Pitfalls in suspending employees amid fraud investigations

By Leo Yu and Tobey Wang, Jingtian & Gongcheng
0
176

It is common practice for employers to suspend employees during investigation of suspected fraud, including but not limited to malpractice such as corruption, bribery and embezzlement. But if suspension is implemented improperly, employers risk being put on the legal defensive, or even exposure to legal repercussion.

This article analyses the function of suspension pending investigation along with compliance risks when dealing with employee fraud, providing our recommendations on how to deal with the situation.

Why suspension?

Leo Yu, Jingtian & Gongcheng, Pitfalls in suspending employees amid fraud investigations
Leo Yu
Partner
Jingtian & Gongcheng

Suspension pending investigation is an effective means for employers to fully investigate and verify employee fraud. When employees are suspected of violating any disciplinary regulation, employers often arrange for suspension of employees pending investigation.

On one hand this helps the employer find out the truth, by preventing the employee from obstructing the investigation or continuing to engage in malpractice, while also encouraging others to come forward with information to report, therefore speeding up the investigation. On the other hand, such suspension tends to put pressure on employees to a certain extent, prompting them to make an early, voluntary confession.

Compliance risks

Tobey Wang, Jingtian & Gongcheng, Pitfalls in suspending employees amid fraud investigations
Tobey Wang
Associate
Jingtian & Gongcheng

Existing laws and regulations do not clearly provide whether an employer has the right to suspend employees during investigation if they are suspected of fraud. Generally, internal suspension pending investigation falls under the employer’s autonomy in management.

However, employees might sometimes reject the suspension and refuse to co-operate with the investigation. In such cases, by rashly dismissing the employee on the grounds of disobeying the suspension, the employer may incur risk of illegal dismissal.

In judicial practice, when determining the legality of such dismissals, the court generally pays attention to: (1) whether the reasons and procedure of the dismissal complied with legal and effective rules and regulations or contractual agreements; (2) the seriousness of the employee’s alleged disobedience; and (3) whether the employee’s disobedience caused any severe consequences.

In a 2020 labour dispute involving the jewellery retailer Pandora, an employee suspended for investigation interfered with ordinary operation of the store by shutting its doors during opening hours, which harmed business and seriously violated the employer’s regulations. On these grounds, the court found dismissal of the employee to be legal.

Conversely, in a 2020 labour dispute involving NNE Pharmaplan (Tianjin), the employee rejected the suspension and refused to return a work computer. After issuing a written warning according to regulations, the employer terminated the employee.

However, the employer’s regulations provide that labour relations may only be terminated after two written warnings. As the notice of termination was delivered to the employee before the second written warning, the employer was eventually found guilty of illegal termination. Therefore, when making such dismissal decisions, employers must carefully evaluate the situation from all angles.

In addition, handling the issue of employees’ wages, social insurance and housing provident fund during suspension pending investigation is a minefield of non-compliance.

Few courts have supported employers to completely deduct employees’ wages during suspension. It is generally believed that a wage not lower than the local minimum standard should be upheld, to cater for the employee’s basic living needs.

However, in adjudication, the employer may sometimes reduce the employee’s wages at its discretion, if the following conditions are met: (1) the employer has relevant rules and regulations or contractual agreement granting it the right to arrange suspension pending investigation and salary reduction on an employee if he/she has committed fraud and infringed on the employer’s rights and interests; (2) such rules and regulations have been implemented by democratic procedure and disclosed to all employees, with their signature for confirmation; and (3) evidence exists of substantial fraud by the employee.

For example, in a 2020 labour dispute involving Beijing China Railway Industry, the court ruled in favour of the employer for paying the employee in question a wage matching the local minimum standard, according to its rules and regulations. But if an employer deducts the employee’s wages without sound basis, the employee may hold the employer liable for unpaid wages, terminate the labour contract unilaterally and seek economic compensation; while the employer will be backed into a corner and may bear adverse consequences.

In addition, due to the continued existence of a labour relationship during the suspension, the employer should continue to pay the employee’s social insurance premiums and housing provident fund. Otherwise, the employer may be required to make supplementary payment later on.

Recommendations

To improve compliance of an employer’s arrangement of employees’ suspension pending investigation, the authors advise employers to:

(1) Clearly stipulate in labour contracts, as well as employer’s regulations, that during an investigation into employee fraud or disciplinary violation, the employer has the right to arrange suspension pending investigation, during which a basic standard wage or one matching the local minimum standard will be temporarily paid, the difference of which would not be reimbursed if the accusation is found to be true, while clarifying specific definition and punitive measures for employees if they reject the suspension;

(2) Arrange for employees to take days off during suspension, with priority to annual paid leave;

(3) If the annual leave quota has been used up and suspension must continue, pay wages to employees as usual, or, with sufficient evidence of fraud, consider paying them at the standard wage stipulated in the contract or policies, but not lower than the local minimum standard;

(4) Continue to pay social insurance premiums and housing provident funds during suspension pending investigation; and

(5) punish employees if they reject suspension, according to seriousness of the situation.

Suspension for investigation is a vital method to verify employees’ fraud and eradicate the company’s “saboteur” within. But the compliance aspect of such practice cannot be ignored.

Employers are advised to improve their policies, standardise ways to handle suspension pending investigation, and clarify the boundaries of rights and obligations between employers and employees to ensure that suspension achieves its ultimate purpose.

Leo Yu is a partner and Tobey Wang is an associate at Jingtian & Gongcheng

collateral

Jingtian & Gongcheng

34/F, Tower 3, China Central Place

77 Jianguo Road
Beijing 100025, China

Tel: +86 10 5809 1368

Fax: +86 10 5809 1100

E-mail: yu.xin@jingtian.com

wang.tong@jingtian.com

www.jingtian.com