Recently, the Nanjing Intermediate People’s Court (“Court”) issued an effective judgment, holding that an exception clause in an employment contract which completely waives the employer’s obligations is invalid, and the employer should compensate for damage caused by its employees within the scope of their employment to other persons.

In 2011, Mr. Zhang joined a tourist company in Nanjing (“Company”) as a driver transporting employees to and from work. The employment contract between the Company and Mr. Zhang stipulated that “if losses are caused by Mr. Zhang’s actions and result from a breach of traffic legislation, Mr. Zhang will bear full responsibility and the Company will not be vicariously liable. Even if the Company is ordered to assume responsibility, it has the right to recover fully from Mr. Zhang. One day, after dropping off all the employees at work on his way back to the parking lot, Mr. Zhang was involved in a traffic accident in which two people riding a motor bike died. The transport department found that Mr. Zhang did not obey traffic signals when driving through an intersection. In addition, the vehicle Mr. Zhang was driving had defective brakes, which prevented him from taking timely action when the accident was about to happen. On the other hand, the deceased were operating an unlicensed motorbike without a license. Therefore, both parties were equally liable for the accident. Based on their investigation, the Court ruled that the Company and the vehicle’s insurer should pay compensation for the damages in the amount of RMB 540,000.

The Court held that employers can contract out of vicarious employee liability for economic losses caused by the employee to the employer. However, the covenant should not waive the employer’s entire obligation. In this case, Mr. Zhang was hired by the Company to be a driver, a high risk profession. The exception clause waives the Company’s management risk by transferring the risk to its employees. Therefore, the Court held that the covenant stipulating that Mr. Zhang should compensate all damages was invalid based on the principle of fairness.

The Court also held that the invalidity of the covenant did not absolve Mr. Zhang’s liability for the damages. Mr. Zhang was responsible for part of the economic losses to the Company. However, the accident was also partly caused by the brake defects of the vehicle and, as the Company failed to properly maintain the brakes, both Mr. Zhang and the Company should be liable for the accident. Therefore, the employee and the employer are both liable. Given this interpretation and Mr. Zhang’s actual income, the Court ruled that Mr. Zhang should compensate the Company’s economic losses in the amount of 30% of his annual income, which is RMB 5,000 in total.

(Source: Wolters Kluwer)

KWM Comments: In this case, the Court held that an exception clause which completely waives the employer’s obligations was invalid based on the principle of fairness. At the same time, the employer had right to ask the employee to compensate for the damage caused due to the employee’s reason. If the compensation is deducted from wages, according to Article 16 of Interim Provisions on the Payment of Remuneration, the monthly deduction shall not exceed 20% of the monthly wages.