In litigation, the American Rule means that in a legal dispute, both parties are responsible for their own attorneys’ fees. No matter who the victor, each party pays their own way. For two large companies with sufficient funds to litigate a matter, this rule may not be very harsh.
But, what does this rule mean to employees in the context of employment disputes?
In employment disputes, the American Rule may be particularly unfair for an employee who has little in the way of financial resources to pursue a claim or mount a defense against a large company with deep pockets. Accordingly, under the American Rule, many employers might walk away with no consequences for an injustice against an employee.
Fortunately, the American Rule may be superseded by statutes and contracts. There are many laws that protect employees from the type of injustice that could arise from the American Rule. Most statutes that apply to employment disputes provide for the recovery of attorneys’ fees if the plaintiff wins at court.
But what does the American Rule mean if it is found in an employment agreement?
When negotiating or entering into an employment agreement, typically one side has greater bargaining power. The employer has a job the employee wants. Sure, some will argue that the employee has the option of not accepting a job based on the terms offered. However, in a tight job market, employees may find themselves with only two options: (1) take the job with not so favorable terms or (2) reject the job and remain unemployed while another person takes the position. Often, it is rare to find a shortage of available and skilled workers. Conversely, there may be a shortage of the right job opportunities. So, while workers may theoretically have the right to walk away, realistically, financial constraints and obligations may leave them with no real option.
When entering into an employment contract, there are many rights that an employee may give up. Accordingly, employees should make sure they understand all of the terms they are agreeing to. Employees may find themselves giving up the right to leave their place of employment to work for a competitor due to a non-complete clause. They may give up the right to a trial by jury because of an arbitration clause. They may even give up their right to pursue legal action against their employer due to financial reasons. What does this mean? How does an employee give up the right to pursue legal actions?
If entering into an employment agreement that contains terms memorializing the American Rule, an employee may need to consider whether they can actually afford the cost of an attorney should the employer breach the agreement.
It may cost tens of thousands or even hundreds of thousands of dollars to litigate an entire case. When employment statutes provide for the recovery of attorneys’ fees, the employee and their attorney know that if successful, they can recover these litigation fees and costs from the employer. However, when parties have contracted away their right to recover attorneys’ fees in an employment dispute, the employee may be faced with deciding whether they can afford to pursue their claims against the employer knowing that a successful outcome may not include recovering the fees and costs of going the distance. If the damages sustained by the employee become relatively minimal after hiring an attorney, or even worse, less than what it would cost to hire an attorney, the employee may be more inclined to walk away.
In its application, the American Rule in an employment agreement may be fundamentally unfair by making it impossible for the employee in the inferior financial position to later protect their rights if needed. This means the employer who came in with greater bargaining power has won.
If you are faced with a job opportunity and have questions or concerns over the terms of an employment agreement, you should consult with an employment attorney to know and understand your rights BEFORE signing.