For what are employees held financially liable?

Employee material liability: when an employer may recover damages caused by an employee

A signed material liability agreement does not automatically give an employer the right to charge an employee for any shortage, damage, fine, or lost profit. To recover money, the employer must prove direct actual damage, a breach of a specific employment duty, the employee’s fault, and a causal link between the employee’s actions or inaction and the loss. As a general rule, liability is limited to the employee’s average monthly earnings, while full compensation is allowed only in cases expressly provided for by law.

Even where there are lawful grounds, the employer cannot arbitrarily deduct the entire amount from the employee’s salary. If the damage does not exceed the employee’s average monthly earnings, the employer must issue an order within the required time, notify the employee, and comply with the applicable deduction limits. If the amount is higher, the deadline for issuing the order has been missed, or the employee has left the company, recovery is generally pursued through court.

When an employee becomes materially liable

An employee is liable for damage caused to the employer as a result of a breach of the employment duties assigned to the employee. The employer must prove all of the following circumstances at the same time:

The employer is responsible for proving that all these conditions exist. A shortage report, the employee’s position, access to goods, or a signed full material liability agreement does not replace evidence of fault and a causal link.

Employment duties should be clearly defined in the employment agreement, job or work instructions, orders, and operating procedures. The employee should acknowledge them by signature or by means of a properly executed electronic document. If the employer cannot identify which specific duty was breached, recovering the damage will be difficult.

What is considered direct actual damage

Direct actual damage may include:

• a shortage of goods, money, raw materials, or other valuables entrusted to the employee;

• loss, destruction, or damage to property;

• necessary expenses for repairing or restoring property;

• amounts reasonably paid by the employer to a third party because of the employee’s wrongful actions;

• excess payments directly caused by the employee’s violation;

• a fine or other expenses paid by the employer if it is proven that they were a direct consequence of a specific employee’s culpable violation.

Not every financial loss incurred by a business constitutes direct damage. For example, selling goods at an excessive discount does not automatically give the employer the right to deduct from the seller the difference between the regular and actual price. The employer must prove that the employee was not authorized to apply that price, violated the established procedure, and caused actual losses rather than merely reducing expected profit.

Lost profit, planned markup, projected income, or other lost earnings cannot be recovered from an employee under the rules of employment-related material liability.

When liability is excluded

An employee is not liable for damage that:

• falls within normal business and operational risk;

• occurred as a result of extreme necessity;

• was caused by circumstances the employee could not foresee or prevent;

• occurred because the employer failed to provide proper conditions for safeguarding the property;

• is associated with access by an unidentified group of persons where the person responsible cannot be established;

• is actually lost profit rather than direct actual damage.

The employer is required to provide the conditions necessary for normal work and for safeguarding entrusted property. The absence of functioning locks, safes, alarm systems, restricted access, proper records, or an opportunity to hand over a shift may indicate fault on the part of the employer. The court takes such circumstances into account when resolving a dispute.

The time when the damage was caused does not by itself release the employee from liability. The statement that an employee can never be liable for the employer’s property before the beginning or after the end of the working day is incorrect. On the contrary, causing damage outside the performance of employment duties is a separate statutory ground for full material liability.

Limited material liability

As a general rule, an employee compensates direct actual damage, but not more than the amount of the employee’s average monthly earnings. This rule applies unless there is a separate lawful ground for full liability.

Liability within the limits of average monthly earnings applies, in particular, to:

• employees — for damage to or destruction, through negligence, of materials, products, tools, protective clothing, and other items provided for use;

• company managers and their deputies, heads of structural divisions and their deputies — for damage caused by excessive monetary payments, improper organization of accounting and storage of valuables, or failure to take measures to prevent downtime, production of defective products, theft, destruction, or damage to property.

Average monthly earnings for the purpose of determining the liability limit are calculated according to the Procedure for Calculating Average Wages approved by Resolution No. 100 of the Cabinet of Ministers of Ukraine.

When an employee must compensate the damage in full

Full material liability means an obligation to compensate the entire proven amount of direct actual damage without the limitation of average monthly earnings. It applies only in the cases specified in Article 134 of the Labour Code of Ukraine.

The list is exhaustive. Article 134 of the Labour Code does not establish a general ground for full liability solely because an administrative offence has been committed. Liability for a specific administrative offence may affect an employment dispute only where another provision of law expressly establishes the relevant property consequences.

An employer’s internal document cannot independently extend this list. A statement in a job description that an employee «bears full material liability» also does not create such liability unless there is a statutory ground for it.

Full individual material liability agreement

Such an agreement may be concluded only with an employee who is at least 18 years old and belongs to one of the categories specified in Article 135-1 of the Labour Code.

Employees working with entrusted valuables

Two conditions must be met simultaneously:

1. The employee’s position or the work performed is included in the List of Positions and Work No. 447/24.

2. The employee’s actual employment duties are directly related to the storage, processing, sale, release, transportation, or use in production of valuables entrusted to the employee.

If the position is included in the list but no valuables are actually entrusted to the employee, concluding an agreement does not create grounds for full liability. Similarly, the agreement will not apply if the position was formally renamed but the nature of the work does not meet the established requirements.

The positions and types of work most commonly found in trade include:

• cashiers, senior cashiers, cashier-controllers, and employees who actually perform cash operations;

• warehouse managers, storekeepers, and other employees who receive, store, and release goods;

• work related to selling and preparing goods for sale;

• work related to receiving and storing inventory and other material assets;

• freight forwarding employees;

• cash collection employees and employees entrusted with monetary valuables.

A job title such as «manager», «administrator», «accountant», «driver», «security guard», or «executive» does not in itself provide grounds for concluding a full material liability agreement. The specific work covered by the employee’s employment function must be checked. An ordinary driver, for example, does not become fully materially liable merely because a vehicle is assigned to that employee.

Remote and home-based employees

A written full material liability agreement may also be concluded with an adult remote or home-based employee who uses equipment and other resources supplied by the employer for work. This may include laptops, monitors, phones, specialized equipment, and other provided assets.

The transfer of such property should be documented by an acceptance certificate specifying the name, model, serial or inventory number, completeness, technical condition, and value.

What should be documented together with the agreement

To protect the employer’s interests, the agreement alone is not sufficient. The set of documents should include:

• an employment agreement or an employment order;

• a job or work instruction;

• a written full material liability agreement;

• an acceptance and transfer certificate for goods, money, equipment, or other property;

• inventory records as of the date the valuables were accepted;

• procedures governing access to the warehouse, cash register, safe, or information system;

• procedures for accepting and handing over shifts;

• record-keeping rules and reporting deadlines;

• documents confirming that the employer has provided proper storage conditions.

The agreement should be prepared in two copies — one for the employer and one for the employee. It should precisely identify the entrusted valuables, the obligations of the parties, the reporting procedure, inventory procedures, and the procedure for returning property.

If an employee is transferred to another position, the lawful grounds for full liability must be checked again. An agreement concluded for work as a freight forwarder does not automatically apply to a manager position or another new employment function.

One-time transfer of property under accountability

Full liability may arise regardless of the employee’s position if the employee received specific valuables under accountability based on a one-time power of attorney or another one-time document.

Such a document may include:

• a power of attorney to receive goods;

• a delivery note;

• an acceptance and transfer certificate;

• a one-time cash or warehouse document;

• a document confirming the issue of funds under accountability;

• a document confirming the transfer of a corporate payment card for specified expenses.

The document must make it possible to determine who received the property, when it was received, in what quantity, at what value, and for what purpose. An employee’s ordinary signature in an internal log without a description of the valuables may be insufficient.

The Supreme Court has stated that a shortage of property received under accountability based on one-time delivery notes may constitute grounds for full compensation regardless of the employee’s position.

Collective material liability

Collective or team material liability may be introduced where employees jointly perform work related to the storage, processing, sale, transportation, or use of valuables and it is impossible to distinguish each employee’s individual liability.

To introduce it lawfully, it is necessary:

• for the work to be included in the List approved by Order No. 43 of the Ministry of Labour;

• to issue an order establishing collective liability;

• to agree its introduction with the elected body of the primary trade union organization, if one operates at the enterprise;

• to establish the composition of the collective or team;

• to conclude one written agreement between the employer and all members of the collective;

• to conduct an inventory and document the collective’s acceptance of the valuables.

Relevant types of work in trade include, in particular, cash operations, receiving, storage, release, sale, and preparation of goods for sale.

An inventory should be conducted when the head of the collective changes, when there is a significant change in the team’s composition, and when valuables are transferred to new employees. If more than half of the original members of the collective leave, the agreement should be concluded again.

The entire shortage cannot simply be divided equally among all sellers. Each employee’s share of liability must be determined taking into account the period of work within the team, the employee’s contribution, the degree of fault, and other circumstances. Joint and several recovery is allowed only where a court establishes that the damage was caused by the joint intentional actions of several persons.

The Supreme Court has refused to recover collective shortages where the employer failed to conduct an inventory when the composition of the team changed and did not document the acceptance and transfer of valuables to new employees.

How to determine the amount of damage

As a general rule, damage is determined based on actual losses using accounting records, based on the book value or cost of the valuables less established depreciation.

In cases of theft, shortage, intentional destruction, or intentional damage to material assets, the amount of damage is determined using the prices applicable in the relevant locality on the date of compensation. For public catering enterprises and commission trade, the law provides special rules for determining certain shortages using established selling prices.

The calculation should include:

• a list of lost or damaged property;

• the quantity of each item;

• the original, book, or accounting value;

• the amount of depreciation;

• the prices applied and the source of information about those prices;

• repair or restoration expenses;

• documents confirming payments made by the employer;

• the final amount of direct actual damage.

The amount of damage cannot be determined arbitrarily or solely on the basis of the retail price of the goods unless the law specifically provides for that method of calculation.

Documents for establishing a shortage and employee fault

To document the case properly, the employer should follow a consistent procedure.

1. Document the incident

A memorandum or initial report should be prepared recording the discovery of a shortage, damage, loss of funds, unauthorized write-off, or another violation.

Where possible, the following should be preserved immediately:

• video surveillance recordings;

• access control system data;

• login records from the accounting software;

• cash register and warehouse documents;

• ECR or pECR data;

• Z-reports, receipts, cash deposits, and cash withdrawals;

• acquiring reports and bank statements;

• correspondence and internal messages.

2. Order an inspection or inventory

The employer issues an order establishing a commission and specifying the objects, deadlines, and grounds for the inspection. For legal entities, an inventory of assets is conducted in accordance with the Regulation approved by Order No. 879 of the Ministry of Finance. A mandatory inventory is conducted, in particular, when the materially responsible person changes.

The results are documented using inventory lists, reconciliation statements, minutes, or a commission report. The materially responsible person should be given the opportunity to attend, review the documents, sign them, or record objections.

3. Request a written explanation

The employee is asked to provide a written explanation of:

• the circumstances of the incident;

• the reasons for the shortage or damage;

• who had access to the property;

• what malfunctions or breaches of storage conditions existed;

• what actions the employee took to prevent the damage.

If the employee refuses to provide an explanation or sign the documents, a report is prepared and signed by members of the commission or other persons present. The refusal does not prove fault, but it records that the employer gave the employee an opportunity to state their position.

4. Identify the specific person responsible

The commission should establish not only the existence of a shortage, but also:

• which duty was breached;

• who actually had access to the property;

• when the damage occurred;

• whether the property had been entrusted to the employee;

• whether the employer provided proper storage conditions;

• which actions or omissions caused the losses;

• whether there are grounds for limited or full liability.

If accounting data alone does not make it possible to identify the person responsible, the shortage cannot automatically be divided among all employees.

5. Approve the calculation and conclusion

The commission prepares a final report or conclusion accompanied by primary documents, explanations, inventory materials, and the calculation of damage.

How to recover damages from an employee

Voluntary compensation

An employee may voluntarily compensate the damage in full or in part. With the employer’s consent, the employee may also provide equivalent property or repair the damaged property.

The arrangement should be documented in writing. The document should contain:

• the acknowledged amount;

• the grounds on which the damage arose;

• the procedure and payment deadlines;

• payment details;

• the consequences of failing to comply with the payment schedule;

• the signatures of the parties.

An application for voluntary salary deductions should be specific and must not become an indefinite general authorization allowing the employer to deduct any future losses.

Employer’s order

If the amount of damage does not exceed the employee’s average monthly earnings, the employer may issue an order for compensation through salary deductions.

The order must:

• be issued no later than two weeks from the date the damage was discovered;

• be communicated to the employee;

• be implemented no earlier than seven days after the employee has been notified.

For the head of an enterprise and their deputy, the corresponding order is issued by the superior authority in the chain of command. If the employee disagrees with the grounds or amount, the employee may challenge the deduction.

Where damage is established by an inventory, audit, or inspection, court practice generally considers the date the relevant report or conclusion is signed to be the date the damage was discovered.

Recovery through court

The employer must apply to court if:

• the amount exceeds the employee’s average monthly earnings;

• the full amount must be recovered under Article 134 of the Labour Code and exceeds the average earnings;

• the two-week deadline for issuing an order has been missed;

• the employee has left the company and a lawful deduction can no longer be made;

• the employee disputes the fault, calculation, or grounds for liability;

• the voluntary agreement is not being fulfilled.

The employer has one year from the date the damage was discovered to apply to court. This is not a one-month period and is not calculated from the date on which the damage was caused.

Termination of employment does not end an employee’s material liability, but it also does not give the employer the right to arbitrarily deduct the entire amount from the employee’s final settlement.

How much can be deducted from salary

For each salary payment, the total amount of all deductions generally cannot exceed 20% of the amount payable to the employee. In cases specifically provided for by law, the limit may be 50%.

The maximum limit of 70% applies only to specific enforcement cases, including the recovery of child support for minor children and certain other deductions expressly provided for by law. An employer cannot apply a 50% or 70% limit merely because the employer wants to recover a shortage more quickly.

Deductions are not allowed from payments that cannot be subject to recovery under the law, including certain types of severance payments and compensation payments.

When an employer may be denied recovery

The most common reasons for refusal include:

• direct actual damage has not been proven;

• the calculation is based on expected profit;

• there are no documents confirming the transfer of property to the employee;

• the employee was not informed of the specific employment duty;

• third parties or unidentified persons had access to the valuables;

• the inventory was conducted with significant procedural violations;

• the fault of a specific employee has not been established;

• the employer did not provide proper storage conditions;

• the full liability agreement was concluded with an employee whose position and work do not meet the statutory requirements;

• the agreement was concluded for a different position;

• the collective agreement was not concluded again after a significant change in the team’s composition;

• the employer missed the deadline for applying to court;

• the amount of losses is not supported by accounting, primary, or valuation documents.

A court may reduce the amount of compensation taking into account the degree of fault, specific circumstances, and the employee’s financial situation. Such a reduction is not permitted where the damage was caused by a crime committed for personal gain.

Example from court practice

In case No. 686/12599/17, the employer sought full compensation for a shortage based on a full material liability agreement signed with the employee. The Supreme Court established that the employee’s position did not belong to the categories for which such an agreement could lawfully be concluded. The Court stated that the mere fact that the agreement had been signed was not sufficient grounds for recovering the entire amount of damage. In the absence of another lawful ground, the employee’s liability could not exceed the limit established by law.

Monitoring shortages, inventories, and employee actions in Torgsoft

In Torgsoft, you can differentiate employee access rights by role. Different access rights to functions and data can be configured for sellers, cashiers, storekeepers, accountants, and owners. Individual settings make it possible to prevent a seller from deleting goods from a sale, restrict sales below the established price, and require the reason and responsible employee to be specified when an item is cancelled. This helps reduce the risk of unauthorized operations, but access rules should be aligned with the staff’s actual job responsibilities.

The user activity log displays operations by event type, while the «Seller» and «Modified by» columns make it possible to determine who processed the sale and who edited the transaction. Log entries are created automatically and cannot be edited by users through the corresponding form. The document change log separately stores information about changes made by employees. Such data may serve as additional evidence during an internal investigation but does not replace inventory reports, primary documents, explanations, and evidence of fault.
To identify discrepancies, Torgsoft supports inventory counting using a computer, scanner, paper inventory sheet, data collection terminal, and serial numbers. The software compares the actual quantity of goods with recorded stock balances and generates data on shortages and surpluses. The inventory results should be documented by the commission in accordance with the company’s internal procedures and legal requirements.

What an employer should check before signing an agreement

1. The employee is at least 18 years old.

2. The position or actual work meets the statutory grounds for such an agreement.

3. The job description clearly defines operations involving goods, money, or property.

4. The employee can actually control access to the entrusted valuables.

5. The property is transferred under an acceptance certificate, delivery note, or another primary document.

6. An initial inventory has been conducted.

7. The employer has provided proper storage conditions.

8. A procedure for handing over shifts, reporting, and returning property has been established.

9. The employee has an individual account in the retail or warehouse software.

10. The agreement does not contain provisions that expand liability beyond what is provided for by law.

Official sources

1. Labour Code of Ukraine No. 322-VIII — Articles 127–130, 132–138, 233: grounds, types, limits, and procedures for material liability, rules for deductions, and the deadline for applying to court.

2. Resolution of the Cabinet of Ministers of Ukraine No. 100 dated February 8, 1995 «On Approval of the Procedure for Calculating Average Wages» — rules for determining average earnings.

3. Order of the Ministry of Finance of Ukraine No. 879 dated September 2, 2014 «On Approval of the Regulation on Inventory of Assets and Liabilities» — procedure for conducting and documenting inventories.

4. Order of the Ministry of Labour of Ukraine No. 43 dated May 12, 1996 — list of types of work for which collective material liability may be introduced and the standard collective agreement.

5. List of Positions and Work and the Standard Full Individual Material Liability Agreement approved by Resolution No. 447/24 dated December 28, 1977 — categories of positions and types of work for which individual agreements may be concluded.

6. Review of the case law of the Civil Court of Cassation within the Supreme Court concerning compensation for property damage — conclusions concerning the validity of agreements, proof of fault, inventories, collective liability, and determination of the amount of damage.

7. Supreme Court Decision dated June 29, 2021 in case No. 686/12599/17 — an agreement with an employee who does not belong to the categories prescribed by law is not sufficient grounds for full compensation of damage.