The short answer is: Yes. A law firm can add a surcharge to a freelance or contract attorney’s rate, as long as the entire fee is reasonable.
When a law firm uses a freelance attorney for a legal project, the firm can elect to bill the client in several different ways: (1) not pass any of the cost to the client; (2) pass the cost to the client at the same rate the firm paid the freelance attorney; (3) mark up the cost and pass the marked up cost to the client; or (4) pass a flat fee cost to the client. Each of these four fee arrangements are ethical in California, assuming the fee passed to the client is not otherwise unconscionable pursuant to California Rule of Professional Responsibility 4-200, and assuming the attorney satisfies the standard requirements set forth under California Business and Profession Code sections 6147-6148; 6068(m) regarding fee arrangements.
Specifically, California case law has found that the amount a law firm pays to a freelance attorney is irrelevant to whether a fee is unconscionable, and nothing in Rule 4-200 suggests that the attorney’s profit margin is relevant to the issue of unconscionability. Shaffer v. Superior Court (1995) 33 Cal. App. 4th 993; Bushman v. State Bar (1974) 11 Cal. 3d 558, 564 (1974) (a fee which “shocks the conscience” is unconscionable); see also ABA Formal Ethics Opinion 2000-420 (“When costs associated with legal services of a contract lawyer are billed to the client as fees for legal services, the amount that may be charged for such services is governed by the requirement of ABA Model Rule 1.5 that a lawyer’s fee shall be reasonable.
A surcharge to the costs may be added by the billing lawyer if the total charge represents a reasonable fee for services provided to the client.”) It should be noted, however, that if the firm chooses to pass a marked up rate to its client, according to the Los Angeles County Bar Association Professional Responsibility and Ethics Committee, it likely constitutes a “significant development” of the case and the arrangement should be disclosed to the client. Rule 3-500; Bus. and Prof. Code §6068 (m); See also Los Angeles County Bar Association Professional Responsibility and Ethics Committee, Opinion No. 518 (“LACBA Opinion 518”).
In response to several large law firms billing their clients the firm’s full associate rate for extremely low- rate contract attorneys, some businesses include standard provisions in their retainer letters stating that a firm cannot put a surcharge on a contract attorney’s hourly rate, and that it must be passed as a cost.
If a firm’s client has such a requirement, then the firm must disclose a potential freelance attorney relationship to the client and renegotiate the provision if the firm plans to add a surcharge for a freelance attorney’s substantive legal work. Law firms and businesses should distinguish between substantive, skilled legal work and unskilled tasks when deciding whether a surcharge is appropriate. Most businesses appreciate a law firm’s willingness to find creative solutions to delivering a high quality service and product at the lowest possible cost. If the contract attorney is not billing on a contingency, law firms need not disclose the details of its relationship with the experienced temporary attorney, the same way law firms need not disclose associate salaries to its clients.