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How to resolve employee liability

One way to resolve missing goods in the warehouse or so-called shortages in the cash register is to conclude a material liability agreement with the employee responsible for the values in question. What does it mean if you sign up to something like this and what can the consequences be for you?

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Chapters of the article

Our law firm was contacted by Mr. Josef with a request for assistance in a situation where he became the new warehouse manager in a company engaged in the production of automation systems. In this context, his employer wanted to sign a material liability agreement with him. The agreement, which he would sign as the sole employee of the warehouse, included liability for the entire warehouse and the company car. However, the client argued that the company did not have a uniform system for handling the warehouse and that the keys to the warehouse were commonly used by several employees. Mr Josef asked us for a legal opinion on the issue.

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Employees face essentially two basic liability regimes under employment law. Any employee who has signed a regular contract and causes damage to his employer (for example, sends a wrong order or forgets his company laptop on the tram) is liable for damages up to 4.5 times his salary under the Labour Code. However, if the employee signs a material liability agreement or an agreement on liability for entrusted objects, no financial ceiling protects him/her. If he fails to prove that he did not cause the damage, he will pay the full amount. The employee’s negotiation of the agreement can therefore be seen as a strengthening of his obligation to compensate for the damage.

Tip: we have devoted a separate article to employee liability, the principles for its application.

Material liability agreement

If an employee enters into a material liability agreement (correctly “entrusted value liability agreement”), he is liable to the employer for the loss of entrusted values such as money in the cash register, goods in the warehouse, etc. The employer’s legal and factual situation is greatly simplified: he knows who he can immediately claim compensation from and does not have to prove any fault on the part of the employee with a signed material liability agreement.

Therefore, the employee can only be relieved of the obligation to compensate for the damage if he proves that he did not cause it: for example, by identifying the guilty party or proving that he did not work with the goods (money) entrusted to him. Another defence may be obvious culpability by an unknown person, for example, when the establishment, shop or warehouse in question has been foreclosed. Depending on these specific facts, the employee may then be relieved of liability either in whole or in part.

The agreement on liability for entrusted values may be concluded no earlier than the date on which the employee reaches the age of 18. If the employee’s legal capacity has been restricted, the representative may not enter into a trust deed on his behalf. The agreement may be concluded not only in the case of an existing employment relationship, but also in the case of temporary and short-term work, i.e. in the case of a work performance agreement or a work activity agreement where the work is outside the employment relationship. The form shall always be in writing and the obligation arising from it shall end on the date on which the employment relationship ends or on the date on which the employer receives the withdrawal from the agreement. This may be done if:

  • the employer transfers the employee to another job or workplace,
  • the employer fails to remedy the defects in the working conditions preventing the proper management of the employee’s assets within 15 calendar days of receiving written notice from the employee,
  • a shared responsibility agreement is concluded and either another employee is assigned to the workplace or another manager or his/her deputy is appointed.

In some cases it is practical for more than one employee to sign a joint material responsibility agreement. Typically, if there are several warehouse workers who look after the operation of the warehouse. However, the indemnity share is expected to be higher for the manager than for the other employees.

The share of the compensation for the deficit incurred is determined by the proportion of the gross earnings of each employee, with the earnings of the manager and his deputy counted twice. The proportion of the reimbursement shall not exceed for each staff member, with the exception of the manager and his deputy, an amount equal to his average monthly earnings before the deficit was incurred.

If it is established that the deficit or part of it is the fault of any of the staff members jointly responsible, that staff member shall be liable for the deficit in accordance with the degree of his fault. The remainder shall then be borne jointly by all responsible staff members.

However, an inventory must be taken before the conclusion of the material liability agreement, as well as when the agreement is terminated due to transfer to another workplace, to another job or termination of employment. If the employee does not request an inventory when he leaves and it is not carried out, the employee shall be liable for any shortfall found at the next inventory at his original workplace.

The agreement applies only to certain types of entrusted values, such as cash, goods in stock, material stocks, etc. However, these are values that are subject to turnover or circulation and are actually disposed of by the employee. The employee may also be fully liable for the company laptop, telephone or car, but under a different type of agreement.

Agreement on liability for loss of entrusted items

A similar situation arises in the case of an agreement on liability for loss of entrusted items. If the employee takes possession of certain items (company laptop, telephone, etc.), he is liable for their loss or damage unless he proves that he did not cause it. In addition to the financial consequences, the employee may face dismissal or, in extreme cases, immediate termination of employment.

The employee can make amends by providing the employer with a similar or identical item for which he or she has accepted responsibility (e.g. an equally old and powerful laptop or the same type and make of mobile phone) or by paying for the damage taking into account wear and tear and the real cost of replacement.

Even this liability agreement may be concluded no earlier than the date on which the natural person reaches the age of 18. If the employee’s legal capacity has been limited, the representative may not enter into such an agreement on his behalf.

Of course, a good insurance policy, which can help to keep damages to a minimum and avoid lengthy litigation over damages, is a certain solution to situations where the employee, regardless of fault, is liable to pay even hundreds of thousands of dollars in damages. Hand in hand with this, however, anything presented by the employer should not be mindlessly signed and it is a good idea to consult an attorney about the wording of the contract.

Tip: we have covered employee liability insurance in our separate article.

In the case of Mr Joseph, we have proposed several options for dealing with the situation. Firstly, the car, which is not covered by this type of contract, should be excluded from the material liability agreement. A second contract, the aforementioned agreement on entrusted values, can be concluded for this vehicle.

As regards the proposed material liability agreement, it can be said that signing the material liability agreement is not something that is in Mr Joseph’s favour at the moment and he can theoretically refuse to sign it as a whole. On the other hand, this type of agreement is commonly associated with the warehouse manager position, and it is quite possible that the employer would attempt to get rid of the employee after refusing to sign. In any case, a situation where the warehouse is not sufficiently secured at the same time could also be a reason to withdraw from the material responsibility agreement in the future and it is pointless to sign it in such circumstances. He could therefore require the employer to either have a joint material responsibility agreement which would be borne by all those who have access to the warehouse. Ideally, however, the terms and conditions of use of the warehouse should also be adjusted so that Mr Proud can indeed be held fully or more liable for it. An inventory should, of course, be taken before accepting it.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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