Labor arbitration or civil litigation, which one is the first choice to claim for compensation against an employee?

There are 5 main circumstances that a company may claim for compensation against an employee. The circumstances are, (1) the employee brings damage to the company’s property; (2) the employee infringed a third party’s rights while working, and the company has compensated the third party; (3) the employee infringes the company’s trade secrets; (4) the employee embezzles the company’s property; and (5) the company has undertaken expenses which are not employer’s responsibilities, such as the company overpays for social security, or pays medical expenses first for the employee.

If the company claims for compensation from the perspective of employment, the labor arbitration in advance is required, and the limitation period for application for arbitration of a labor dispute is normally 1 year. Therefore, if the company’s claim exceeds such limitation period, it may lose the right to win. For example, in the case (2015) Yi Zhong Min Zhong Zi No. 01012, Z resigned in March 2012; in July 2013, the company filed a labor arbitration on the grounds of infringing trade secrets; however, due to the expiration of the limitation period, the labor arbitration committee and the courts of both the first and second instance rejected the company’s claim.

In view of this, a company could apply for arbitration of a labor dispute regarding the claim for compensation, if the above-mentioned limitation period is available. The legal basis for this circumstance is Article 16 of the “Provisional Regulations on Wage Payment”, which states that, “If an employee causes economic losses to the employer due to their own reasons, the employer may demand compensation for the economic losses in accordance with the provisions of the labor contract”. The circumstance (1) and (2) in the beginning are typical.

If the above-mentioned limitation period is not available, or the circumstance is much more complicated which has involved laws other than the laws related to the employment, it is recommended to choose the appropriate cause of action regarding individual cases, in order to resolve such disputes by civil litigation, which limitation of period is normally 3 years. The two main causes of action are tort and unjust enrichment.

In terms of tort, it mainly involves the circumstance (3) and (4). The legal basis for (3) is Article 9 of the “Law of Anti-Unfair Competition”, which is about the infringement of trade secrets. The legal basis for (4) is Article 1165 of the “Civil Code”, that is, “Whoever is at fault in infringing upon another party’s civil rights and interests and causing damage thereto shall bear tortious liability.”

In terms of unjust enrichment, the legal basis is Article 122 of the “Civil Code”, that is, “A person who gains unjust enrichment without any legal basis, resulting in loss to another person, shall return the unjust enrichment to the person who suffers the loss upon the request thereof.” The circumstance (5) in the beginning is typical.

However, in practice, there are disputes on the jurisdiction regarding tort and unjust enrichment, some courts would take such disputes as a labor dispute and require a labor arbitration in advance, such as the case (2015) Yi Zhong Min Zhong Zi No. 01012. In the “Annual Report of the Supreme People’s Court on Intellectual Property Cases (2009)” (Fa [2010] No. 173), the Supreme People’s Court pointed out that, “Article 79 of the ‘Labor Law’ requires a labor arbitration procedure in advance, and only those who are not satisfied with the arbitration award can bring a lawsuit to the people’s court. However, if an employer raises a dispute over the infringement of trade secrets in accordance with the confidentiality or competition restriction clauses in the labor contract, there will be a question whether the dispute should be resolved through the labor dispute settlement procedure or can be directly accepted by the court as an unfair competition dispute.” In this annual report, the Supreme People’s Court introduced a typical case, and confirmed that such dispute could be accepted by the court directly. We also found there are some changes in the rules of judicial practice in recent years, that is, more and more courts would directly accept cases regarding tort or unjust enrichment related to an employee. It is difficult to find cases regarding tort or unjust enrichment related to an employee which are required a labor arbitration in advance. However, whether a court would accept relevant cases directly, the key is to choose the right legal basis, use appropriate statements and provide corresponding evidence.