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Asia Briefing

Terminating an Employee in Vietnam

1450861574_45703Because it is a socialist country, foreign investors may not be surprised to learn that Vietnam’s labor laws are employee friendly. This is reflected in the degree of protection employees have from termination. This article will explain when an employee may be terminated, which procedures need to be followed, and will discuss severance payment.

Types of Labor Contracts

Vietnam’s Labor Code recognizes the following three types of labor contracts, each with different stipulations on termination:

  • Indefinite-term contract: a labor contract without an expiry (expiration) date;
  • Definite-term contract: a labor contract with an expiry date between 12 months 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 until the employee’s term as union representative has ended. Employees who are not rehired are entitled to severance payment. 

If the employer wishes for 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 is 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.

Unilateral Termination

There are five instances in which an employer can end the employment relationship by unilateral termination:

  1. The employee fails to perform the job according to the terms of 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.
  2. 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; six 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.
  3. The company has to scale down or reduce staff due to natural disaster, fire, or other force majeure.
  4. 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.
  5. 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 No. 2 have been reached.

Notice of Termination

Except for the grounds under No. 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.

Severance Payment

Employees who have worked at the company for more than 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 No. 5, a full month’s salary per year should be paid instead, with a minimum of two months’ salary.

The employer needs to make the severance payment within seven days of the termination.

Dismissal

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 five days during a month, or 20 days during the year, without a plausible reason. Plausible reasons include illness, fire, natural disaster, or the death of a relative,
  • An employee previously convicted of a crime recommits that crime.
Since its establishment in 1992, Dezan Shira & Associates has been guiding American investors through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, including liaison offices in Boston and Waltham specifically established to support our American clients, we are your reliable partner for business expansion in Asia and beyond. For inquiries, please email us at[email protected]. For further information about our firm and how we can support American investors in Asia, please visit our North American Desk.