Can an employer recover losses caused by an employee's serious dereliction of duty?

Where an employee's serious dereliction of duty causes significant loss, an employer will typically dismiss for serious breach of discipline and will also consider claiming damages from the employee. In practice such claims are demanding on evidence, so the question is whether an employer's claim will be upheld.

First, because the claim arises from the employment relationship, an employer must first go through labor arbitration. In deciding the amount, arbitration and adjudication bodies usually take a range of factors into account: the employer's ordinary business risk, the cause of the loss and the causal link, the degree of the employee's fault, the fairness of allocating the risk, and whether the employer was negligent in supervision. They then fix a sum by reference to the employee's wage level and on a fair and reasonable basis. The compilation of Typical Labor Dispute Cases of Chinese Courts 2024 (including social insurance disputes) contains a chapter on "determining liability for losses caused to an employer by an employee's improper performance of duties". Its author reviewed similar judgments from courts at different levels in different regions and concluded that, where an employee causes loss through ordinary negligence, the great majority of courts hold the employee liable for nothing, whereas in cases of gross negligence or intent the employee is held liable, though the proportion varies. In the judgment of the Jincheng Intermediate People's Court of Liaoning Province in (2021) Liao 07 Min Zhong No. 2801, the employee was ordered to bear 40 per cent of the employer's loss; in the civil judgment of the Guangshui City People's Court of Hubei Province in (2021) E 1381 Min Chu No. 2235, the employee was ordered to bear 30 per cent; and in the judgment of the Bao'an District People's Court of Shenzhen, Guangdong Province in (2021) Yue 0306 Min Chu No. 4243, the employee was ordered to bear the loss in full.

Second, under Article 1191 of the Civil Code an employer may exercise a right of recourse on the basis of tort liability, and that route is not confined to employment relationships but also covers service relationships. The court will usually determine a relatively fair amount by weighing whether the person providing labor or services acted intentionally or with gross negligence, the duties and standard of care attached to the post, the person's income and financial capacity, gaps in the employer's management, and whether the loss has already been recovered through other channels. A case published by the Futian District People's Court illustrates the point. Mr Li, an employee of Company A, worked in after-sales vehicle repair. In the course of performing his work he caused property damage to a company outside his own, and Company A paid the compensation, so the objective requirements for exercising a right of recourse were satisfied. Photographs of the site showed, however, that a roller shutter had not been fully raised and that there was no height marking or passage warning, so collision damage to equipment was a latent hazard, and Mr Li had no management responsibility for the shutter or other workplace facilities. He had passed the earlier doors normally, which showed that he had exercised ordinary care. The evidence submitted by Company A could not prove that Mr Li had acted intentionally or with gross negligence. The hazard lay in the workplace facilities, and Company A had failed to adopt the necessary safety precautions and management measures, so the employer was itself negligent in management and supervision. As Mr Li had acted neither intentionally nor with gross negligence, he should not be required to pay compensation, and the court dismissed Company A's claim.

Comparing the two routes, the judge in either case weighs the various factors and decides whether there is liability and in what proportion. An employment relationship differs from an ordinary civil relationship, however: the fruits of the employee's labor belong to the employer, while the employer owes the employee a duty of supervision. Loss caused by an employee's ordinary negligence can therefore generally be placed within the employer's business risk, and the risk should not simply be shifted to the employee, which would be inconsistent with the idea of running a company and would also offend the principle of fairness. Where the loss is substantial, the evidential difficulties and the issues in dispute in practice come down to three elements: whether the employee's dereliction is established, the amount of the company's loss, and the causal link between the two. In (2017) Hu 02 Min Zhong No. 11626, for example, neither Mr Guo nor his subordinates followed the company's rules on periodic follow-up and reporting during a project, and Mr Guo was unaware of how the project was actually being executed. The company recovered the relevant sums through litigation, but the resulting tie-up of funds and the expense of recovery were real, and Mr Guo was therefore found to have failed in his supervisory duties.

Third, where an employee causes loss, may the employer set that loss off against the employee's wages? An employee who provides labor is entitled to the corresponding remuneration, and the right to remuneration should be distinguished from an ordinary claim; an employer is not entitled to set off its actual loss against the employee's remuneration of its own motion. As to the employer's right of recourse, Article 90 of the Labor Contract Law provides: "Where an employee terminates an employment contract in violation of this Law, or breaches a confidentiality obligation or non-compete obligation agreed in the employment contract, and thereby causes loss to the employer, the employee shall bear liability for compensation." Article 16 of the Interim Provisions on Wage Payment issued by the former Ministry of Labor provides: "Where an employee causes economic loss to the employer for reasons attributable to the employee, the employer may require the employee to compensate that loss in accordance with the agreement in the employment contract. The compensation may be deducted from the employee's wages. The amount deducted each month shall not exceed 20 per cent of the employee's wages for that month. If the wages remaining after the deduction are below the local monthly minimum wage, the wages shall be paid at the minimum wage." An employer setting off loss against wages is therefore limited to 20 per cent of the employee's wages for the current month, and the wages remaining after deduction must not fall below the local monthly minimum wage.

Finally, Minton's note.

For employers: they should collect and preserve evidence proving intent or gross negligence, the amount of the loss and the causal link between them, such as CCTV footage, work records, accident investigation reports, correspondence and written self-criticisms, and they should set out in their internal rules what amounts to dereliction of duty, negligence or supervisory failure. A clause might read: "The following conduct constitutes serious breach of discipline, and the company may terminate the employment contract immediately: serious dereliction of duty causing the company economic loss of RMB 10,000 or major damage to its reputation; failure to manage subordinates properly or to discharge supervisory duties, causing the company economic loss of RMB 50,000." At the same time, under Article 26 of the Labor Contract Law, a clause of an employment contract that exempts the employer from its statutory liability or excludes the employee's rights is void. Where the employer is at fault in its own management, it cannot attribute the whole of the responsibility to the employee.

For employees: they should strengthen their awareness of risk in the course of their duties, comply strictly with the requirements of their post and exercise the degree of care that matches their responsibilities. Where a post carries explicit requirements, they should carry out their daily work strictly in accordance with those requirements; in general posts without specific duties, they should still exercise care, report to their superiors promptly and keep a record of the whole process.