In general the D.C. opinion takes a permissive line, finding no inherent ethical problem with a lawyer or law firm entering into a PEO arrangement. However the opinion expresses serious reservations about two common elements of PEO arrangements: the PEO's reservation of a shared right to hire & fire the work site employees, and the PEO's right to inspect the client company's books and records.
Here is what the D.C opinion says on these issues:
Finally, some PEOs adhere to published standards of a trade organization known as the Employer Services Assurance Corporation (“ESAC”). ESAC requires that a PEO share with the “client” (i.e., the law firm), and in some instances exercise exclusively, the power to hire and fire employees (who here would include lawyers and legal assistants as well as clerical and secretarial staff), that the PEO have at least a shared right to direct and control the work of the employees, and that ESAC have access to client (i.e., law firm) work sites and records. A lawyer owner who permitted the removal of these rights and responsibilities wholly or partly from the management of the law firm would violate the Rules of Professional Conduct. Hence the use of a PEO by law firms in this jurisdiction is prohibited if the arrangement gives the PEO actual (as opposed to merely legal) authority over the hiring or firing of lawyers or legal assistants, or authorizes the PEO to direct or control the provision of legal services by any employee of the law firm. The responsibilities in question include the duties to exercise independent judgment on behalf of clients, see D.C. R. Prof. Conduct 2.1, 1.8(e)(2), maintain client confidences and secrets, see id. 1.6, 1.8(e)(1), act zealously on behalf of the client’s interests, see id. 1.3(a), avoid conflicts, see id. 1.7, and supervise the conduct of the others working for the firm, see id. 5.1, 5.3. By contrast, the ASO form, or the PEO form without such objectionable attributes, does not appear to raise any of these concerns.
Thus we answer the inquiry in the affirmative, subject to the limitations and concerns noted above. Use of an employee management company by a law firm is permissible only if it does not affect the firm’s provision of legal services and does not limit or infringe any of the duties and responsibilities of lawyers set out in the D.C. Rules of Professional Conduct.
The italicized sentence in the first paragraph quoted above is probably the heart of the matter. While the PEO may retain a "legal right" to hire and fire, the law firm cannot lose actual control over hiring and firing.
I think both the issue of hiring and firing and the question of access to the law firm's records could be addressed by an addendum to the customer service agreement providing that the PEO will only hire and fire in consultation with its law firm client, and that the PEO's access to the law firm's books and records is limited to that necessary to address payroll, UI, and workers' compensation issues.
