New guidance on restructuring your workforce in Vietnam

By Linh Bui
Asia Employment & Safety Vietnam

In brief

Dismissing employees, whether for under-performance or misconduct, has always been a difficult task in Vietnam given the strongly pro-employee labour legislation. However, the Government has recently issued new legislation in an attempt to level the playing field and create a clearer avenue for companies to legally dismiss employees for under-performance. Partner Linh Bui, Senior Associate Mai Loan Nguyen and Associate Hai Nguyen report.

How does it affect you?

  • Companies can now issue internal rules setting out performance criteria that can be used to assess an employee's performance and form the basis of a decision to terminate a labour contract
  • The new decree sets out specific circumstances in which companies have the right to retrench employees in the case of 'restructuring', or for 'economic reasons'
  • It is now clear that in case of retrenchment, only the retrenchment allowance needs to be paid, and severance allowance is not additionally payable
  • Employees can now unilaterally terminate their contracts for 'personal or family difficulties' only in limited prescribed circumstances

New process for dismissing under-performing employees

Under the 2012 Labour Code, an employer has the right to unilaterally terminate a labour contract when an employee 'repeatedly fails to perform work in accordance with the terms of the labour contract'. However, in practice, due to the broad and vague wording of the law it has been very difficult for employers to dismiss a non-performing employee for this reason. In such cases employers often opt to negotiate with employees to voluntarily resign, in order to avoid the risks of future claims for unlawful dismissal.

The Decree 05/2015/ND-CP, which details and guides the implementation of the Labour Code (Decree 05), now provides a clearer process for employers to terminate the employment of non-performing employees. It is dated 12 January 2015 and effective from 1 March 2015. In particular, employers can now specify in their company's internal rules the criteria for assessing their employees' performance. These criteria can then be used by the employer to assess whether an employee has repeatedly failed to perform his/her tasks, and to decide whether there is a legal basis to unilaterally terminate the employee's labour contract.

Decree 05 appears to suggest that the internal rules on performance criteria and appraisal can be issued separately from the official internal labour rules of the employer (ILR), which need to be registered with the labour authority. The employer is required under Decree 05 to obtain an opinion of the trade union before issuing such internal rules. The opinion can be given by the trade union of the company or, if the company does not have a trade union, by the upper level trade union (ie the Labour Federation at the district level or of the industrial zones authority where the employer is located).

Companies should now consider developing and issuing the above internal rules on performance criteria and appraisal in order to have clearer grounds on which to exercise their right to unilaterally terminate non-performing employees. However, care should be taken in setting the criteria to ensure they are sufficiently measurable to provide the greater certainty that is sought. This may be easier to achieve for factory workers, for example, than employees in managerial positions. Further, as with all employment matters in Vietnam, care should also be taken to make sure that all relevant procedural steps and formalities are complied with in the termination process, in order to avoid future claims by the employees.

Clearer grounds for retrenchment

Under the 2012 Labour Code, an employer has the right to retrench employees after the employer has tried but failed to offer new jobs to the employees in the following cases: (i) 'restructuring or a change of structure or technology adversely affecting the jobs of many employees'; or (ii) 'for economic reasons, [where] many employees are in danger of losing their jobs'.

Due to the vagueness and ambiguity of its wording, this provision raises many unsolved questions that make it hard to implement in practice. It is not clear which situations constitute a 'restructuring', 'change of technology' or 'economic reasons', and how many employees must be affected in order for the circumstance to be regarded as affecting 'many employees'.

Decree 05 clarifies these uncertainties in the law and stipulates circumstances that constitute the above retrenchment grounds. In particular:
  • 'Restructuring and change of technology' is defined to include the following circumstances:
    • Change of the labour organisation structure, or labour restructuring by the employer;
    • Change of products or product structure of the employer; or
    • Change of processes, technology, machinery and/or equipment for production or business associated with the production or business line of the employer.
  • 'Economic reasons' is defined to mean one of the following circumstances:
    • Economic crisis or economic recession; or
    • Implementation of a state policy on restructuring the economy or implementing an international undertaking.

It is also clear under Decree 05 that the above retrenchment provision will now apply when the event results in two or more employees having to be retrenched.

Given the above, before proceeding with the retrenchment plan, companies should carefully consider and ensure that their relevant event falls within the above list of circumstances and that they have sufficient evidence to justify their reasons for retrenchment.

No more doubling up of retrenchment payments

Based on a technical reading of the 2012 Labour Code, in the case of retrenchment as discussed above, an employer must pay retrenched employees both retrenchment and severance allowances. This provision seems to have been a drafting mistake in the 2012 Labour Code. Logically, in this case, employees should only be entitled to a retrenchment allowance – as was the case under the former Labour Code. In practice, although the labour authorities seem to agree with this argument, the labour authorities have nevertheless suggested that companies comply with the letter of the law and pay both retrenchment and severance allowances until the Government provides further guidance on this issue.

Decree 05 has finally resolved this issue by clarifying that, in the case of retrenchment, the employer is required to pay only the retrenchment allowance to the affected employees, and that no severance allowance is additionally payable. 

Grounds more restricted for employees to unilaterally terminate their contracts

The 2012 Labour Code allows employees to unilaterally terminate their labour contracts on the basis of 'their personal or family difficulties which make them unable to continue working'. Again this wording is broad and vague and has allowed employees to use their own discretion to decide whether their circumstances are difficult enough to unilaterally resign.

Decree 05 has narrowed this right by setting out the specific scenarios of personal or family difficulties under which an employee can unilaterally terminate his/her labour contract. These circumstances include taking leave to care for a specified scope of close relatives, or going overseas to live or to work.