The replacement of employment-at-will with "just cause" and ephemeral "public policy" standards has both financial and managerial consequences. These consequences impact not just the employer, but also the entire employment market, affecting the income and opportunities of employees as well. Although the most obvious costs involve litigation and avoidance, there are also significant intangible costs to employers and employees caused by the change in managerial behavior that results when a "just cause" system is in place.
What are the dimensions of a "just cause" system? In an early analysis of the data involved in granting "just cause" protection to employees, Professor Jack Stieber of Michigan State University estimated that approximately 2.3 million private-sector employees not covered by collective bargaining agreements were discharged In 1977, of which about 1 million were not probationary employees. [42] Using these figures, Nathan Lipson and J. Douglas Korney made some estimates of the potential cost of granting "just cause" arbitration rights to the nation's non-union employees. [43] If only half of the discharged employees utilized a state-financed arbitration system, the cost of such arbitration (using average 1981 costs) would have amounted to $566 million in 1982.
Given the decrease in union membership and the increase in jobs stimulated by the Reagan economy, as well as the increase in arbitration costs, these figures would be substantially higher today. And these would only be the costs to government. Even greater costs would be associated with attorneys for the parties, preparation time, lost work time, and similar transaction costs, as well as (most significantly) the payout of awards, much of it for periods of time when the parties were waiting to arbitrate their disputes. Given the many billions of dollars such a system would remove from the productive economy, one needs to ask whether society would benefit from the imposition of universal "just cause" arbitration. Of course, these costs need to be compared to current litigation costs – costs which threaten to increase rapidly as additional jurisdictions succumb to the temptation to craft exceptions to or eliminate employment-at-will.
The litigation costs associated with wrongful discharge are already staggering. According to a 1987 Newsweek article, 72% of the employees who brought wrongful discharge actions between 1980 and the time of the article recovered damages, with an average award of $582,000. [44] Juries simply favor discharged employees. Reviewing various surveys in 1988, David J. Jung and Richard Harkness [45] found estimates of how often plaintiffs win ranging from 60% to nearly 80%, with average awards ranging from $425,500 to $582,000. Their own study revealed a 70% plaintiff success rate, with an average award of $486,812. The median award was $124,150. In an interesting cost calculation, the authors took into account the 30% of cases employers win, to arrive at an average "expected award" of $342,377.
A Rand Institute for Civil Justice study [46] released the same year analyzed 120 California wrongful termination jury trials between 1980 and 1986 and found plaintiffs victorious in 68% of the cases, with the average jury award over $650,000. Of that average amount, 40% was for punitive damages. Half of the plaintiffs were awarded more than $177,000. The study also found that only about 59'0 of all cases go to trial, suggesting staggering sums paid out by employers in settlements.
Such figures indicate that wrongful discharge cases are very much in the mainstream of the contemporary litigation mania. Based on the famous 1987 Rand study of trends in jury trials and verdicts, [47] which revealed that the average award in San Francisco and Chicago was $302,000, it would appear that wrongful discharge litigation does not offer a category which is somehow less costly or market-threatening. In fact, the average figures ranging from $425,000-5650,000 indicate that wrongful discharge litigation is one of the more expensive areas of courtroom combat.
Wrongful discharge litigation may be less risk-intensive than some other flashy areas of tort litigation. In comparing the Rand figures with their own research, Jung and Harkness [48] revealed a "curious amalgam". Although the median award in wrongful discharge cases is similar to medical malpractice cases, for example, the average is less than half as large. Product liability cases also average more than twice as high as wrongful discharge cases. But the median wrongful discharge figure of $124,150 is twice as high as the median for all cases, at $62,000. In short, wrongful discharge litigation is a dangerously expensive threat to the nation's businesses.
Furthermore, the danger of the extremely large wrongful discharge award should not be minimized. One of the most significant factors affecting the settlement value of cases is the risk of an extremely high award. The wrongful discharge field of law has seen many staggeringly high awards. Single individuals have received jury awards covering actual and punitive damages as high as $20 million, $4.7 million, $3.25 million, and $2.57 million. [49] In fact, according to the 1990 NCC Draft Report, "jury awards exceeding $1 million have been common." [50] With the threat of such massive awards hanging over the heads of employers, the settlement values of cases can be quite substantial.
The NCC Draft Report cites the estimate that 150,000 to 200,000 American workers would have a legitimate claim under a "good cause" standard each year. The value of these claims in total employer payouts would be too speculative, but reference to the studies on average awards indicates a multi-billion potential loss to employers in payouts alone. If each payout cost $100,000 (a not unreasonable figure), the payout would total $20 billion annually. Of course, one would assume that the existence of universal "good cause" protection would substantially reduce the number of employees terminated each year. In fact, in a theoretical world, none of the 200,000 workers who would have a legitimate claim would be fired, since employers would simply not act wrongfully in the face of such severe legal sanction. However, since we live in both a real world and a litigious one, it can safely be assumed that the majority of so-called legitimate cases would still be around, imposing their substantial costs on American employers.
In addition to the high cost of awards, there are of course the equally substantial transaction costs, especially for attorneys. According to the Rand wrongful discharge study, [51] defense billings for discharge cases add up to over $80,000 for an average case. A typical 1987 case involving a potential award of $1.5 million would cost almost $250,000 to defend. These fees are rising between 15 and 24 percent annually. With costs running this high, the settlement value for discharge cases naturally goes up as well. After all, if a case will cost $80,000 to defend, it will take a great deal of dedication to principle (or a legitimate fear of encouraging additional suits) to avoid settling for an amount less than that.
The employee also pays. The Rand study reveals substantial loss to suing employees. With an average final payout of $208,000 per case (after appeals have reduced the average jury award), plaintiff attorneys are taking home about $83,000 per case (using the standard 40% contingency fee figure). The average plaintiff employee only receives about $125,000 when all is said and done, even though total costs have exceeded $289,000. Amazingly, the $164,000 in transaction costs are 319'o higher than the payout to the plaintiff employee who initiated the suit. The cost of the suit makes up 609'a of the total financial payout. This certainly explains why both defense and plaintiff attorneys vigorously fight all efforts to limit access to litigation for wrongful discharge claims. It also shows quite convincingly that the current system of courtroom litigation does not serve the interests of employees very well.
From the standpoint of transaction costs alone, the current system of piecemeal recourse to courtroom litigation makes little economic sense, ft keeps the world's largest per capita force of lawyers employed, but does little to enhance the economy or make American business competitive with other nations. Any shift to full "Just cause" arbitration rights appears to be equally costly. The transaction costs may be reduced, but the overall costs of discharge may increase substantially. Employment-at-will avoids almost all of these costs. From the standpoint of litigation costs alone, and in the context of the great risk and loss of time that discharged employees must incur, the current system offers insufficient reward to employees.
