Answer: The general principle of dealing with employers¡¯s losses caused by employees under China¡¯s employment law is to strictly examine the causes of losses and limit amount of compensation against employees. For example, Article 16 of the 1995 Provisional Regulations on Wage Payment, which is currently in effect, stipulates that if an employer suffers economic losses due to an employee¡¯s fault, the employer may claim compensation for the economic losses in accordance with the provisions provided in the employment contract.
According to this regulation and judicatory decisions, employees¡¯ liability to compensates for a loss to the employer must satisfy all the following three conditions: Firstly, the employee¡¯s compensation for a loss must ground on provision(s) in employment contract or effective company rules;1Quanzhou Sheshi Weaving Co., Ltd., Zeng Fanhe Labor Dispute Retrial Review and Trial Supervision Civil Ruling Fujian Provincial People¡¯s High Court Civil Ruling (2019) Min Min Shen No.2290. The court held that employer only relying on company rules without employment contract agreement can not claim compensation for losses caused by employees’ dereliction of duty. Hunan Wugang Rural Commercial Bank Co., Ltd., Tang Guanghong Labor Dispute Retrial Review and Trial Supervision Civil Ruling Hunan Provincial People¡¯s High Court Civil Ruling (2020) Xiangmin Shen No.315. ¡°For the situation where workers should be liable for compensation for losses caused to the employer, it must be based on the agreement in the employment contract or the provisions in the legally formulated company rules of the enterprise.¡±Secondly, the employee¡¯ impugned act was intentional or grossly negligent;2Xinjiang Zunmao Hongfu Hotel Co., Ltd., Wang Guohua Labor Dispute Civil Trial Supervision Civil Ruling Xinjiang Uygur Autonomous Region High Court Civil Ruling (2023) Xinmin Shen No.435. The court held that only employees who intentionally or grossly negligently cause employer losses should be liable for compensation and only bear secondary liability. Hunan Wugang Rural Commercial Bank Co., Ltd., Tang Guanghong Labor Dispute Retrial Review and Trial Supervision Civil Ruling Hunan High Court Civil Ruling (2020) Xiang Min Shen No.315. ¡°On the basis of the employee’s intentional or gross negligence in the loss caused. When determining the scope of the employee’s liability, we should take into account the employee’s subjective fault, income, the amount of direct economic losses, and the agreement between the employer and the employee on compensation for damages.¡±Thirdly, there is a causal relationship between the fault behavior of employees and the economic losses. For example, in the case of Liao Gaobo before the Guangdong Provincial High Court in 2020, the court ruled that the employee’s malicious act of acquiring the company’s source code caused losses to the company and should compensate the company for RMB 150,000.3Civil Ruling on Labor Dispute Retrial Review and Trial Supervision of Liao Gaobo and Zhuhai Ruijing Juyuan Technology Co., Ltd. Civil Ruling of Guangdong Provincial People¡¯s High Court (2020) Yue Min Shen No.12508. The employee was ordered to pay RMB 150,000 in compensation for stealing the company’s project source code, but there was no explanation on whether it was paid in a lump sum or by instalments.
When calculating the amount of compensation payable by employees, in principle, we should not assume that employees are to compensate all losses. First of all, since employers are the main beneficiary of business operations, they ought to be the main bearer of business risks; secondly, in many cases, employees’ negligence only partially contribute to the losses result. For example, where an employer suffers an unrecovered payment for sales that is relevant to an employee’s negligence, objectively, the default and non-payment behavior of the customer in arrears is likely the main reason in the causality analysis, and thus the negligence of the employee does not necessarily constitute the operating causal factor linked to the loss.
Finally, when employers require employees to compensate the economic loss and deduct the employees’ wages, monthly deduction amounts must not exceed 20% of the employees¡¯ wages, and the employees’ wages after deduction must not fall short of local minimum wage standard.4Article 16 of the Provisional Regulations on Wage Payment stipulates that ¡°if a worker causes economic losses to the employer due to their own reasons, the employer may claim compensation for the economic losses in accordance with the agreement of the employment contract. Compensation for economic losses may be deducted from the wages of the worker. However, the monthly deduction shall not exceed 20% of the worker’s monthly wage. If the remaining wage after deduction is lower than the local monthly minimum wage standard, it shall be paid according to the minimum wage standard.¡±Some place, such as Shenzhen, Guangdong Province, stipulates that monthly deduction must not exceed 30%.
The aforementioned is a general situation in which an employee causes tangible losses to the employer due to their fault during the implementation of the employment contract. The employee’s liability for compensation for losses is strictly restricted by employment law to protect comparatively vulnerable employees. This is distinct form the liability for normal civil compensation after employees leave their role. Please see On the same day an employee resigned, he left his role and caused damages. Is he liable for the damages? for a departed employee causing losses to the employer by infringing trade secrets of the employer and/or violating the obligations of non-competition, we will deal with the issue concerning obligations for trade secrets and non-competition and the relevant liabilities in Chapter 6.
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Mr. Dong Wang has been in practice for over 20 years, specializing in business law, including employment law, commercial law, company law, and intellectual property law. Mr. Wang has earned respect and trust from his clients due to his professionalism, fidielty, and kindness.
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- 1Quanzhou Sheshi Weaving Co., Ltd., Zeng Fanhe Labor Dispute Retrial Review and Trial Supervision Civil Ruling Fujian Provincial People¡¯s High Court Civil Ruling (2019) Min Min Shen No.2290. The court held that employer only relying on company rules without employment contract agreement can not claim compensation for losses caused by employees’ dereliction of duty. Hunan Wugang Rural Commercial Bank Co., Ltd., Tang Guanghong Labor Dispute Retrial Review and Trial Supervision Civil Ruling Hunan Provincial People¡¯s High Court Civil Ruling (2020) Xiangmin Shen No.315. ¡°For the situation where workers should be liable for compensation for losses caused to the employer, it must be based on the agreement in the employment contract or the provisions in the legally formulated company rules of the enterprise.¡±
- 2Xinjiang Zunmao Hongfu Hotel Co., Ltd., Wang Guohua Labor Dispute Civil Trial Supervision Civil Ruling Xinjiang Uygur Autonomous Region High Court Civil Ruling (2023) Xinmin Shen No.435. The court held that only employees who intentionally or grossly negligently cause employer losses should be liable for compensation and only bear secondary liability. Hunan Wugang Rural Commercial Bank Co., Ltd., Tang Guanghong Labor Dispute Retrial Review and Trial Supervision Civil Ruling Hunan High Court Civil Ruling (2020) Xiang Min Shen No.315. ¡°On the basis of the employee’s intentional or gross negligence in the loss caused. When determining the scope of the employee’s liability, we should take into account the employee’s subjective fault, income, the amount of direct economic losses, and the agreement between the employer and the employee on compensation for damages.¡±
- 3Civil Ruling on Labor Dispute Retrial Review and Trial Supervision of Liao Gaobo and Zhuhai Ruijing Juyuan Technology Co., Ltd. Civil Ruling of Guangdong Provincial People¡¯s High Court (2020) Yue Min Shen No.12508. The employee was ordered to pay RMB 150,000 in compensation for stealing the company’s project source code, but there was no explanation on whether it was paid in a lump sum or by instalments.
- 4Article 16 of the Provisional Regulations on Wage Payment stipulates that ¡°if a worker causes economic losses to the employer due to their own reasons, the employer may claim compensation for the economic losses in accordance with the agreement of the employment contract. Compensation for economic losses may be deducted from the wages of the worker. However, the monthly deduction shall not exceed 20% of the worker’s monthly wage. If the remaining wage after deduction is lower than the local monthly minimum wage standard, it shall be paid according to the minimum wage standard.¡±