It may not have happened to you....yet. But there is a good chance that you might get "bumped" from your seat on a future vacation. Yes it's legal and yes you have rights...which is why it's a good idea to know a little bit more about airline overbooking before you get to the airport.
U.S. airlines are allowed to overbook flights to allow for "no-show" passengers. However, if passengers are involuntarily bumped, airlines are required to do ask for volunteers to give up their seats in exchange for compensation. Most involuntarily bumped passengers are subject to minimum compensation schedules.
Bumping occurs when there are more passengers with confirmed reservations who show up for a flight than there are seats on the plane. This is called overbooking the plane. Airlines overbook because they know from experience that all passengers who have made reservations seldom show up for the flight. To have any chance of filling the plane, airline computers estimate the number of passengers likely to be no-shows and accept reservations accordingly. (Airlines also ignore the overbook limit when a customer is buying a full-fare ticket, because the cost of bribing volunteers with a bump ticket is usually less than the additional income derived from a full-fare ticket.)
In an overbooking situation, agents will make a gate area announcement asking for volunteers with flexible schedules to give up their seats. Typically, the initial amount offered is based on two factors: the length of the flight, and how long the volunteer must wait in order to be scheduled on a later flight. Usually, the gate agent's first offer is for $250 (this may vary).
If not enough passengers take up the first offer, agents will usually only increase the offer just once or twice more. For example, Delta Airlines says that it tries to limit increases to just two rounds only in order to get flights out on time. If agents are unable to find enough volunteers, they will begin to involuntarily bump a few unlucky passengers, based on a variety of factors, like the time the passenger arrived for the flight, the amount they paid for their ticket, and their frequent flyer status.
AIRLINE OVERBOOKING
There is no compensation if alternative transportation gets the passenger to the destination within one hour of the original scheduled arrival.
The equivalent of the passenger's one way fare up to a maximum of $200 for substitute domestic flights that arrive between one and two hours after the original scheduled arrival time or for substitute international flights that arrive between one and four hours after the original scheduled arrival time.
If the substitute transportation is scheduled to get you to your destination more than two hours later (four hours internationally), or if the airline does not make any substitute travel arrangements for you, the compensation doubles to a maximum of $400.
There are exceptions to these rules. This minimum compensation schedule does not apply to charter flights, to scheduled flights operated with planes that hold 60 or fewer passengers, or to international flights inbound to the United States. If a passenger can't be accommodated to their satisfaction, they may be eligible to request a refund for the remaining part of the trip, even if the trip were on an otherwise nonrefundable ticket.
TAKING ADVANTAGE OF GETTING BUMPED - ON PURPOSE
To take advantage of bumping, you have to be on a flexible travel schedule. Making a reservation only if a flight is almost full. If there are less than eight seats available, some people will most likely be bumped.
Look for flights on heavily traveled days, but on small-bodied aircraft like 727's and 737's. (Bumping compensation rules don't apply to commuter airlines or charter flights.)
The best are holiday flights, frequent business routes, afternoon departures on Fridays and Sundays, transcontinental nonstops and nonstops on domestic routes that have just a few such flights.
Select the last flight of the day so that the highest compensation will apply. Conversely, if you must get to your destination, don't wait for a late flight.
If the airline asks for volunteers, speak up. The compensation could be as little as a $50 voucher or it could go as high as around $500 voucher. Reminder: You don't get a free flight if the airline can get you on another flight for the same destination within the hour
For more information on FEDERAL LAWS REGARDING OVERBOOKING check out this PDF link.