When a Company Retains Counsel for Employees

Posted on Tuesday, August 28, 2018

When Laidlaw International Inc. found out that a grand jury was investigating the company for allegedly submitting fraudulent invoices to a local government, it arranged for counsel for the three employees that were the primary targets of the investigation. In addition, the bus and transit company engaged a fourth attorney to represent former employees and existing staff members who were not currently the subject of the grand jury investigation. 

Each of the retainer agreements noted the following:

The attorneys' professional obligation was to the employees, not the company.
The lawyers were not required to make disclosures to the company.
Payment of fees was not contingent upon the attorney cooperating with the company.

In addition, the company notified employees that they were free to engage an attorney other than the counsel Laidlaw had retained. However, the resulting legal bills would be the responsibility of the employee. Faced with the prospect of large legal bills, all three employees accepted the company's offer. However, Laidlaw also stated in the agreements that it had the right to stop paying for the attorneys at any time.

The New Jersey division of criminal justice objected to the arrangement arguing that it created a conflict of interest. The state moved to disqualify the lawyers. Since Laidlaw held the "purse strings," the state believed that attorneys would be required to ensure that company's interests were protected. As described in court documents, "such an arrangement risks dividing the attorney's loyalty between the client and the client's employer."

Under Rules of Professional Conduct, attorneys can be hired by companies for their employees under certain conditions. The trial court held that the company-paid attorneys did not violate these rules and could represent Laidlaw employees in the grand jury investigation after imposing some restrictions. It also noted the company hired "competent, knowledgeable, respected attorneys."

The Supreme Court of New Jersey affirmed the lower court  (In the Matter of the State Grand Jury Investigation, A-80-08, November 2009). However it stipulated six rules that companies must abide by if they pay lawyers for employees:

1. The employee-client must give informed consent.

2. There cannot be interference from the company regarding the attorney's professional judgment so that "the lawyer-client relationship remains sacrosanct," the court stated.

3. Information relating to how the client is being represented is protected. The lawyer cannot communicate with the company about the relationship with the employee. This includes redacting bills submitted to the company for payment so that no specific legal information is detailed in the billing.

4. There must not be an existing attorney-client relationship between the attorney and company paying the bill.

5. The entity paying the bill must do so in the same way (frequency, manner, etc.) as it pays its own counsel.

6. Before a decision can stop paying an employee's legal bills, the company and the attorney must make an application to the court for a hearing on the matter. If a company "fails to pay an employee's legal fees and expenses when due," the court added, "the employee shall have the right, via a summary action" for a court order.

In addition to ruling that no conflict existed in having Laidlaw pay for its employee's legal representation, the court also provided the following guidance for companies in similar situations:

Instead of telling employees that legal representation is being offered on a "take it or leave it" basis, the company should not place limitations on the attorney who can be engaged. Instead, the company should impose reasonable limits on fees and expenses.
Retention letters to employees should clearly state that "nothing in the representation shall limit the lawyer's responsibilities to the client..." Further, it should be stated that the company will not "direct or regulate the lawyer's professional judgment in rendering" legal services.

Posted in Tax And Accounting Topics For Business

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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