Employees' Compensation For Losses Caused To Company

Dear All,

Our company has suffered huge losses due to the negligence of an employee. Our first and only client faced a lot of problems due to the bad programming logics of this developer. Not only was the project delayed, but it also had numerous errors in it. Now, the client wants our company to pay the amount back.

How should our company get the employee to compensate for the losses incurred?

Thanks in advance,

Caroline

Dear Caroline,

In any company, employees work as a group. Somewhere, this programmer must be reporting to someone senior to him. There should be a quality team or testing team to run the program.

For delays in the project, it is the onus of the company as an entity to take responsibility for the project. If the company did not execute the checks and controls needed to run the project effectively, it cannot blame the employee for the same.

If you still feel that the employee did not perform well, you can issue a show cause notice, warning letter, or if needed, a termination letter. Keep in mind that without a due review of performance, a company cannot terminate an employee.

As for recovering damages, unless there is a contract signed stating clearly that the person is liable to pay damages in case of quality parameters not being met, the company cannot do anything. In this case, the only thing that is possible is termination on grounds of non-performance without the scope of recovering any damages.

Dear Caroline,

Annika has given a good reply. I would like to add just a small thing. The Supreme Court has ruled that employers cannot recover the entire amount from the employee for damages caused by him/her. It is advisable to seek the first advice of a legal expert before proceeding. However, you can conduct a domestic inquiry, provide the employee with an opportunity to defend themselves, and take appropriate action if they are found guilty.

From a procedural standpoint, it seems that rather than relying on the process, you depended on individuals. Why did this process failure occur, or was there no process at all? Why were there no checks and balances in the system? These are important questions that you cannot ignore.

Thanks,

Dinesh V Divekar

Hi Caroline,

Thank you for your message. I have reviewed the text you provided and made some corrections for spelling, grammar, and paragraph formatting:

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Thanks a lot, Annika and Dinesh.

Our intention is not at all to blame this person, just to get him to compensate for the losses. Ours is a very small company with few employees, and therefore we tend to build a kind of personal relationship with employees.

Let me explain in detail: this employee of ours was working on a project all alone; it being a very small project could be handled easily by one person. Before the project was deployed to the client, thorough testing was done by concerned people. Numerous errors were resolved. However, when the client used it, knowing it was our first project, they did not get irritated, but rather informed us about the problems faced.

When this employee was asked to resolve these issues, he ended up creating a few more problems in the project, which did not persist at the time of deployment. When these problems were resolved, many more cropped up. We, treating him like family, did not issue any warning letter as such, but kept pushing him to learn from his mistakes and not to repeat them.

However, this never happened; the same problems kept occurring. Now, the client and ourselves are quite frustrated with the errors in the project. We do not see the fault of our client at all.

Our fault probably could be about the extent of trust we had shown in the person. Though it is very clearly written in his appointment letter that the company can recover losses incurred by employees if it desires so.

We have withheld the last two months' salary of this person due to non-rather poor performance. Can this salary be confiscated as a means of compensation for losses?

Please advise.

Caroline

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I hope these corrections are helpful. Let me know if you need any further assistance.

Dear Caroline,

Our intention is not at all to blame this person just to get him to compensate for the losses. I have made clear about the verdict of the Supreme Court on the recovery of losses from an employee.

Ours is a very small company with few employees, and therefore, we tend to build a kind of professional relationship with employees. Small or big, it is important to develop a professional relationship and not a personal one.

Let me explain in detail: this employee of ours was working on a project alone, as it was a small project that could be handled easily by one person. Before the project was deployed to the client, thorough testing was done by concerned people, and numerous errors were resolved. However, when the client used it, knowing it was our first project, they did not get irritated but rather informed us about the problems faced. Why were these problems not detected before passing your product to the client? Was it a failure of the testers as well?

When this employee was asked to resolve these issues, he ended up creating a few more problems in the project which did not persist at the time of deployment. When these problems were resolved, many more cropped up. We, treating him like family, did not issue any warning letters but kept pushing him to learn from his mistakes and not to repeat them. Employer-employee relationships are one thing, and family relationships are another. Why did you mix these two together?

However, this never stopped; the same problems kept occurring. Now, the client and ourselves are quite frustrated with the errors in the project. We do not see the fault of our client at all. If the same problems kept recurring, then this shows that the employee in question was incapable of handling the work assigned to him.

Our fault probably could be the extent of trust we had shown in the person. Though it is very clearly written in his appointment letter that the company can recover losses incurred by employees if it desires to do so.

We have held the last two months' salary of this person due to poor performance. Can this salary be confiscated as a means of compensation for losses? Withholding salary is illegal under the provisions of various labor laws in general and under the provisions of the Shops and Establishment Act in particular. Software companies fall under the purview of this act. If an employee commits workplace errors and causes losses to the company, you should conduct a domestic inquiry. If his culpability is established in the inquiry, then award him appropriate punishment. Forfeiture of wages is one of the punishments you can award him. The recovered amount should be deposited in the Labor Welfare Fund, and you cannot keep it for yourself; that is illegal. However, remember that the Supreme Court has ruled that even if you forfeit the wages of a worker, recovery has to be split into multiple installments so that the worker receives half of his/her take-home salary. Recovery of the amount should not exceed 50% of the take-home salary of any month.

Final comments: Assessing the case from a legal point of view, let us examine this case from a management theory perspective. This fiasco has happened due to poor recruitment. The whole episode explains the caution one should observe while recruiting an employee. What recruitment tests did you conduct while hiring this employee? Did you ask questions related to the job competencies of this position? Have you identified the job competencies of every position?

This is the dilemma of SMEs. All candidates want to work in branded companies. Those who do not get jobs in branded companies end up turning to SMEs or to companies that are yet to establish or startups. SMEs have to put up with these inferior employees and move forward. That is their life and fate!

I may sound a little harsh; however, I have tried to analyze the case dispassionately and critically. My comments should not be taken as criticism of your management style as a whole.

Thanks,

Dinesh V Divekar

Caroline,

Just because you say that it is a small company doesn't remove the responsibility of the company. The principle of working on trust and personal relationships is the error of the company, not the employee.

Additionally, if the employee has made so many errors, then there is a critical problem in the recruitment that was done. Obviously, the employee doesn't have the required skills, and the company kept entrusting him with more and more work with little regard for his capability.

Just stating that the company can recover losses is not enough. You need to mention the amount, etc. This is not an open-ended contract where the company can do what it wants.

Just because the company is small, it cannot do immoral and illegal things.

Plus, look at the impact on morale and on the employees. Do you think that by punishing this employee he will actually continue working for you? Very doubtful... What will be the impact on others? They will also never trust the company.

Don't forget, there are two sides to every story, and this employee will have already shared a different story with everyone else.

In my opinion, the best thing you can do as a company is to terminate his services because there is pretty much a guarantee that if you try to recover damages, the employee morale overall will be damaged. Plus, think to yourself - what percentage of the loss can be recovered by the employee's salary.

Don't cut off your nose to spite your face.

I hope this helps.

Regards, Annika

Dear Ms. Caroline,

I read all the posts but could not figure out what made your employee go wrong. Why are we discussing how to recover losses?

1) Did you ever try to find out the reason or cause as to why he failed in meeting company objectives?
2) Does he have the experience and right skills to handle the project as assigned by your company?
3) Did anybody try to run the project thoroughly on a trial basis pre-implementation at the client's location? If this phase had been successful, then bugs would have been eliminated before implementation at the client's place.
4) Why can't we blame the company for such losses? What is the responsibility of the top management leading your company?
5) Perhaps you are not following systematic procedures - SDLC.

There should be something wrong in the loop even though he was handling the project alone. Please study your employee by doing a root cause analysis and then come to a conclusion.

With profound regards,

Dear Caroline,

You cannot hold an employee liable for losses suffered by the company, provided it is proved beyond doubt that the losses caused to the company were willfully caused and were caused by an illegal act or omission not authorized by the company in the normal course of business activities.

Losses caused to the company due to wrong judgment void of malice in the act or mind of the employee do not constitute the right of the company to claim any damages from the employees. Losses of such nature as stated above are covered and understood as a business risk.

Unlike the company, employees are not liable for losses that occur in the course of business.

Regards,
Octavius

Dear Ms. Caroline,

Do you have any reply to my queries? I am looking forward to hearing from you.

With profound regards,

I thank all of you for your advice.

May I know a little more about the Supreme Court or other legal aspects regarding employees' compensation for losses caused to the company due to delays in work or negligence? Is the company solely liable to bear the losses, or can the employee be asked to share the losses? If so, by what percentage? Would it be entirely illegal to ask the employee to share the losses caused?

Dear Caroline,

You can recover the small percentage amount from the defaulting employee. However, take into account the salary of the employee before awarding him the punishment.

In the erstwhile era of industrialization, workers did not observe safety precautions, which led to industrial accidents. In some cases, injuries were caused to fellow employees as well. In addition to this, there was a breakdown in production. Despite all this, a worker was terminated, and a small amount was recovered.

If the worker were to pay the entire damage charges to the company, then probably he would have ended up working for decades without taking payment!

As for depositing the recovered amount to the Labour Welfare Fund is concerned, not many companies do it. However, I mentioned this in my earlier post because you should know what the legal provisions are.

Ok...

Dinesh V Divekar