable penalties under such Act for the failure to cover. (Finally, note that generally beginning on or after Sept. 23, 2012, your firm will have to provide a summary of benefits and coverage (SBC), which generally will be prepared (based on a template) by your insurer if your group health plan is insured (or by you if your plan is self-insured), and if you make any material modification to your group health plan that affects the SBC information, then you must provide 60-days' advance notice of the modification.)

If your firm's medical plan is self-insured, and you wish to exclude, for example, your Of Counsel employee attorneys (or any other class of employees), then you should check in advance that your plan does not thereby discriminate in favor of highly compensated individuals in violation of Code Section 105(h). “Highly compensated individuals,” in this case, includes generally the highest paid 25% of all of your employees. Code Section 105(h) sets forth nondiscrimination requirements both for: 1) eligibility to participate; and 2) benefits provided to participants. If your self-insured medical plan does discriminate in favor of highly compensated individuals, then certain amounts payable to highly compensated individuals under the plan will be taxable to such individuals ' not a good result for them. (Note that Code Section 105(h) allows for the uniform exclusion from coverage of part-time or seasonal employees.)

To the extent your Of Counsel employee attorneys (or any other class of employees) are eligible to participate in your group medical, dental, vision, long-term disability, and life insurance benefits, then the terms of your Code Section 125 “cafeteria plan” (125 plan) should provide for the payment of the premiums for these benefits by such employees (as well as other participating employees) to be made pursuant to the 125 plan. In addition, in such case, if your 125 plan provides for health care flexible spending accounts or dependent care flexible spending accounts, then the 125 plan also should allow for participation by your Of Counsel attorneys. Note that, similar to a self-insured medical plan, your 125 plan cannot discriminate in favor of highly compensated individuals as to eligibility or as to contributions and benefits, and also cannot discriminate in favor of “key employees,” without adverse income tax consequences to such individuals. (In addition, your group life insurance and dependent care assistance benefits also have separate non-discrimination requirements.)

Focusing now on your 401(k) plan (or plans in the case of some firms), you actually have a fair amount of latitude regarding inclusion or exclusion of a class of attorney employees (such as Of Counsel attorneys). It is critical, however, that if such class of attorneys is to be ineligible to participate in the plan, then the plan document (as well as the summary plan description) must clearly provide for such exclusion. Similarly, if such attorneys are eligible to participate in the plan, the plan document (and summary plan description) should unambiguously provide for such eligibility. In addition, you should make sure that your employee handbook (and any offer letter) is not misleading, if it touches upon 401(k) plan participation. (Note also that you should take into account the potential impact on discrimination and coverage testing before excluding any class of employees from participation in your 401(k) plan.)

If your 401(k) plan more generally just excludes part-time, temporary or seasonal employees, your plan should limit such exclusion to individuals who work less than 1,000 hours in a year, or should provide that, notwithstanding any such classification exclusion, any employee who completes at least 1,000 hours of service will be an eligible employee. However, if your plan uses the “elapsed time” method of determining years of service, rather than hours of service, then you effectively are prevented from excluding part-time employees from your 401(k) plan on the basis of hours of service. (In addition, your 401(k) plan cannot have an indirect service requirement that violates the minimum service requirement applicable to your plan under the Code.)

If you inadvertently do not allow eligible attorney employees (or other eligible employees) to participate in your 401(k) plan, it is not necessarily the kiss of death for your plan, but the cost to fix the error can be pricey. Under IRS correction procedures, if you improperly exclude an eligible attorney (or other eligible employee) from participating in your 401(k) plan, then to correct such error you generally will have to make a corrective contribution to the plan for the employee for the period of exclusion equal to 50% of the plan's applicable actual deferral percentage for the year of the employee's missed deferral multiplied by the employee's compensation for such period, as well as a corrective contribution for any missed employer match based on the plan's applicable actual deferral percentage (not multiplied by 50%), and also adjust for earnings. Whether you will have to formally submit this plan operational correction (with a filing fee) to the IRS for its blessing will depend on the subjective significance of your exclusion error, and also how recent the error was. In short, you want to make sure that you follow the terms of your 401(k) plan for eligibility purposes (as well as for all other purposes, of course).

Independent Contractors

If your new attorney will not be an employee, but rather will be an independent contractor, then your ability to provide employee benefits to the attorney is much more limited.

While typically your firm's welfare benefit plans only would provide that employees (and partners and LLC members) are eligible to participate, you could extend eligibility to your independent contractor attorneys if your benefits are insured ' provided that your insurance policy coverage language is negotiated to expressly cover such independent contractor attorneys. In addition, your plan document and summary plan description should accurately describe any such class of non-employee attorneys who are eligible for coverage. Finally, before you open up your insured welfare benefits to any attorneys who are independent contractors, you should confirm that under applicable state law, your plan is not subject to any additional undesirable (or unacceptable) requirements, if your plan is considered a multiple employer welfare arrangement (a.k.a. a MEWA) under ERISA and state law as a result of covering the non-employees.

If your firm's welfare benefits are self-insured, you generally should steer clear of extending eligibility in your plan to any independent contractor attorneys, unless you have thoroughly vetted the matter as to applicable state law requirements if your plan would be considered a MEWA. State laws applicable to self-insured MEWAs can be onerous deal-breakers, including, e.g., licensing and minimum surplus and state deposit requirements. Note that any independent contractor attorneys covered under your health insurance cannot exclude from federal taxable income the value of the health insurance you provide to them.

As to your 401(k) plan, you cannot allow independent contractor attorneys (or other non-employees) to participate. While the Code does permit partners and LLC members to be covered under tax-qualified retirement plans maintained by their partnership or LLC (as the case may be), and treats such individuals as employees for qualified plan purposes, if you otherwise allow non-employees to participate in your 401(k) plan, it very well could be the end of your plan. Such non-employee 401(k) plan participation will
violate the “exclusive benefit rule” of Code Section 401(a)(2) ' i.e., that your plan only can provide benefits to your employees and their beneficiaries.

If your new independent contractor attorney is not eligible to participate in your employee benefit plan (be it welfare or 401(k)), then you should make sure that the terms of your plan document and summary plan description are not ambiguous as to such ineligibility. It also is important to include in your applicable plan document specific language that provides that if a governmental agency, such as the IRS, reclassifies the attorney (or any other independent contractor) as your common law employee (notwithstanding your classification of him or her as an independent contractor), then the attorney will not be entitled to retroactive benefits under the plan for periods prior to the reclassification. This provision hedging against liability for providing past benefits upon retroactive employee reclassification by the government often is referred to in the employee benefits legal community as “Microsoft” language, based upon the emergence of the use of such precautionary language following a class action lawsuit brought against Microsoft Corporation by former freelance workers following an IRS reclassification of Microsoft's freelancers as employees in an employment tax audit in late 1989.

Conclusion

If you are looking to, or already have, expanded your firm's attorney base to include less-traditional attorney positions, then you must: 1) properly classify any such attorney as an employee or independent contractor, as the case may be; and 2) provide the benefits, if any, to these attorneys that are called for under your applicable benefit plans. As to the benefits provided to these attorneys, there is room for planning, subject to applicable laws. It is critical, however, that your benefit plans, summary plan descriptions, and applicable insurance policies include the attorneys (and other employees) intended to be covered and that you follow the eligibility provisions of your benefit plans.

Douglas A. Smith is Of Counsel with the Atlanta office of Arnall Golden Gregory LLP, where he is a member of the firm's Employee Benefits and Executive Compensation Practice Teams. He can be reached at 404-873-8796 or [email protected].