Employer’s burden of proof in false reimbursement disputes

By Tracy Liu and Larry Lian, Jingtian & Gongcheng
0
106

For most employers, false reimbursement is a serious disciplinary violation under their rules and regulations, often forming the basis for dismissing employees found to have made such false claims. However, in practice, false reimbursement can be highly concealed, with many employers only discovering the fact after funds have been approved and reimbursed.

In judicial cases involving false reimbursement, this original approval of employee reimbursement claims often comes back to haunt and adversely affect the outcome.

This article focuses on arbitration and judgment practice of such matters in Shanghai, and combines recent practical experience of the authors to suggest recommendations for employers to properly present evidence and respond in such labour disputes.

Types of false reimbursement

Tracy Liu, Jingtian & Gongcheng, Employer’s burden of proof in false reimbursement disputes
Tracy Liu
Partner
Jingtian & Gongcheng

In practice, employee false reimbursement generally falls under one of the following three scenarios.

Fictitious and non-existent payment event. While the invoice submitted by the employee is genuine, the payment event, or trigger of reimbursement, behind the invoice is fabricated. This may take the form of a clear contradiction between contents of the invoice and the payment event, or an impossibility of the payment event. For example, an employee goes on a business trip to Beijing, but submits invoices indicating F&B consumption in Shanghai.

Genuine payment event with false or irregular invoice. While the employee’s payment event is genuine, the invoice is false or irregular. For example, the invoice cannot be verified with the tax authority, or the invoice numbers for different batches of reimbursement are consecutive.

Genuine payment event with genuine invoice but violating reimbursement rules and regulations. While the employee’s payment event is genuine and the invoice is valid, the reimbursement is in breach of the employer’s rules and regulations. This could happen when: (1) the type of expense claimed is prohibited by the employer; (2) the amount exceeds reimbursement standard and level stipulated by the employer; or (3) the employee uses invoices of non-business expenses for reimbursement of business expenses.

Adverse impact on rulings

Larry Lian, Jingtian & Gongcheng,Employer’s burden of proof in false reimbursement disputes
Larry Lian
Counsel
Jingtian & Gongcheng

In many cases, if the false reimbursement has persisted for some time but the employer has previously failed to raise any objection to irregularities, the adjudicating authorities may hold that the employee’s false reimbursement has been acquiesced and permitted by the employer. On such grounds, they may decide that the employee is not liable for any serious disciplinary violation, and ultimately reject the employer’s claims.

Among the above-mentioned three types of false reimbursement, employers are more likely to win the case in the first two scenarios.

As fictitious reimbursement and provision of false invoices are considered serious transgressions involving subjective malicious intent and serious breach of integrity by employees, adjudicators tend to hold that the employee’s legal liability for false reimbursement and serious breaches of discipline is not relieved by the employer’s prior approval.

However, in the third scenario, adjudicators may view the employer’s longstanding approval as, to some extent, a change or variation of its original reimbursement policy, and thus consider that the employer should no longer hold the employee to account, and that the employee is not liable for the false reimbursement.

Burden of proof

Considering relevant cases in Shanghai in recent years where employers had approved reimbursement claims, the authors suggest employers take the following measures to win support of adjudicating authorities.

Proof of knowing and deliberate violation. Employer ability to prove the employee knowingly and deliberately violated reimbursement regulations may facilitate determination of the employee’s subjective malice. For example, the employer can submit evidence proving that the employee has prior knowledge of the reimbursement policy, or that he/she had been disciplined in the past for false reimbursement.

Proof of seriousness of violation. Adjudicators tend to measure the seriousness and harmful consequences of false reimbursement to determine if it is within the realm of reasonability. Therefore, if the employer can prove that the employee’s act of false reimbursement is significant – for example, in terms of frequency, duration or cumulative amount – it may help the employer gain a favourable decision, based on severity of the violation.

Proof of concealment of false reimbursement difficult to immediately identify. The employer may claim to have performed a formal review on basic financial and tax compliance matters, and exercised reasonable due diligence and good faith in approving and reimbursing expenses. On this basis, the employer can further prove that the employee’s false reimbursement is concealed and deceptive.

For example, the employee may have made false reimbursement claims for company expenses that were, in reality, spent on personal items. However, the specific list of items purchased was not reflected on the invoice submitted to the employer, who would therefore have no way of discovering the truth until verifying with official tax records obtained from the authority.

Or the entity issuing the invoice may in fact be engaged in commercial or other services that do not provide, nor are permitted to provide, catering services, but the employee listed and submitted the invoiced item for reimbursement as an F&B invoice. In this case, the employer could only have learned the truth by investigating information of the invoice issuer via official channels, or visiting the entity on site.

Armed with this information, the employer can mount a defence by claiming it is neither realistic nor reasonable to expect its routine auditing process to timely detect such false reimbursements that are unidentifiable by their form or presented information.

By proving that the employee’s violation falls under one of the above scenarios, the employer will find its odds much improved in arbitration or court.

In this case, the employer may have a chance to convince adjudicators that, despite to some extent failing to strictly review the reimbursement and suffer from management oversight, such failure neither changes the nature of the employee’s false reimbursement, reduces the degree of its fault, nor should affect determination of such action as a serious disciplinary violation.

Tracy Liu is a partner and Larry Lian is a counsel at Jingtian & Gongcheng

collateral

Jingtian & Gongcheng

45/F, K. Wah Centre
1010 Huai Hai M. Road,

Shanghai 200031, China

Tel: +86 21 2613 6125

E-mail: tracy.liu@jingtian.com

larry.lian@jingtian.com

www.jingtian.com

Law.asia subscripton ad red 2022