Why should workers have to pay their own legal fees even when they win their lawsuit?

The argument for shifting legal fees in labour dispute cases on to the employer

This is a summary of a more detailed legal argument made by Jason Law, JD University of New York Law School. The full article is available here as downloadable PDF. .

During the run-up to the Spring Festival holiday, government and trade union officials were once again prioritizing the resolution of labour disputes, to ensure that migrant workers could return home with at least some of the pay owed to them by employers. In December 2011, at least eight government departments issued notices demanding that employers pay their workers on time, and the national trade union urged local unions to mobilize and prioritize legal assistance for migrant workers in these matters.

This annual tradition of officials scrambling to assist workers ahead of the holiday only underscores the fact that, despite years of new policies and laws, many employers continue to shirk their responsibilities and fail to provide their employees with their salaries and benefits in a timely manner. While a new amendment criminalizing the nonpayment of wages, implemented earlier in the year, is a welcome addition to the law, it is only aimed at cases where large amounts of wages are at stake, and in practice, it appears to have only been applied against bosses who have run away leaving large numbers of workers unpaid. Most workers must rely on civil remedies — mediation, arbitration, or the courts — for their labour disputes. These remedies have a limited deterrent effect on bosses and can be prohibitively expensive for workers.

The cost of going to court

While the authorities have acknowledged, in recent years, the high cost of seeking justice by eliminating fees for labour arbitration and increasing the amount of money spent on legal aid, the cost of pursuing legal redress remains high. The legal process is a daunting obstacle, often requiring the help of an attorney, which is an expensive proposition if sought privately. When the minimum fee for a lawyer is over double the monthly minimum wage, it simply does not make economic sense for an unpaid worker to seek the help of a private lawyer unless the compensation sought has accumulated to an egregiously high amount. Moreover, lawyers are largely forbidden from accepting labour dispute cases on a contingency basis. See Article 11 of the National Development and Reform Commission and Ministry of Justice Notice on the publication of the Administrative Measures on the Fees for Legal Services (国家发展改革委、司法部关于印发《律师服务收费管理办法》的通知》). As such, workers often need to find a way to pay the attorney before they receive any compensation or find an attorney willing to accept payment after the fact.

In labour rights cases supported by China Labour Bulletin, the estimated standard fee for a lawyer, on average, would have been 38.8 percent of the total compensation sought in the more than 400 cases where data is available. The numbers are worse when the compensation actually awarded is factored in. In those cases, where data is available, the standard fee for a lawyer would have been over 175.9 percent of the compensation ultimately awarded.

Given the high cost of hiring a lawyer, most workers need to rely on free or low cost legal aid. The Chinese authorities have increased the amount of legal aid offered in recent years, mostly by paying subsidies per case handled by legal aid providers. However, the subsidy amount, which varies from region to region, is still below the government’s own minimum suggested lawyers fees. Such low compensation does little to attract attorneys to legal aid work; skilled attorneys seek higher paying positions and the ranks of legal aid workers remain low while the need remains high amidst the burgeoning number of legal disputes. Legal aid attorneys must rely on outside sources of funding, or rely solely on the subsidy to cover the many costs of litigation.

An example of the costs that discourage workers from taking legal action is a 2010 case involving a Shenzhen worker who was illegally dismissed from his job after making suggestions about management and worker treatment. Since he had been working for less than a year, he was only entitled under the law to compensation of one month’s salary, which amounted to 900 yuan. However, the market rate in Shenzhen for attorneys handling such cases was around 6,000 yuan. The attorneys handling the case did not receive government legal aid and could only take the case because of financial support from CLB.

The legal process also gives employers numerous opportunities to use delaying tactics such as frivolous appeals, to add cost and time, often frustrating workers into giving up or settling for much less than what they’re actually owed. Legal aid attorneys, paid the same flat subsidy at each stage of the case regardless of the amount of work put in, may encourage their clients to settle rather than work longer hours for no additional reward. And at present, there is little legal sanction to deter employers from using such tactics.

The need for a new system

Instead of requiring workers and the government to bear the costs of legal action, such costs should be shifted onto the employers. Attorney fee-shifting is a staple of civil rights litigation in many legal systems. In such a system, rather than having both parties pay their own legal costs and fees, if the injured party is successful in winning his or her lawsuit, the total cost, including attorney’s fees, is paid for by the losing party. In the context of labour rights, such a system would allow a worker to have his legal costs paid for by the employer, if the worker prevails in his lawsuit. In the United States, federal statutes, such as the Civil Rights Attorney's Fees Award Act of 1976, allows for winning parties to recover attorney fees in federal civil rights cases, including violations of the Fair Labor Standards Act. Additionally, 40 states have laws that allow for workers to recover attorney fees from the employers in successful wage dispute claims.

Fee-shifting accomplishes multiple goals: It increases the numbers of labour attorneys providing legal aid, it enhances enforcement of labour laws, imposes the costs of recovery on the party responsible for the labour dispute, and deters employers from both violating labour laws in the first place as well as from engaging in delaying tactics after a dispute begins.

Rather than being limited to a small flat fee, as in the current legal aid system in China, under a fee-shifting regime, attorneys would be compensated with a reasonable fee if they were able to help their clients prevail in their labour disputes with their employers, even in cases where the compensation awarded to the worker is low. Thus assured of compensation, the pool of available labour attorneys will expand, enhancing the private enforcement of labour laws.

Fee-shifting also ensures that employers who violate workers’ rights are not only responsible for compensating their workers, but also for the legal costs entailed in the case. Instead of the burden and costs of labour rights enforcement disproportionately being placed on the government, workers and civil society, the costs are rightfully placed on those that violate the law. The added cost should further deter employers from breaking the law in the first place. Additionally, since the added costs of delays and appeals are borne by the employers, they are no longer incentivized to delay but rather to settle earlier in order to avoid the risk of having to pay both parties’ heightened legal fees.

Enforcing the system

For fee-shifting to work however, the system will have to be fair and rigorously enforced. There are already local regulations in Shenzhen, which allow for fee-shifting in labour disputes up to a point. However, problems in both the wording of the regulations and its implementation limit its usefulness. The 2008 Regulations on the Promotion of Harmonious Employment Relationships (深圳经济特区和谐劳动关系促进条例), state in Article 58 that:
 

If a worker prevails in a labour dispute after labour arbitration or trial, the attorneys’ fees paid by the worker may be assumed by the employer, but such fees may not exceed 5,000 yuan; the portion in excess of 5,000 yuan must be paid by the worker.

There are many issues here. One major issue is that the regulations require workers to have already paid the attorney; only then will the employer be required to reimburse the worker’s fees. This immediately eliminates one of the major benefits of a fee-shifting policy, namely its ability to provide lawyers for those who would normally not be able to afford them. The requirement also discourages attorneys from providing lower-cost or free services since they can only be reimbursed if they charge the worker upfront.

The 5,000 yuan ceiling similarly limits the regulation’s effectiveness. This ceiling is presumably aimed at preventing attorneys from engaging in fraudulent or frivolous actions to drive up their fees. However, any regulations for fee-shifting should follow the example set in other legal systems and optimally be aimed at reasonably compensating the attorneys of winning parties for their services, regardless of whether or not the attorney had already been paid for by the worker. Since local governments already issue specific guidelines for the permissible range of lawyer fees, any limits should be based on those guidelines, and fees for frivolous or fraudulent activity could be denied on evidence of such activity.

The non-mandatory nature of the regulations is another problem. The regulations only state that attorney fees “may” be assumed by the employer not “must” be assumed by the employer. Of course, such wording would not be a problem if, in practice, arbitration panels and courts regularly granted fee-shifting requests. However, in Shenzhen such institutions seem very reluctant to grant fee shifting requests.

From 2008, when the regulations were first implemented, through 2010, CLB supported 76 successful labour dispute cases in Shenzhen. In all cases the worker was able to obtain compensation from the former employer, and in all cases the attorneys asked for the employer to pay their client’s legal fees. Only three of 76 fee-shifting requests were granted. All four instances were from the courts; no labour arbitration panels granted the requests. Often times, labour arbitration panels didn’t even know about the regulations, declaring that requests for fee-shifting were outside the purview of labour dispute arbitration, even though the regulations clearly state that fee-shifting may occur after arbitration. Lax enforcement is clearly one of the largest problems with the Shenzhen regulations.

Conclusion

In order to reduce the costs of labour rights enforcement, as well as the incidence of labour rights violations, it is essential that China implements an effective system of attorney fee-shifting in labour rights cases. Currently, high costs deter workers from seeking legal redress and force them to accept a lower settlement or sometimes engage in extreme actions in their search for redress. Such a system inappropriately rewards the employer for violating workers’ rights. Fee-shifting on the other hand increases the cost to employers and deters them from violating rights in the first place. Moreover, attorneys would be more willing to take labour dispute cases safe in the knowledge that they can collect a reasonable fee from the employer. This would both reduce the costs for the worker and expand the pool of available attorneys, thereby strengthening the enforcement of labour rights.

Critics of fee-shifting may argue that it encourages frivolous lawsuits and discourages workers from settling their disputes early, since their lawyers will benefit from racking up costs by delaying and playing for time. However, if the system ensures that fee recovery is limited only to successful cases and only reasonable fees are granted, as is the case in other jurisdictions, concerns about abuses should be alleviated. Indeed, by issuing attorney fee guidelines, local governments have already demonstrated that they are capable of determining the reasonableness of attorney fees; and they should also be capable of determining whether a requested fee is reasonable or not.

The present system does not adequately protect workers’ rights or do enough to deter employers from violating those rights. Workers, the government, and civil society currently bear the brunt of the costs associated with labour rights enforcement. Fee-shifting will increase the enforcement of labour laws and deter employers from violating rights in the first place. A policy that shifts the costs of rights protection onto those employers that violate workers’ rights is fundamentally more equitable.

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