Zhiheng Pufa | Five key points for enterprises to deal with the loss of employees- Zhiheng Law Firm

Author |Attorney Chen Yuxun

Introduction

The smooth operation of a business depends on the hard work and dedication of its employees. However, in the course of their duties, employees may inadvertently or even intentionally cause harm—resulting in losses to the employer’s assets, the failure of a business partnership, or the need to compensate third parties for damages. This is a common yet challenging issue in corporate management; mishandling it can lead to labor disputes and further financial losses.

This article focuses on legal practice in the Shenzhen region and the author’s firsthand experience, briefly outlining how enterprises should handle similar situations. It is divided into two parts—employee liability to third parties and employee liability to the employer—to address certain concerns and provide guidance for ensuring the smooth operation of corporate management.

Legal premise

Clearly define the “entry threshold” for holding enterprises accountable.

Legal Basis

Article 1,191 of the Civil Code provides: “If an employee of an employer causes damage to others while performing work tasks, the employer shall bear tort liability. After the employer has assumed tort liability, it may seek reimbursement from the employee who acted with intent or gross negligence.”

Article 16 of the “Notice on Issuing the Provisional Regulations on Wage Payment” stipulates: “If an employee causes economic losses to the employer due to reasons attributable to the employee, the employer may, in accordance with the provisions of the labor contract, require the employee to compensate for such losses.” Compensation for economic losses may be deducted from the employee’s own wages.

However, the amount deducted each month shall not exceed 20% of the employee’s monthly wages. If the remaining portion of the wage after deductions falls below the local monthly minimum wage standard, it shall be paid at the minimum wage standard.

Article 34 of the Shenzhen Regulations on Employee Wage Payment stipulates: "(II) Employers may deduct the following expenses from employees' wages: (1) compensation for economic losses caused to the employer by the employee's own actions; (2) other expenses approved by the employee. Before deducting the expenses under item (1) each month, the employer shall notify the employee in writing, and the employee's wage balance after each deduction shall not be lower than the city's minimum wage standard."

Clarify the nature of liability—individual liability or organizational liability.

Our country is a socialist state with Chinese characteristics in the new era, where employers and employees share common interests and enjoy a harmonious and stable relationship. In the actual operation of enterprises, it is necessary not only to safeguard workers’ legitimate interests and fundamental rights but also to uphold the normal economic order, ensure lawful and compliant business practices, and prioritize the enterprise’s survival and development. A careful reading of Article 1191 of the Civil Code reveals that, legally, the principle of “vicarious liability” borne by the enterprise vis-à-vis third parties takes precedence; the enterprise’s right of recourse against its employees is a subsequent step. The key distinction between individual liability and employer liability lies in the definition of “in the course of performing work duties”—that is, the prerequisite for external compensation is the employee’s status as an “employee” and the performance of “work duties.”

Accordingly, if an enterprise bears “vicarious liability” for the tortious acts of its employees and makes compensation to a third party, the two essential elements for seeking recourse against the employee are: (1) the employee was performing their job duties; and (2) the employee’s conduct involved fault—either intentional wrongdoing or gross negligence.

Performing work tasks constitutes “official conduct” in external dealings and represents the enterprise; however, if it is a personal act not arising from the performance of work tasks, then…For losses caused to others, the liability is personal, and the employee shall bear such responsibility on their own (subject to discussion in certain cases).

Secondly, there must be fault, which refers to either intentional conduct or gross negligence on the part of the employee. Ordinary negligence or unforeseeable accidents, however, do not give rise to a right of recourse. As for the employee’s subjective state, it is generally determined by reference to the terms of the employment contract, internal rules and regulations, job descriptions, operating procedures, the employee handbook, industry practices, and other relevant factors, in order to assess whether the employee has fulfilled their duty of care.

Standards for the determination of “enterprise losses”

Only direct, tangible property losses—such as damage to equipment, loss of assets, or payment of compensation directly attributable to the employee’s fault—may be claimed. Indirect losses, such as lost expected profits or damage to business reputation, are generally difficult to recover. For example, if a transaction falls through, it is unlikely that the expected profits that would have been earned from its success will be awarded. However, it may be advisable to explore whether there was intentional interference with the transaction or deliberate defamation of the business’s reputation, and to pursue criminal prosecution or civil claims on other legal grounds.

To illustrate with an example from the consultations I have received:

(1) An employee of a hardware factory in Dongguan, with 20 years of experience in the industry, caused a mold‑making error for a certain product due to gross negligence and failed to detect it. As a result, products worth RMB 30,000 were produced that did not comply with the contractual specifications, and the project schedule was delayed, leading to the client’s return of the goods. In light of this loss, the employer is entitled to seek recourse against the employee.

(2) A courier company in Shenzhen had an employee (a freight driver) who, due to gross negligence and failure to exercise due care while driving during cargo transportation, rear-ended the vehicle ahead. The traffic police determined that the employee was fully liable for the accident, resulting in the employer being required to pay 7,000 yuan in repair costs to the other party. In light of this loss, the employer may seek recourse against the employee.

Accountability pathway

Three core measures that enterprises can adopt

Negotiated recovery: the lowest-cost priority option.

Applicable scenarios:The amount of loss is relatively small, the employee has demonstrated a good attitude in acknowledging their mistake, and both parties have no dispute regarding the allocation of responsibility.

Key points of operation:A written recovery agreement must be signed to clearly define the responsibilities of both parties, the amount to be recovered, the method of payment, and the payment deadline, thereby preventing future disputes.

Wage deductions: Limited deductions within the statutory limits

According to Article 16 of the Provisional Regulations on Wage Payment: “If an employee causes economic losses to the employer due to their own reasons, the employer may, in accordance with the provisions of the labor contract, require the employee to compensate for such losses.” Compensation for economic losses may be deducted from the employee’s own wages. However, the amount deducted each month shall not exceed 20% of the employee’s monthly wages.

If the remaining portion of the wage after deductions falls below the local monthly minimum wage standard, it shall be paid at the minimum wage standard.

Important notes: The deduction cannot be made in a lump sum; it must be deducted monthly. The deductible amount shall not exceed 20% of the employee’s monthly salary, and sufficient funds must be retained to cover the employee’s basic living expenses. Furthermore, the deduction applies only to the portion of the salary that is “related to the loss.”

Judicial litigation: the final recourse when negotiations fail.

Prerequisite for filing a lawsuit:Evidence of the employee’s fault has been secured (e.g., work records, surveillance footage, third-party claim letters, communication records, etc.), and despite negotiations, the proposed offset fails to cover the full extent of the losses.

Key to presenting evidence:It is necessary to prove three core facts: “the employee acted with intent or gross negligence,” “the loss is directly attributable to the employee’s conduct,” and “the amount of the loss has actually been incurred.”

At present, in Shenzhen’s judicial practice, the proportion of damages awarded by the courts for employees to compensate employers for losses typically falls within the following range, along with the corresponding factors considered.

Case number	Basic Facts of the Case	Proportion of damages awarded	Court reference factors
(Cases No. 2018) Yue 0303 Min Chu 10515 and 10804	An employee entered incorrect data in a project, resulting in the employer having to pay 10,000 yuan in compensation.	5%	The employee has signed the Employee Handbook, and the employer is entitled to claim compensation. The employer has actually paid RMB 10,000, and given that the employee was at fault, the compensation is determined at 60% of that amount. As for the additional RMB 100,000 in alleged reputational damages, no factual basis has been provided, and therefore such claim is not supported.
(2017) Yue 0304 Min Chu 12877 No.	The employee, acting as a warehouse manager, violated procedures and damaged the shelving.	20%	At the outset of the accident, both the plaintiff and the defendant had signed a compensation agreement; subsequently, additional compensation was agreed upon, but it was not possible to establish a direct causal link.
(2020) Yue 0306 Min Chu 31703 No.	As an employee of the auto repair shop, the worker was involved in a traffic accident while moving a vehicle, resulting in a loss of RMB 420,000 to the shop. The shop’s internal rules and regulations stipulate that, in the event of such losses, the employee shall bear 45% of the liability.	30%	The court considered three factors in reaching its decision: whether the employee was the direct party responsible for the accident, the extent of the repair shop’s losses, and the extent of the defendant’s liability. At the same time, considering that the rules and regulations were not formulated through a democratic process and have already been made public, but the repair shop has provided relevant training, and taking all factors into account, the percentage will be reduced from 45% to 30%.
(2018) Yue 0306 Min Chu 8906 No.	The employee is the regional manager of the employer in a certain region and is also the only employee there. When equipment in that region was lost, the employee signed a document agreeing to assume full responsibility.	50%	The loss of the frequency converter had a direct causal relationship with the plaintiff’s damages and the defendant’s negligence. However, given that the plaintiff lacked an adequate supervisory mechanism in its business operations and allowed the Shenyang branch to be managed by only one person, resulting in the failure to promptly detect issues and the subsequent escalation of losses, the plaintiff, as the operator, was also at fault for its inadequate management and preventive measures, thereby contributing to the damages arising from the loss of the frequency converter.
(2020) Yue 0304 Min Chu 16251 No.	An employee privately received funds, admitted to this fact in a WeChat chat, and promised when the refund would be issued.	100%	As an employee, the defendant is obligated to observe workplace discipline and professional ethics. Based on the evidence on record, it can be determined that the defendant, during his employment, improperly appropriated the plaintiff‑employer’s business funds.

Risk aversion

Four Key Actions for Proactive Risk Prevention by Enterprises

Improve regulationsRules and regulations

In the employment contract, clearly stipulate a clause stating that “if economic losses are caused to the employer due to reasons attributable to the employee, the employer may require the employee to provide compensation.” In the employee handbook and internal rules and regulations, “circumstances for holding employees accountable for their misconduct” and “standards for compensating losses” must be clearly defined and subject to democratic procedures and public notice to ensure that employees are informed and consent, thereby rendering such provisions lawful and effective.

Strengthen on-the-job training

Conduct specialized training for high-risk positions (such as finance and operations roles), maintain training records, and mitigate the risk of errors arising from “insufficient competence.”

Purchase commercial insurance

By purchasing insurance such as employer’s liability insurance and public liability insurance, companies can transfer a portion of the risk of third-party compensation claims arising from employee actions.

Secure the evidence promptly.

In the event of a loss, promptly collect employee activity logs, loss-related documentation, communication records, and other relevant materials to preserve evidence for subsequent accountability measures.

Legal misconceptions

Three Common Mistakes Businesses Make

Myth 1:

When an employee causes trouble, some employers, in a fit of anger, immediately terminate the employment contract without considering the severity of the employee’s misconduct or whether the dismissal is reasonable. They may also overlook the procedural requirements for terminating the labor contract, which can easily result in an unlawful dismissal. Consequently, the employer may be ordered by arbitration to pay compensation for the unlawful termination or to reinstate the employee, thereby creating potential legal liabilities.

Myth 2:

Directly freezing employees’ unpaid wages to offset losses violates the statutory limit that monthly wage deductions may not exceed 20% of the current month’s salary, and such conduct likewise risks being subject to arbitration.

Misconception 3:

Ignoring the four elements of an infringement, a penalty was imposed without due consideration.

For an enterprise to seek compensation from an employee for losses, four prerequisite conditions must be met:

(1) The employee has engaged in conduct that resulted in losses;

(2) The loss has already occurred;

(3) There is a direct causal relationship between the conduct and the consequences;

(4) The employee was at fault in this incident.

Conclusion

When employees cause problems, companies must both firmly safeguard their rights in accordance with the law and meticulously adhere to proper procedures, ensuring that the facts are clear, the evidence is sufficient, and the procedures are lawful. Building a corporate culture with clearly defined rights and responsibilities, as well as a system of distinct rewards and punishments, is the fundamental solution to preventing and resolving such issues.

Author

Introduction

Chen Yuxun

Lawyer at

Member of the Labor and Human Resources Law Department at

Member of the Commercial Defense Department, Criminal Center,

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Zhiheng · Introduction