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Duane Morris bestows partner title on powerless attorneys to shift tax and business costs, suit alleges

By Debra Cassens Weiss

August 1, 2024, 10:55 am CDT

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.

The proposed class action suit by Black female nonequity partner Meagan Garland also alleges that the firm violates California equal pay laws by “systematic gender and race-based pay inequity practices.”

“Duane Morris’ male-dominated, mostly white executive committee determines compensation for all attorneys, including nonequity partners, and does so in an opaque, even black-box fashion,” the suit says. “The secrecy about how compensation decisions are made only reinforces the pay inequity and enables the firm to continually disfavor female and nonwhite attorneys in favor of male and white attorneys.”

The suit names as defendants Duane Morris, its equity partners and its Tax Accounting Group, which offers to prepare tax filings for nonequity partners.

Garland, a San Diego resident who is an employment attorney, said she had 12 years of employment law expertise when she was hired as a special counsel in 2018. She later learned that her annual pay was in the range for a second-year associate, the suit alleges. Despite “glowing” reviews for Garland, the pay gap between Garland and comparable white male lawyer widened, the suit says.

In January 2021, Garland received the partner title, although she had nonequity status.

“Nothing about Ms. Garland’s work responsibilities, reporting structure or client interactions changed as a result of her change in title,” the suit says.

She did not share in firm profits or losses after the title change.

But the firm stopped withholding employment taxes from Garland’s compensation and “began assessing to her a share” of the firm’s partnership taxes owed to states in which the firm practices, the suit says.

The firm also withheld and directed back to itself 4% of gross annual fixed-fee representation as a capital contribution and withheld for an entire year 18% of annual fixed-fee compensation to defray operating expenses, according to the suit.

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 also alleges that Duane Morris funds its political action committee and makes United Way charitable contributions with wages unlawfully deducted from compensation of nonequity partners.

The suit also contends that Garland has been underpaid since her hiring and includes some alleged examples. In 2023, a white male employment lawyer in California with the same billing rate as Garland was paid almost double her compensation and double her bonus. That same year, a white male partner with five fewer years of experience earned $165,000 more than Garland.

The suit seeks punitive damages and civil penalties “up to $25,000 per violation” for misclassified nonequity partners. It also seeks a declaratory judgment for misclassification of employment, an accounting of money owed to equity partners and restitution.

Causes of action include breach of contract regarding compensation, breach of the implied covenant of good faith and fair dealing, violation of California’s business code and its Equal Pay Act, intentional and negligent misrepresentation, conspiracy to deprive nonequity partners of money, breach of fiduciary duty, professional negligence and unjust enrichment.

Duane Morris gave this statement to the ABA Journal: “We strongly disagree with the allegations set forth in the complaint. We look forward to responding to those allegations and vigorously defending the case in court.”

Hat tip to Bloomberg Law.