Seeking recourse against an employee for economic loss

By Dong Chundao, AllBright Law Offices

With the increasing compliance awareness of employers, there has been a progressive increase in cases where an employer demands compensation from a worker for property loss incurred as a result of a breach by the worker of its compliance management rules and regulations. Due to the imperfections and ambiguities in Chinese laws, there is a debate in judicial practice as to how an employer can seek recourse against a worker who has caused it to incur an economic loss.

Relevant legal provisions

One of the earliest pieces of legislation to address this issue is the Interim Provisions for the Payment of Wages, formulated by the former Ministry of Labour in 1994. Article 16 specifies that “if, due to a reason attributable to a worker himself or herself, his or her employer incurs an economic loss, the employer may, pursuant to [the worker’s] employment contract, demand that he or she compensate for the economic losses”. This provision deems the worker’s liability for damages a contractual liability, with the specific liability to be borne determined by relevant provisions specified in the employment contract between the parties.

Dong Chundao Partner AllBright Law Offices
Dong Chundao
AllBright Law Offices

Some regions, such as Shanghai, have issued different regulations. Article 22 of the Measures of Shanghai Municipality for the Payment of Wages by Enterprises, formulated in 2003, specifies that “where an employer, in accordance with the law, demands that a worker compensate it for an economic loss incurred by it due to a reason attributable to the worker himself or herself, and wishes to deduct such compensation from his or her wages, the portion deducted may not exceed 20% of the worker’s wage for the month in question and the wage remaining after the deduction may not be less than the minimum wage rate specified by Shanghai”. The measures substitute compensation “in accordance with the contract” to compensation “in accordance with the law”.

Pursuant to the Employment Contract Law, an employer may also establish and improve labour rules and regulations in accordance with the law, and formulate rules and regulations that have a direct impact on the immediate interests of workers, such as those for labour discipline, provided that the same are submitted to the employee representative congress, or all of the employees, for discussion and are posted or announced to the workers.

Determination of damage liability

It is the opinion of some that, given the inequality in the employment relationship between a worker and employer, it would be overly harsh on the worker to simply treat fault liability as the principle for attributing liability. For example, if a manual labourer damages an expensive piece of production equipment, requiring him or her to bear damages is unrealistic and unreasonable.

The remuneration of a worker is the distribution of only a portion of the employer’s overall income, which must also cover the company’s operating expenses and deliver a profit. Since the employer reaps most of the profit, based on the principle of balance of rights and obligations, the employer should also bear the attendant risk liability. Losses caused by workers themselves are a kind of operational risk that employers are required to face.

Then, if the person in charge of the sales, financial, public relations, or other such department of an enterprise breaches compliance management regulations, such as committing commercial bribery, keeping false accounts, etc., in an effort to secure greater benefits for the enterprise, or in executing relevant administrative orders of the enterprise, how is the situation to be handled if the enterprise incurs an economic loss due the imposition of penalties by the relevant administrative or judicial authority due to such violation? Should the worker pay compensation?

It is the author’s opinion that the special nature of an employment relationship needs to be considered and the determination made based on a comprehensive consideration of the extent of the worker’s fault. If the worker was not negligent or only slightly negligent, it is not appropriate for his or her employer to claim damages. If the worker breached prohibitive provisions of the enterprise’s compliance management regulations deliberately or in a grossly negligent manner, or even a violation of the law or a criminal offence, thereby causing the employer to incur an economic loss, the worker should be held liable for damages.

Determining measure of damages

How should the measure of damages be determined where a worker is liable for damages due to a deliberate action or gross negligence, or for committing a violation of the law or a criminal offence? First, if the same is provided for in the employment contract, the compensation as specified in the employment contract should prevail. If the employment contract is silent but the same is provided for in relevant rules and regulations, the worker may be demanded to pay compensation on that basis.

If the employment contract and the rules and regulations are silent, the measure of damages bearable by the worker should be determined based on a comprehensive consideration of the specific losses incurred by the employer and the economic situation of the worker. The compensation amount may be deducted from the worker’s wages, provided that the portion deducted each month does not exceed 20% of the worker’s wage for the month in question. If, after the deduction, the wage remaining is less than the local monthly minimum wage rate, his or her wage should be paid at that minimum rate.

As for a worker who has left the enterprise or been dismissed, the employer may, pursuant to article 27 of the Law on the Mediation and Arbitration of Employment Disputes – specifying that “the time limit for applying for arbitration in an employment dispute shall be one year. Such time limit shall commence to count from the date on which the party learned or ought to have learned that his/its rights were infringed” – apply, within one year, for labour arbitration, demanding that the worker compensate for its losses.

If a worker causes his or her employer to incur a loss, his or her liability for damages should be determined based on the extent of his or her fault. If the worker was not negligent, or only slightly negligent, the employer should not claim damages; if the loss was caused as the result of a deliberate action, violation of the law or criminal offence by the worker, he or she should be fully liable for damages. If the loss was caused by gross negligence, partial liability for damages should be determined based on the extent of his or her fault.

Dong Chundao is a partner at Allbright Law Offices in Shanghai


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