Does the "Significant damages" equal to the "Significant economic losses"?

Z was a company’s chief accountant who is responsible for accounting work. He should review reimbursement receipts as the first reviewer, then collect, bind, and double check the final reimbursement receipts after the whole review process had been accomplished. Z’s colleague L and H fabricated several diesel invoices, by which they had reimbursed RMB 640,000. During the review process, Z failed to timely check whether such invoices were issued according to relevant requirements, in addition, Z failed to find out that such invoices were inconsistent with the accounts, and his signatures were faked. The company fired Z with the reason that Z had grossly negligent during his work which caused a significant damage. Z argued that the company had recovered those money and there was no actual damage, and he brought the dispute to the labor arbitration committee. Z’s claims were rejected by the labor arbitration committee, the court of the first and second instance. Finally the case was ended with the high court rejecting Z’s application for retrial (see (2018) Lu Min Shen No. 3526). Why did those courts support the company?

Paragraph 3 of Article 39 of the “Labor Contract Law” stipulates that an employer may dissolve a labor contract if a worker is guilty of serious dereliction of duties or corruption, and causes the employer to suffer significant damages. Regarding the “Significant damages” (hereinafter referred to as the “SD”), Article 87 of the “Opinions on Several Issues concerning the Implementation of the Labor Law” (Lao Bu Fa [1995] No. 309) stipulates: “the ‘SD’, as mentioned in Item 3 of Article 25 of the ‘Labor Law’ shall be stipulated by the enterprise in its internal rules, and it is not appropriate to make a unified interpretation nationwide for it. Where an employer dissolves a labor contract based on such reason and a labor dispute arises, and a party applies for arbitration, the labor dispute arbitration committee shall identify the ‘SD’ stipulated in the enterprise rules according to such circumstances as the type, scale and degree of damages of the enterprise.” Therefore, the “SD” can be stipulated by the employer itself, and its scope is not limited to economic losses of a specific amount, but can also be other damages, such as damage to a company’s credit, image, etc.

In judicial practice, even if the internal rules of an employer have not stipulated the scope of the “SD”, the judicial authorities would determine whether the consequence shall be deemed as the “SD” by considering the type and consequences of damage, the cost of handling, and the risk of negative impacts. We have selected 4 typical categories of the “SD” for reference.

The first category is the “SD” to an employer’s commercial reputation. In the case (2021) Yue 01 Min Zhong No. 9092, the Guangzhou Intermediate People’s Court pointed out: “This material is the equipment installed in real estate, and it would be used for a long time, so it requires stricter requirements on product quality. In addition, such material involves personal safety. Therefore, even if there is no direct economic loss for the time being, it will cause ‘SD’ to the commercial reputation of Zhao X Real Estate Company.”

The second category is the “SD” to an employer’s daily operation. In the case in the beginning of this article, the Shandong High People’s Court pointed out: “Although the embezzled funds have been recovered, the above-mentioned embezzlement has occurred and it has brought a significant impact on the company’s operation and management.”

The third category is the cost of handling with damages could be deemed as the “SD”. In the case (2020) Hu 02 Min Zhong No. 5876, the Shanghai No. 2 Intermediate People’s Court pointed out: “Mr. S neglected to check the accounts at work, and after receiving the deduction notice, he knew that the relevant manufacturers had negative accounts, however, he still arranged the payment, which had violated his job responsibilities. Although the New X Store could collect the corresponding arrears through legal channels, the litigation costs incurred for it are unavoidable.”

The fourth category is the violation of confidentiality obligations could be deemed as the “SD”. In the case (2021) Zhe 02 Min Zhong No. 2836, the Ningbo Intermediate People’s Court pointed out: “The Employee Handbook has prescribed the specific scope of confidentiality matters,…J’s explanation of the email in the appeal essentially avoided the most fundamental question, which is why J, as the executive of Company T, use his personal mailbox to send emails involving agency agreements to suppliers, so J’s explanation of relevant details is not credible.”