Employers can suffer significant financial and reputational damage from the actions of their employees. While dismissal with or without notice is the most common recourse for serious misconduct or negligence, increasingly employers are looking to take stronger action by recovering their losses from employees guilty of wrongdoing. An employer did just that in the recent matter before the Hong Kong District Court. We consider the Court’s decision and other remedies employers may consider pursuing against employees who have engaged in serious misconduct or negligence.
Pet Line Company Limited v Wong Wai Hei  HKDC 227
The defendant in Pet Line was a store employee who was alleged to have manipulated the store’s loyalty card programme (which offered discounts and free gifts to members) to benefit herself, by combining transactions of loyalty card programme members with transactions by non-members. The discounts were tied to the value of the transaction, so by combining payments she generated a discount and pocketed the difference.
The former employer was successful in obtaining damages equal to its losses arising from the fraudulent transactions, unwarranted discounts, unnecessary credit card charges and unaccounted for goods, where they were able to prove the employee’s wrongful conduct using CCTV footage and time stamps on invoices.
Interestingly, the former employer also sought the return of ‘discretionary bonuses’ it had paid to the employee on the basis that these had been paid to reward the employee for her performance where in fact this included the sham transactions. The Court held that there was no legal basis for the return of the discretionary bonuses as:
- the employment contract did not contain an express right to recover bonuses already paid;
- the former employer did not rely on an implied contractual term (although it was mentioned in passing and the Court noted the high threshold for establishing an implied term as a matter of law); and
- although the former employer claimed that the bonuses were paid on a discretionary basis, all but one of them was tied to objective criteria, e.g. the employee’s punctuality/ attendance or the sales of the store. Here the Court noted that the function of damages is to put the innocent party into a position it would have been in if there had been no breach and in this instance, the employee had performed her part of the bargain by attending work on time, handling transactions to meet the store’s sales targets and therefore the former employer would be better off if it were to fully recover the bonus.
Other remedies available to employers
The common law recognises that an employee is under an implied duty to discharge his or her responsibilities with reasonable care and skill. While there is limited case law in Hong Kong, there is a line of English authorities following Lister v Romford Ice and Cold Storage Co Ltd  A.C. 555, which holds that where an employee breaches this duty, he or she may be liable for losses suffered by the employer.
Therefore, in principle, an employer can claim damages against an employee either in contract (breach of implied duties) and/or tort (negligence) where it has suffered loss as a result of the employee’s negligent act. Assuming a breach of contract and/or duty is established, there are still a number of matters the employer would need to successfully make out. In particular:
- Causation: Did the act(s) of the employee cause the losses?
- Remoteness: Do the losses flow from the breaches?
- Contributory negligence: To what extent is the employer itself responsible for the damage?
- Mitigation: Did the employer take reasonable steps to mitigate its loss?
An employer will need to prove that the damages it has suffered were a result of the actions of the employee. Such losses could include the payment of damages to a third party where an employer has been found vicariously liable, as in Lister where a lorry driver, during the course of his employment, reversed into another person causing that person injury. But they may also include losses stemming from the employee’s negligence (for example, a bank employee may be liable for certain losses related to their failure to do creditworthiness checks on customers).
An employer’s ability to recover the costs of an internal investigation or the costs of replacing or re-doing work that has been done by an employee negligently/in breach of contract is more complex and certainly, there is English case authority which provides that an employer will be unable to bring a claim against an employee for fines or the costs of an internal investigation where liability for the fine is personal to the employer company.
In practice, commercial issues are likely to dictate whether an employer would claim against an employee. For example bringing a claim against an employee is likely to make him or her less co-operative in any ongoing investigation or litigation and/or the prospects of recovery from an employee may be low. While in general, dismissal will continue to be the key outcome of employee wrongdoing, employers seeking to increase the available recourse should at least ensure that:
- there are express terms in the employment contract or bonus documentation that provide a clear right to claw back amounts paid in the event of serious misconduct or serious negligence; and
- bonus targets include a general requirement regarding the proper performance of the employee’s duties and compliance with their obligations under the employment terms.
For more information, please contact Gareth Thomas, Tess Lumsdaine or your usual Herbert Smith Freehills contact.