Vietnamese Labor Contracts: What You Need to Know
By: Chet Scheltema – Regional Director, Dezan Shira & Associates
South East Asia continues to attract foreign investors seeking to draw from its ever-more-skilled, abundant and still relatively inexpensive labor resources. However, historic sensitivity to abusive labor practices, and in some cases combined with the influence of litigious jurisprudence, has led to an environment where foreign investors are advised to tread cautiously and lay a solid foundation for human resources management, lest they run afoul of local labor laws or trigger costly labor disputes. One pillar of this firm foundation is typically a well-crafted employment contract.
Certain South East Asian countries, including Vietnam – and Indonesia and Malaysia – distinguish themselves by mandating a formal, written labor contract signed by the parties. Rather than viewing it an additional administrative burden, foreign investors should consider this as an opportunity to establish a firm foundation for human resources management in Vietnam.
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Where a worker is hired in Vietnam for more than several months, a labor contract is required, both in the Vietnamese language and in the native language of the employee.
The contact should lay out the key terms of the employment relationship, including the location of work, scope of work, work and rest hours, length of the employment term, salary, and details of social insurance provided, and matters relevant to preserving health and safety.
If such a contract is not signed, then a penalty may apply in the amount of a minimum of VND 500,000 (US$20) up to a maximum of VND 20,000,000 (US$800) per infraction. Additional fines and penalties may apply and outstanding taxes and/or social insurance would be due and owing.
The term of the labor contract should normally range from twelve to thirty-six months, although it could be an indefinite term contract, and in some cases a seasonal employment relationship of less than a year is permitted.
It should be noted that a fixed term employment contract twice renewed becomes an open term employment contract, with ramifications when terminating the relationship and calculating severance. If termination is unlawful, then reinstatement may be required or additional severance.
Probation may not exceed thirty days, sixty days in instances where the work is highly technical. Probation contracts are treated as a distinct contract from a standard contract. During the term of probation contacts, both the employer and the employee may cancel the agreement without prior notice if the position or performance fails to live up to the terms agreed to. Once the probation contract reaches its end, the employer may decide if it would like to engage the employee under a standard labor contract.
Special provisions: confidentiality, intellectual property, and non-compete clauses
Although employees are bound by a statutory duty of confidentiality and while intellectually property in theory belongs to the employer, investors are advised to clearly set the tone of the relationship in the labor contract with strong confidentiality and intellectual property protection terms and to address special circumstances. For instance, if the employee works non-traditional hours, then where will the line be drawn between work time and personal, thus helping to avoid confusion about who owns any intellectual property developed.
As for non-competition, an employer may attempt to include provisions restricting the future activities of an employee post-employment, although such clauses will generally be treated as unenforceable.
Terminating or amending an employment contract
A labor contract may only be amended by mutual agreement of the parties in writing, except of course in instances of promotion or salary increase, in which case a notice should be sent to the employee.
Either the employer or employee may unilaterally terminate employment by 30 days prior notice, or by 45 days prior notice under an indefinite term contract.
An employee may be immediately dismissed in unusual cases where an act of severe or gross misconduct has occurred, including in such instances as theft or repeated violation of company rules. However, the employer must follow a number of steps, including conducting a formal hearing, and should formally document that it has done so. In such an instance, severance may not be required.
Vietnamese labor law also allows an employer to terminate the employment relationship where an “act of god” has occurred (force majeure), although specific steps and procedures must be followed. Employee(s) would be entitled to statutory severance.
Employees completing twelve (12) months of employment are entitled to severance within seven (7) days in the amount of half a month of salary for each year of work completed (determined by the average of last six months). A full month of salary is required when terminated for reason of structural or technological change, economical restructuring, or because of merger or consolidation.
Dispute resolution in Vietnam is managed in a way consistent with a cultural preference for resolving disputes through mediation and settlement. Employers must establish a “labor conciliation council” within the company to serve as the first recourse to resolve disputes. A public district conciliation panel may become involved to address intractable disputes. In some unusual cases, the dispute may be brought directly to the courts.
Personal income tax and social insurance
Although not specifically addressed in the labor contract itself, the employer is under a statutory requirement to withhold and pay personal income tax at the rates specified below. For any additional tax due, the employee would become responsible and file and contribute at the year end.
Social insurance allowances must be withheld and contributed by the employer as follows, if the term of the contract is greater than three months. The specific allowances withheld are for sick leave, maternity, work-related accidence and occupational illness, pension, and mortality. For employees working less than three months in duration, the contribution is included in the salary, and the employees then becomes responsible to make payment.
RELATED: Social Security in Vietnam: Understanding Your Obligations
Establishing a firm foundation to human resources management in Vietnam starts with preparing and signing well-considered employment contracts. Far from being an administrative nuisance imposed under Vietnamese law, when handled deliberately with guidance from experienced counsel, they should be regarded as the first step in establishing robust human resources for a company by cultivating stability in the workforce and limiting disputes and disruption.
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