What Is a Material Liability Agreement and How Does It Work?

Quick Overview

• Under current Labor Code terminology,an agreement on financial liability is referred to as an agreement on liability for entrusted assets.
• It applies , for example, to cash, securities, goods, or material supplies that an employee may personally control during the period of entrustment.
• The agreement must be in writing and may be entered into only after the age of 18.
• If a shortage occurs, the employee is presumed to be at fault; the employee may be fully or partially relieved of liability if they prove that the shortage occurred through no fault of their own.
• Unlike ordinary damages caused by negligence, the limit of 4.5 times the average monthly earnings does not apply here—the shortfall is generally reimbursed in full.

Are you about to sign a material liability agreement and unsure what its terms mean for you? Have a lawyer review the document before you sign it. We’ll point out risky provisions and explain what you may actually be liable for.

In the case of ordinary damage caused by an employee through negligence, the compensation sought generally may not exceed 4.5 times the employee’s average monthly earnings prior to the breach of duty. However, different rules apply in the event of a shortfall in the value of items entrusted to the employee under a liability agreement for entrusted items or in the event of the loss of an entrusted item—in these cases, the employee may be liable for the full amount of the damage.

Unless you can prove that you did not cause the damage, you will be required to pay the full amount. At this point, the employee is generally at a disadvantage because they must prove that they did not cause the damage. Conversely, the employer’s situation is considerably simpler from both a legal and practical standpoint: the employer knows exactly who to demand compensation from immediately and does not have to prove the employee’s fault in any way.

Damages can take many forms. Most often, they involve damage to or loss of property, or the money the employer spent to remedy the consequences of your mistake. A breach of your duties, however, does not necessarily have to be intentional. Even if you act negligently (for example, by failing to lock up properly when leaving work), this fact can easily be used against you.

Intentional Acts and Negligence

In cases of negligence, your employer may demand compensation for damages not exceeding 4.5 times your average earnings—even if you have not signed a material liability agreement. If it is proven that you acted intentionally, no limit on damages applies. The law takes an equally strict view of cases where you cause damage while under the influence of alcohol or other intoxicating substances. If your intent is proven, your employer may also claim compensation for lost profits

In cases where you have not breached any duty but the employer has nevertheless suffered damage (for example, because the damage was caused by your subordinates), the employer cannot require you to compensate for such damage. This rule also applies if you are a supervisory employee (such as a store manager).

If you sign an agreement on financial liability or an agreement on liability for the loss of entrusted items, you will be subject to increased liability as an employee .

The agreement does not have to list every single banknote, item of merchandise, or piece of inventory that an employee takes custody of during work. It may also apply to assets entrusted to the employee after the agreement is concluded. However, these must always be assets intended for turnover or circulation—such as cash, securities, merchandise, or inventory—which the employee has the authority to handle personally.

If the status of the entrusted assets is not precisely recorded at the time the agreement is entered into, this does not in itself mean that the agreement is invalid. In the event of a dispute, however, the employer must prove what assets the employee actually took custody of and what shortfall arose in relation to them.

From practice: Disputes often arise not because of the existence of the agreement itself, but because of whether it is possible to reliably determine what assets the employee actually took over and when the shortfall occurred. Therefore, we recommend not underestimating the importance of an inventory count or written handover documents when taking over a cash register, warehouse, or other entrusted assets.

Agreement on Financial Liability

If you enter into a material liability agreement, you are liable to your employer for any loss of entrusted property, such as cash in the register, merchandise in the warehouse, and the like. In such a case, your employer may demand compensation from you without first having to prove that you caused the loss. You are therefore only relieved of the obligation to compensate for the loss if you yourself prove that you did not cause it: for example , by identifying the person responsible or demonstrating that you did not have access to the entrusted goods (money). In practice, it is common for multiple employees to sign an agreement on joint financial liability. If you are a manager, you should also expect that your share of the compensation in such a case will be higher than that of “regular” employees.

Agreement on Liability for Loss of Property

A similar situation arises with an agreement on liability for the loss of entrusted items. If, under this agreement, you take possession of certain items (a company laptop, phone, etc.), you are liable for their loss or damage unless you can prove that you were not at fault. In addition to financial consequences, if you cause damage to your employer, you may also face termination or, in extreme cases, immediate termination of your employment.

When is an employee not required to pay for a shortage?

Even a signed agreement on financial liability does not mean that an employee automatically has to pay for every identified shortfall. The employee may be fully or partially exempt from liability if they can prove that the shortfall occurred through no fault of their own.

Typically, it may be relevant, for example, that other persons had uncontrolled access to the entrusted assets or that the employer failed to create conditions that would have allowed the employee to properly protect and monitor the assets. If multiple factors contributed to the shortfall, the employee may be released from liability only partially.

Is your employer demanding that you reimburse a shortfall or other damages? Before you sign an acknowledgment of debt or consent to wage deductions, have your employer’s claim reviewed by a lawyer. The mere existence of a material liability agreement does not necessarily mean that you are always required to pay the amount demanded.

Summary

An agreement on financial liability, which the Labor Code refers to as an agreement on liability for entrusted assets, applies primarily to money, securities, goods, and other assets intended for trade or circulation. It must be in writing and may only be entered into with an employee who is at least 18 years old. If a shortfall occurs, the employee is generally required to reimburse the full amount; however, the employee may be released from liability in whole or in part if they can prove that the shortfall occurred through no fault of their own. Different rules apply to ordinary damage caused by negligence and to the loss of a specific entrusted item; therefore, it is important not to confuse these two scenarios.