Damaged company equipment, financial losses resulting from an employee’s mistake, the loss of a client, or the disclosure of confidential information—there are many situations in which an employee’s actions can cost a business real money. However, even when an employee’s fault seems obvious, an employer cannot always demand compensation for the full amount of the damage incurred.
Rokas Puodžiūnas, an attorney at the AVOCAD law firm, points out that under labor law, an employee’s financial liability is deliberately limited; therefore, the mere fact that the company suffered losses is not sufficient. “In business, it’s natural to think that if an employee’s mistake cost the company money, the employee should cover those losses. However, legally, the situation is not that simple. The employer bears the burden of proving not only the damage itself, but also the employee’s unlawful actions, fault, and a causal link between the employee’s actions and the resulting losses,” says the lawyer.
Losses alone are not enough
The Labor Code stipulates that each party to an employment contract must compensate the other party for any pecuniary and non-pecuniary damages caused by a breach of employment duties for which the party is at fault. In practice, the circumstances leading to damage can vary greatly: an employee may damage work equipment entrusted to them, fail to comply with occupational safety or other mandatory rules, cause financial losses through their actions, or harm the employer’s reputation. However, for an employee to be liable to compensate for damages, all the conditions for liability must be met. First, the employer must have actually suffered damages—which may consist of both direct losses and lost revenue. Furthermore, the employee’s unlawful actions or omissions must be established. For example, the employee may have violated work procedures, safety requirements, job descriptions, or the duties established by law for a specific profession.
A causal link is also required—the losses incurred by the employer must be the result of a specific violation by the employee. Finally, the employee’s fault must be established.
Furthermore, the injury must be directly related to the employment relationship and the employee’s work activities. If the injury did not occur while the employee was performing his or her job duties, compensation for it may be governed not by the Labor Code but by other legal provisions.
“The most important thing for employers to understand is that an employee’s liability is not presumed simply because the company has suffered a loss. The employer seeking compensation for damages must prove all the necessary elements of liability. If even one of these conditions is missing, the claim against the employee may be unfounded,” emphasizes R. Puodžiūnas.
Even if the employee's fault is proven, it may not be possible to recover the full amount
Another important consideration for businesses is that the Labor Code limits the amount of property damage for which an employee is liable. As a general rule, an employee must compensate for any property damage caused, but not more than three times their average monthly salary. If it is determined that the damage was caused by the employee’s gross negligence, this limit increases to six times their average monthly salary.
Gross negligence is understood as an extremely pronounced lack of care—when a person fails to exercise even the degree of caution that is clearly necessary under the specific circumstances. “This means that even in cases where an employee’s actions have caused significantly greater financial losses to the company, the employer does not automatically acquire the right to recover the entire amount from the employee. The legislature deliberately sets limits on liability, since wages are usually a person’s primary source of livelihood,” explains an AVOCAD attorney.
When might an employee be required to pay for the full amount of the damages?
However, the limitation on an employee’s liability is not absolute. The Labor Code provides for specific cases in which an employee may be required to compensate the employer for the full amount of the damage incurred. Full compensation for damages may be required when the damage was caused intentionally or when the employee’s actions constitute a criminal offense. The same rule applies when the damage is caused by an employee who is intoxicated or under the influence of narcotic, toxic, or psychotropic substances.
The employee may also be required to compensate for the full amount of damages in the event of a breach of the duty to protect confidential information or a non-compete agreement, if the employer has suffered non-pecuniary damage, or in cases where full compensation for damages is provided for in a collective bargaining agreement. “It is precisely in these situations that the financial consequences for the employee can be significantly more severe. For example, the deliberate disclosure of confidential business information to a competitor could result in losses amounting to hundreds of thousands, and the standard cap of three or six times the average salary would not necessarily protect the employee in such a case,” notes R. Puodžiūnas.
If an employee causes damage to a customer, the company may be the first to be held liable
Situations in which an employee’s actions cause damage not to the employer itself, but to a client, partner, or other third party, are also relevant to business. In such cases, the employer is generally required to compensate the affected party for the damage. However, after compensating for the damage caused by the employee, the employer may acquire a right of recourse against the employee at fault for the damage. In such cases, the conditions and limits of the employee’s liability as set forth in the Labor Code are taken into account.“This is particularly relevant for employers in operations where employees work directly with clients’ property, operate vehicles, make financial decisions, or perform other actions where mistakes could result in losses that the company itself would bear first. Therefore, it is important not only to properly regulate employees’ duties but also to ensure that work processes, responsibilities, and internal rules are clearly documented,” says R. Puodžiūnas, a lawyer at AVOCAD.
An employer cannot simply decide to deduct the full amount of the loss from an employee's salary
In practice, the issue of recovering damages is also important. The employee and the employer may first agree, by mutual consent, on the amount, procedure, and deadlines for compensation for damages. In certain cases, the employer may issue a written order to deduct the damages from the employee’s wages; however, the Labor Code also imposes specific restrictions on this procedure. If the dispute cannot be resolved through an agreement or if a larger amount is claimed, the employer may have to turn to the authorities that handle labor disputes. Therefore, the mere fact that the employer has calculated the damages caused by the employee does not, in and of itself, grant the employer the right to unilaterally deduct the full amount from the employee’s wages.
“I would recommend that employers avoid the ‘let’s deduct first, then figure it out later’ approach. Before making a decision on recovering damages, it is essential to assess the basis for the employee’s liability, the limits of that liability, and the recovery procedure itself. A procedural error can lead to an additional labor dispute even when the employee did in fact contribute to the damage,” notes an AVOCAD attorney.
According to R. Puodžiūnas, the restrictions set forth in the Labor Code do not mean that an employee can avoid liability for his or her actions. They are intended to maintain a balance between the employer’s right to recover losses incurred due to the employee’s fault and the protection of the employee, as the economically weaker party in the employment relationship. “Each such case must be evaluated on a case-by-case basis. If a company has suffered significant damage, before making a claim against the employee, it is advisable to first gather evidence, accurately calculate the losses, and assess what limit of liability applies in the specific case. And for an employee who has received a claim for a large sum, it is worth verifying whether the employer’s claim actually meets the conditions set forth in the Labor Code,” summarizes AVOCAD attorney Rokas Puodžiūnas.