COMPENSATION UNDER THE MATERIAL LIABILITY REGIME
Topic 36:
COMPENSATION UNDER THE MATERIAL LIABILITY REGIME
Senior Lecturer, Dr. Lê Thị Thúy Hương
SUMMARY OF THE CASE AND COURT DECISION
[Judgment No. 02/2017/LĐ-PT dated March 17, 2017, of the People’s Court of Quảng Nam Province regarding a dispute over compensation for damages arising from an employment contract.]
Summary of the Case:
Joint Stock Company (hereinafter referred to as “Company G”) entered into a fixed-term employment contract No. 06/HĐ-CT CTC with Mr. Nguyễn Ngọc, effective from May 15, 2013, to May 20, 2016 (hereinafter referred to as “Employment Contract”), for him to work as the Director of the company’s bookstore in T City. Under the Employment Contract, Mr. Nguyễn Ngọc was responsible for directly managing the bookstore’s goods and equipment. The Employment Contract included an agreement stipulating that Mr. Nguyễn Ngọc would be liable to compensate for damages if he violated Company G’s regulations on economic management, resulting in shortages, damage, or loss of property, goods, tools, or equipment at the bookstore.
From late 2013, the bookstore under Mr. Nguyễn Ngọc’s management operated inefficiently. Following an inventory audit conducted on October 20, 2014, Company G determined that, during the period from when Mr. Nguyễn Ngọc assumed the role of bookstore Director until October 15, 2014, the company’s assets at the bookstore had been depleted by 315,446,233 VND (after deducting the allowable shrinkage rate). The cause was attributed to Mr. Nguyễn Ngọc’s lax management and breaches of commitments made to Company G. The bookstore has since been closed, causing significant harm to the employment of other employees and the reputation of Company G.
Based on the terms agreed upon in the Employment Contract, the company’s internal regulations, and Article 130 of the Labor Code, Company G asserted that Mr. Nguyễn Ngọc was liable to compensate for the aforementioned damages. However, Company G only demanded that Mr. Nguyễn Ngọc compensate 60% of the total damage value, equivalent to 236,770,992 VND.
Mr. Nguyễn Ngọc disagreed, arguing that since he assumed his role at the bookstore, although there had been losses, they remained within Company G’s allowable shrinkage rate of 0.5%, and did not amount to the figure claimed by the company. He further contended that his signature on the inventory report was solely for the purpose of handing over assets and did not constitute an admission of the shrinkage value asserted by Company G. As Mr. Nguyễn Ngọc refused to pay compensation, Company G initiated legal proceedings.
Court Decision:
The Court rejected Company G’s request to compel Mr. Nguyễn Ngọc to compensate the company.
COMMENTARY
I. Introduction
The employment relationship between an employee and an employer is regarded as a transactional relationship involving the exchange of goods. In this context, the employer is the buyer, the employee is the seller, and the commodity traded in the labor market is a highly distinctive one: “labor capacity.” Consequently, when entering into an employment relationship, the employee’s sole obligation is to provide their labor capacity to the employer by performing a specific job under the employer’s management and direction.
Meanwhile, all tools and means necessary for performing that labor must be supplied by the employer. As a result, during the course of their work, employees are entrusted with using, storing, and managing labor tools, machinery, equipment, and property legally owned by the employer. If an employee causes damage to such property, they bear the responsibility to compensate for it.
Through an analysis of Judgment No. 02/2017/LĐ-PT of the People’s Court of Quảng Nam Province (hereinafter referred to as “Judgment 02/2017/LĐ-PT”), the author will elucidate the provisions related to an employee’s liability for compensation under the material liability regime [Although this case was resolved under the 2012 Labor Code, the provisions of the 2019 Labor Code remain largely similar. Therefore, the author will comment on the case based on the 2019 Labor Code].
II. Legal Issues
- Conditions and Grounds for Compensation Under the Material Liability Regime
1.1. Conditions for Applying the Material Liability Regime
In essence, compensation for damages under the material liability regime is a form of property damage compensation. From this perspective, material liability can also be understood as a type of civil liability in the broad sense related to property damage compensation. However, this is not an extra-contractual liability but rather a contractual liability for damages. This distinction arises because such liability can only emerge when an employment relationship is established based on an employment contract.
From this reasoning, material liability is considered a form of contractual damage compensation, which is the most critical factor distinguishing the material liability regime under labor law from extra-contractual compensation under civil law. Only when these two conditions are proven can an employer have a basis to apply the material liability regime to an employee. Conversely, an employer can only pursue extra-contractual liability if the requirements under the Civil Code are satisfied.
Thus, there are two conditions for applying the material liability regime: (1) the damaged property must be property that the employee was assigned by the employer to manage, use, store, or process [See Article 129 of the 2019 Labor Code. See also Chu Thanh Hưởng (editor), Textbook on Vietnamese Labor Law, supra, p. 224]; and (2) the damage must occur while the employee is performing their obligations under the employment contract.
In other words, at the time of the damage, the relationship between the parties must be an employment relationship (not an ordinary civil relationship). If these two conditions are not fully met, the determination of liability for damages will not fall under the compensation provisions of the material liability regime in labor law [University of Law, Ho Chi Minh City (2022), Textbook on Labor Law, supra, p. 376].
In Judgment 02/2017/LĐ-PT, to determine whether Company G could apply the material liability regime to compel compensation from Mr. Nguyễn Ngọc, it is necessary to examine whether the two aforementioned conditions were satisfied in this case.
First, Mr. Nguyễn Ngọc signed an employment contract with Company G, effective from May 15, 2013, to May 20, 2016, to manage the bookstore as its Director. Thus, pursuant to the employment contract and in his capacity as Director, he was entrusted by Company G with managing the bookstore’s assets and bore responsibility for those assets.
Second, following an inventory audit on October 20, 2014, Company G claimed that from the time Mr. Nguyễn Ngọc assumed the role of bookstore Director until October 15, 2014, the company’s assets at the bookstore had been depleted by 315,446,233 VND. If Company G could provide sufficient evidence to prove that this loss occurred during the period Mr. Nguyễn Ngọc was working under the employment contract at the bookstore, then, under the second condition, there would be a basis for Company G to apply compensation under the material liability regime as stipulated in labor law against Mr. Nguyễn Ngọc.
1.2. Grounds Giving Rise to Compensation Liability Under the Material Liability Regime
As a general principle, to specifically determine compensation liability, it is necessary to examine the grounds giving rise to such liability.
Under civil law, for damages caused by an individual, four grounds may be considered: (1) Actual damage has occurred; (2) The act causing the damage is unlawful; (3) There is a causal relationship between the unlawful act and the actual damage [University of Law, Ho Chi Minh City (2017), Textbook on Extra-Contractual Damage Compensation, Đỗ Văn Đại (editor), 1st reprint, Hong Duc Publishing House, pp. 377-381]; and
(4) Fault of the person causing the damage [Unlike the 2005 Civil Code, Clause 1, Article 584 of the 2015 Civil Code no longer explicitly lists fault as a ground for extra-contractual liability. However, depending on the specific case, this factor may still be considered. See University of Law, Ho Chi Minh City (2017), Textbook on Extra-Contractual Damage Compensation, Đỗ Văn Đại (editor), supra, pp. 381-382].
Since material liability is also a form of property damage compensation, determining material liability for an employee requires examining the grounds giving rise to it. These grounds are fundamentally similar to those for extra-contractual damage compensation but exhibit certain distinctions:
– First, material liability is imposed by the employer (the injured party) on the employee (the party causing damage) [Phạm Công Trứ (editor) (1999), Textbook on Vietnamese Labor Law, National University Publishing House, Hanoi, p. 283].
– Second, the act causing damage under the material liability regime need not solely be an unlawful act; it may also include violations of internal labor regulations, breaches of a responsibility contract, or simply acts by the employee causing damage, provided the conditions for applying material liability are met.
– Third, under the material liability regime in labor law, the party causing damage may only be required to compensate for a portion of the damage incurred [Id., p. 284].
– Fourth, material liability is applied in accordance with strict procedures prescribed by labor law.
When examining the element of fault in material liability, there is a notable difference between the 2012 Labor Code and the 2019 Labor Code. Under the 2012 Labor Code, the burden of proving fault rested with the employer, implying that fault was one of the grounds for determining compensation under the material liability regime.
However, in the 2019 Labor Code, fault no longer appears to be a required condition when assessing the grounds for compensation under this regime. Specifically, unlike disciplinary proceedings, the 2019 Labor Code does not mandate that compensation procedures adhere to the principle of proving the employee’s fault [Under Article 130 of the 2019 Labor Code, fault is only considered in determining the specific compensation level, not as a ground for establishing liability, nor does it reference compliance with Clause 1, Article 122 of the 2019 Labor Code].
Similarly, Decree No. 145/2020/NĐ-CP, which details the procedures for handling compensation, does not mention the employer’s burden of proving fault. Thus, under current regulations, it can be interpreted that labor law has removed fault as a ground for determining material liability, aligning with the approach of the 2015 Civil Code, unless competent authorities provide contrary guidance in the future.
- Determining the Level of Compensation Under the Material Liability Regime
In principle, when an employee causes property damage to an employer, the employee must compensate based on the actual damage incurred.
Under Article 129 of the 2019 Labor Code, the level and method of compensation are divided into three scenarios.
First, in cases of damage to machinery, equipment, or other property, compensation is based on the actual damage incurred.
However, if the damage is not serious and results from negligence, the maximum compensation is capped at three months of the employee’s salary. Thus, the conditions for applying this special compensation limit are: (i) the damage must not be serious, and (ii) the damage must be caused by the employee’s unintentional fault. Regarding what constitutes “not serious” damage, the 2019 Labor Code defines it as damage below 10 months of the minimum wage. This approach is reasonable, as it avoids the need for frequent adjustments to damage thresholds as required under previous regulations. Adjusting the minimum wage automatically alters the threshold for what is considered “not serious” damage, providing a practical and adaptable standard.
Second, in cases where an employee causes the loss of the employer’s property or other property entrusted by the employer, or consumes materials beyond the permitted allowance, the employee must compensate for the damage, either partially or fully, based on market value at the time or as stipulated in the internal labor regulations.
Third, in cases where there is a responsibility contract between the employer and the employee, the terms agreed upon by the parties will apply [Clause 2, Article 129 of the 2019 Labor Code].
In the judgment, Company G argued that Mr. Nguyễn Ngọc, due to lax management, caused a loss of bookstore assets exceeding the allowable shrinkage rate of 0.5%, and thus must compensate 60% of the total damage.
However, upon reviewing the case file, the Court found: “In the detailed compensation breakdown for the losses, the Board of Directors assessed responsibility and determined the shrinkage amount (60%) to be 236,770,991.86 VND, requiring compensation only for this amount. Yet, the inventory audit from May 20, 2013, to October 15, 2014, also identified the compensation liability of Mr. Nguyễn Ngọc and other responsible individuals as 157,847,328 VND, with a total collected compensation of 107,407,904.37 VND. Thus, Company G had imposed overlapping compensation obligations on Mr. Nguyễn Ngọc for two separate amounts.”
In the author’s view, it is indeed true that, in this case, there is insufficient basis for Company G to demand compensation from Mr. Nguyễn Ngọc at the level it determined, given the overlapping damage amounts as noted above. However, the Court’s decision to entirely reject Company G’s claim is perplexing. It would have been more convincing if the Court had thoroughly examined the terms agreed upon between Mr. Nguyễn Ngọc and Company G regarding his compensation liability, while also providing clearer reasoning to determine whether Mr. Nguyễn Ngọc actually caused damage to Company G and, if so, the specific extent of that damage.
- Procedures and Process for Implementing Compensation Under the Material Liability Regime
The procedures and process for implementing compensation under the material liability regime are fundamentally similar to those for handling labor discipline [See Topic 32]. This means that, to require an employee to compensate, the employer must adhere to the compensation handling procedures as prescribed by law.
In this case, the Court determined that Company G failed to follow the proper process for handling compensation against Mr. Nguyễn Ngọc. Specifically, Company G did not prepare minutes of a meeting to establish the fault of each individual, which would have served as the basis for allocating responsibility in the detailed compensation breakdown for losses during the inventory period from May 20, 2013, to October 15, 2014. Additionally, there were no minutes documenting the handling of compensation liability. Company G also failed to provide minutes of the Board of Directors’ meeting.
Meanwhile, Mr. Nguyễn Ngọc did not acknowledge his fault in causing the loss of assets at the G Quảng Nam supermarket bookstore. Furthermore, Company G could not prove Mr. Nguyễn Ngọc’s fault. Consequently, the failure to comply with the proper compensation liability handling process was the primary reason the Court rejected Company G’s request to compel Mr. Nguyễn Ngọc to compensate for the property damage at the bookstore.
III. Conclusion
The compensation liability under the material liability regime, as established by labor law for employees toward employers, represents a balance of interests between these two parties in the employment relationship. The principle is that, despite the employee’s weaker position in the employment relationship, if they cause damage to the employer’s property during their work, they must bear the responsibility to compensate. However, the challenge lies in the need for labor law to apply specific provisions to determine this liability, thereby protecting the employer’s lawful property rights while ensuring that the employee’s rights and interests are not infringed upon due to their subordinate position.
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“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”
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