In a recent Chongqing court case, two employees were held partly liable for the employer's CNY 670,000 in losses caused by their breach of job duties and gross negligence in falling for a scam.

One employee, the company accountant, invited the other employee, the company cashier who managed the company's bank accounts, to an online social media chat group after receiving instructions to do so from the social media account of the company's managing director. In the group chat, the company cashier received an instruction from the managing director's social media account to transfer company funds. The instruction asked for CNY 670,000 to be transferred to the bank accounts of two unknown persons. The cashier followed the instruction without confirming it with the managing director in person.

After the employer discovered the fraudulent transfers, it sued the two employees. Although the employees argued to the Chongqing court that the law provides only two circumstances when an employee is required to compensate an employer for damages (i.e. the employee violates a training bond agreement or a non-compete agreement), the court held that the employer could recover based on the employment contracts with the employees. The Chongqing court cited as the governing law the PRC Tentative Regulation on Salary Payment, which allows an employer to recover any damages attributable to the employee in accordance with the employment contract. The employment contracts with the company accountant and company cashier each stated that the employee should compensate the company for damages caused by employee conduct in breach of law, company policy, labor discipline or job duties.

The Chongqing court found that the accountant and the cashier were overly credulous and failed to observe basic financial processes and thus acted in breach of their job duties. The court also found that the employees were grossly negligent by not exercising the appropriate care and caution when executing payments for the company. Therefore, they were liable for the company's damages.

However, the Chongqing court further ruled that the employer was also at fault because it had not established any formal written financial policies. Therefore, the court held that the two employees were each liable for only 10% of the total damages suffered by the employer.

Key take-away points:

All employment contracts should include a clause on compensation for damages caused by the employee's wrongful conduct during the performance of duties. However, in judicial practice, the employee's conduct giving rise to compensatory liability seems to be limited to intentional wrongdoing and gross negligence. Claims for compensation based on slight fault or mere negligence in fulfilling job duties have less chance of being supported by the courts.