Biglaw

Are Nonequity Partnerships Part Of A Biglaw Tax & Discrimination Scheme?

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Rich Businessman Poor BusinesswomanSomething has been fishy about the nonequity class of partners for years now. For starters, the non in front of the equity takes out a huge part of what being a partner means — its about as nonsensical as a non-partisan Supreme Court. A critical approach to the rise in nonequity partnerships has been that it was a gimmick firms used to bill out their retitled senior associates at a higher rate without their clients knowing any better, but a recent lawsuit against Duane Morris alleges a much darker rationale. ABA Journal has coverage:

Duane Morris reduces business expenses and tax obligations for equity partners by shifting some of the burdens to lawyers who carry the partner title but have no equity or power in the law firm, according to a lawsuit filed Wednesday.

“The firm intended nonequity partners to operate as employees but sought the benefit of classifying them as bona fide partners/owner,” says the suit filed July 31 in the U.S. District Court for the Northern District of California.

Back in 2019 Above The Law flagged several firms who disproportionately gave nonequity partner positions to minorities. Duane Morris was one of the leaders in handing out nonequity titles to its minority attorneys. When asked to comment on why this was the case, Diversity and Inclusion Officer Joe West blamed it on the firm’s lateral strategy:

“We’ve grown organically by following the business and by adding groups in subject matter and geographic areas that make sense for our strategy,” he said. “You have much less control, and that act alone could skew the numbers.”

The suit alleges that the firm’s real motivations have less to do with their laterals and more to do with relieving themselves of financial obligations:

Money withheld as a capital expense is nonetheless reported as income for nonequity partners, “allowing the firm to both use nonequity partner’s money for its own expenses and shift the taxation burden of ‘phantom income’ from equity partner to nonequity partners,” according to the suit.

The firm doesn’t pay workers’ compensation insurance for nonequity partners, doesn’t pay for disability insurance, and doesn’t pay for or subsidize the cost of employee benefits, the suit says.

“As a result of her ‘promotion,’ Ms. Garland’s effective pay decreased as a direct result of the firm’s misclassification scheme,” the suit claims. “As it did with all other nonequity partners, the firm improperly shifted its business expenses to Ms. Garland, while excluding her from sharing in equity partner profits.”

The suit goes on to make further claims of discrimination, namely that Ms. Garland was paid much less than some of her white male peers and juniors, but the consequences of the nonequity prong of the suit could send ripple effects throughout law firms depending on the outcome. Duane Morris plans to fight the accusations in court.

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Duane Morris Bestows Partner Title On Powerless Attorneys To Shift Tax And Business Costs, Suit Alleges [ABA Journal]

Earlier: Repeat After Me, ‘Partnership Without Equity Is Not A Partnership’

Yup, Nonequity Partnership Is Used Disproportionately For Minorities

Chris Williams became a social media manager and assistant editor for Above the Law in June 2021. Prior to joining the staff, he moonlighted as a minor Memelord™ in the Facebook group Law School Memes for Edgy T14s.  He endured Missouri long enough to graduate from Washington University in St. Louis School of Law. He is a former boatbuilder who cannot swim, a published author on critical race theory, philosophy, and humor, and has a love for cycling that occasionally annoys his peers. You can reach him by email at [email protected] and by tweet at @WritesForRent.

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