Being a socialist country, it may come as little surprise to foreign investors that Vietnam’s labor laws are employee-friendly. This is reflected in the degree of protection employees have from termination. In this article, we will explain when an employee may be terminated, which procedures need to be followed, and discuss severance payment.
Types of labor contracts
Vietnam’s Labor Code recognizes the three following three types of labor contracts, each with different stipulations on termination:
- Indefinite term contract: a labor contract without an expiry date;
- Definite term contract: a labor contract with an expiry date between 12 and 36 months; and
- A seasonal or project-specific contract not exceeding 12 months.
Expiry of a labor contract
Once a definite term contract expires, the employment relationship ends. The only exception is where the employee is a trade union representative whose term has not yet ended. In that case, the contract continues till the employee’s term as union representative has ended. Employees that are not rehired are entitled to severance payment (discussed below).
If the employer wishes the employee to continue working, the two parties must sign a new contract within a month after the expiry date. If not, the expired contract will revive as an indefinite term contract.
After the second definite term contract has expired, the employer must offer an indefinite term contract, which does not expire.
A seasonal contract will turn into a definite term contract of 24 months.
Labor contract termination
A labor contract ends by operation of law if the employee dies, goes missing, loses civil capacity, reaches retirement age, is sentenced to prison or prohibited from performing the job in a court ruling. It also ends if the company closes down.
The employer and employee may end the contractual relationship by mutual agreement as well. This is often a better approach than unilateral termination, given the strong protection employees have under Vietnamese labor law. Here too, the employee may be entitled to severance payment.
When it is difficult to reach an amicable agreement, the employer can sever the labor relationship by unilateral termination, or dismissal.
There are five instances in which an employer can end the employment relationship by unilateral termination:
- The employee fails to perform the job according to the terms in the contract, collective labor agreement, or the company’s internal rules. Employers should note that the task must be clearly described in the contract. The employee may be terminated after two written warnings have been issued within one month.
- The employee has been on leave due to sickness or an accident, after a certain amount of time, dependent on the type of contract. This is 12 months for an indefinite contract; 6 months for a definite term contract, and half the contract term in a seasonal contract. If the employee’s health recovers after termination, the employer should reconsider hiring that employee.
- The company has to scale down or reduce staff due to natural disaster, fire or other force majeure.
- For absences of 15 days or more, a labor contract can be suspended if the employee is called for military service, is in custody, has been sent for compulsory re-education or drug rehabilitation, is pregnant, or has agreed on suspension with the employer.
- The company needs to lay off employees due to structural or technological changes, economic reasons, a merger or consolidation.
Employees may not be terminated unilaterally if pregnant; on maternity leave; on annual or other leave; or before the terms under 2. have been reached.
Notice of termination
Except for the grounds under 5., the employer is obligated to give prior notice before unilateral termination. The notice period is 45 days for an indefinite term contract; 30 days for definite term, and three days for seasonal.
Employees that have worked at the company for over 12 months are entitled to severance payment. The severance payment consists of half a month’s salary for each year worked at the company. Here, salary is considered the average monthly payment the employee received over the past six months, including all payments outside of base wage.
If the employee is terminated for the grounds under 5., a full month’s salary per year should be paid instead, with a minimum of two month’s salary.
The employer needs to make the severance payment within 7 days of the termination.
Dismissal is the immediate termination of a labor contract. The company does not need to make a severance payment or give notice.
An employee can be dismissed if:
- The employee commits theft, embezzlement or an intentional act of violence, gambles or uses drugs at the workplace, or discloses secret company information.
- The employee has been absent for 5 days during a month, or twenty days during the year, without a plausible reason. Plausible reasons include illness, fire, natural disaster, the death of a relative,
- An employee previously convicted of a crime recommits that crime.
Further Support from Dezan Shira & Associates
Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email email@example.com or visit www.dezshira.com.
Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.
Import and Export: A Guide to Trade in Vietnam
In this issue of Vietnam Briefing Magazine, we provide you with a clear understanding of the current business trends related to trade in Vietnam, as well as explaining how to set up your trading business in the country. We also attempt to give perspective on what will be Vietnam’s place in the Association of Southeast Asian Nations (ASEAN) in 2015, and look at some of the country’s key import and export regulations.
Using Vietnam’s Free Trade & Double Tax Agreements
In this issue of Vietnam Briefing we explore how Vietnam’s Free Trade Agreements – and especially those via its membership in ASEAN – will affect foreign investment into Vietnam. We also go a step further and examine the specific, bilateral Double Tax Agreements that Vietnam has enacted, and how these can be further used to minimize profits and withholding taxes that would otherwise be levied upon foreign investors.
Developing Your Sourcing Strategy for Vietnam In this issue of Vietnam Briefing Magazine, we outline the various sourcing models available for foreign investors – representative offices, service companies and trading companies – and discuss how to decide which structure best suits the sourcing needs of your business.