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Terminating a Labor Contract: The Correct Process According to the Law

Terminating a Labor Contract: The Correct Process According to the Law

 The year 2023 just ended with significant challenges in the labor market, such as “mass layoffs” by leading global corporations and the Restructuring plans of large enterprises in Vietnam. Confronted with the challenges of recovering and developing the economy after the severe impact of the Covid-19 pandemic, enterprises must find ways to maximize revenue concurrently with reducing operational costs. Consequently, reducing personnel is often one of the prioritized options that enterprise consider.

Nevertheless, terminating a labor contract with an employee in compliance with legal regulations while still ensuring thebenefits of both the employer and the employee is a challenging problem. In cases where an enterprise fails to implement or improperly implements the regulations of labor laws, the enterprise will face significant legal risks when employees file complaints or lawsuits, which could lead to the termination of a labor contract being deemed unlawful. For example, in the case between Pacific Petroleum Export and Import Trading Joint Stock Company (Pacific Gas) and Mr. NTT – the former CEO of the Company, according to the decision of the appellate judgment, Pacific Gas is obligated to compensate the employee with an amount exceeding 5.4 billion VND due to the unlawful act of unilateral termination of the labor contract.

Thus, the topic we are exploring this time, “Terminating a Labor Contract: The Correct Process According to the Law”, will help enterprises gain a comprehensive understanding of the process of terminating labor contracts in accordance with legal regulations.

Termination of labor contract

Currently, Labor Code 2019 and related guiding documents do not provide a specific definition of the termination of labor contracts. However, based on the definition of a labor contract in clause 1 Article 13 of Labor Code 2019, the termination of a labor contract can be understood as the act of terminating the rights and obligations of the parties involved in the employment relationship under one of the cases stipulated by the law.

Circumstances in which labor contract is terminated

The termination of a labor contract can arise from various objective and subjective reasons from both the employer and the employee. Therefore, in order to Terminating a Labor Contract: The Correct Process According to the Law, the first and one of the most crucial steps that enterprises need to pay attention to is accurately determining the case for terminating labor contract as permitted by labor law.

According to the current labor laws[1], there are 13 specific cases for terminating an employment contract, as follows:

  • On expiry of the labor contract;
  • The job has been completed in accordance withthe labor contract;
  • Both parties agree to terminate the contract;
  • The employee is sentenced to a jail term but not to a suspended sentence and not within the cases of entitlement to release/freedom, or is sentenced to the death penalty, or is prohibited from performing the job prescribed in the labor contract by a legally enforceable verdict or decision of a Court;
  • The employee being a foreigner working in Vietnam is deported pursuant to an enforceable decision or verdict of a Court or pursuant to a decision of a competent State agency;
  • The employee dies; or is declared by a Court to have lost legal capacity for civil acts, to be missing or to be deceased;
  • The employer being an individual dies; or is declared by a Court to have lost legal capacity for civil acts, to be missing or to be deceased. The employer not being an individual terminates its operation or the specialized agency for business registration under the provincial people’s committee issues notification that the employer no longer has a legal representative or an authorized person to exercise the rights and discharge the obligations of the legal representative;
  • The employee is disciplined in the form of dismissal;
  • The employee unilaterally terminates the labor contract;
  • The employer unilaterally terminates the labor contract;
  • The employer permits the employee to cease workin cases of changes in the structure, technology, or for economic reasons; or in cases ofdivision or separation, consolidation or merger; sale, lease out or conversion of enterprise type; or on transfer of the ownership or use right of the assets of the enterprise;
  • The work permit of an employee being a foreigner working in Vietnam expires;
  • There is an agreement on probationary work stipulated in the labor contract, but the probationary work did not satisfy the requirements or either party rescinded the agreement on probationary work.

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Processes, procedure for termination of labor contract

As mentioned above, the current labor laws regulate multiple cases for terminating labor contract, and for each case, the laws regulate different processes, procedures for labor contract termination. In practice, this can cause difficulties, confusion for enterprises when terminating labor contracts with employees. As such, for the termination of labor contract to be in compliance with the provision of the laws, enterprises should take notes of the following common cases of labor contract termination, as follow:

The labor contract expires

For cases where a definite-term labor contract approaching its expiration, and the enterprise does not need to renew the contract with the employee, the enterprise must notify the employee in writing about the expiration of the labor contract[2]. Currently, labor laws do not specify the exact notification period for the employee in this case. However, enterprises can refer to points b and c, clause 2, Article 36 of Labor Code 2019 to provide advance notice to the employee, either 30 days or 03 days depending on the specific term of the signed labor contract.

An issue that enterprises need to pay attention to when terminating a labor contract in the case of contract expiration is if the employee is a member of the leadership board of the employee representation organization and is currently in tenure, the enterprise is required to extend the labor contract with the employee until the end of their tenure[3]. If the enterprise still wishes to terminate the labor contract, it may consider other options as listed above or proceed according to clause 3, Article 177 of Labor Code 2019 (reaching a written agreement with the leadership board of the employee representation organization or reporting to the specialized labor authority under the provincial People’s Committee if no agreement is reached).

Enterprise unilaterally terminates the labor contract due to the failure of the employees repeatedly fail to perform their work according to the labor contract

Current labor laws permit enterprises to unilaterally terminate a labor contract if the employees repeatedly fail to perform their work according to the labor contract. The enterprise must adhere to the following processes and procedures[4]:

  • The enterprise has agreed with the employee on the criteria of assessment of work completion level (either within the labor contract or an annex, job description that has been signed);
  • The enterprise had establishedthe regulations for assessment of work completion level according to the provisions of the laws, which specify the criteria to evaluate the work completion level of the concerned employee;
  • The enterprise is required to seek the opinions of the employeerepresentation organization, ifthe employee representation organization has been established (through dialogue in the workplace) regarding (i) the Regulations for assessment of work completion level and (ii) the decision to unilaterally terminate the labor contract for this reason;
  • The enterprise must prove that the employee repeatedly failed to perform their work in accordance with the criteria specified in the Regulations for assessment of work completion level;
  • Besides, the enterprise must notify the employee at least 45 days in advance for the case of indefinite-term labor contract, at least 30 days in advance for the case of definite-term labor contract with a duration of 12 months to 36 months, and at least 03 working days in advance for the case of definite-term labor contract with the duration of less than 12 months.

The enterprise terminates the employment of the employee in the case of change of organizational structure or employee/staffing structure (“Restructuring”).

In case the enterprise carries out a Restructuring plan that leads to the termination of employees’ labor contracts, the enterprise must undertake the following processes and procedures[5]:

  • Issuing the Restructuring decision;
  • Compiling a list of employees who will undergo retraining to continue their employment and implementing the retraining of employees for new job positions (if any);
  • Establishing labor usage plan in case the Restructuring affects the employment of multiple employees;
  • Conducting dialogue at the workplace and gathering opinions from representative members regarding (i) the labor usage plans and (ii) the retrenchment of employees due to the Restructuring;
  • Notifying the implementation of the Restructuring and retrenchment to the local labor management authority at least 30 days prior to the implementation;
  • Notifying the redundant employees about retrenchment at least 30 days in advance. The termination of the labor contract can only be implemented 30 days after the employee has been notified of the termination;
  • Issuing the decision to terminate the labor contract; and
  • Settling financial obligations for the redundant employees within 30 days from the termination date of the contract. This includes salary, bonuses (if any), job loss allowance, and other amounts as stipulated by the law and the company’s policies.

The enterprises handle disciplinary actions against the employee under the form of dismissal

The termination of a labor contract due to dismissal is applied only to specific behaviors outlined in Article 125 of Labor Code 2019 and the internal labor regulations that have been duly registered with the competent state authority. Additionally, the enterprise must strictly adhere to the procedures and processes for handling labor discipline as outlined in Article 70 of Decree 145/2020/ND-CP, as follows:

1. In the cases the enterprise detects that an employee has an act of violation of labour discipline, the enterprise shall make minutes of violation and inform the representative organization of employees of which such employee is a member (if any). In the cases where a violation of the employee is detected after it has been committed, the enterprise shall collect evidence required to prove the employee’s fault.

2. Within the statute of limitations for handling labour discipline as stipulated in Clause 1, Clause 2 of Article 123 of Labor Code 2019, the enterprise will hold a meeting on labor discipline as follows:

– At least 05 working days before the date of the disciplinary meeting, the enterprise will notify the compulsory participants, including (i) the representative organization of employees of which the employee being disciplined is a member; (ii) the employee; and (iii) the employee’s attorney (if any) of the following information and the enterprise shall ensure that these participants will receive the notification before the meeting takes place:

– The agenda, time, location of the meeting; and

  • Full name of the employee to be disciplined and the employee’s violation of discipline.
  • Upon receiving the enterprise’ notification, the above participants must send the confirmation of their presence at the meeting to the enterprise. In case any of the participants cannot attend the meeting according to the time and location being notified, the employees and the enterprise shall agree on a rescheduled meeting; if no agreement is reached, the Company will make decision;

– The enterprise will hold a meeting on employee discipline at the time and location being notified. If any of the participants does not send the confirmation of their presence or is absent, the meeting will still take place by the enterprise; and

– Minutes shall be taken during disciplinary meetings and signed off by the participants before the end of the meeting. Any participants who refuse to sign the minutes must provide their full name and explanation in the minutes.

3. The decision on discipline must be issued by the person who has the power to handle labour discipline, within the statute of limitations for handling labour discipline and sent to the participants.

Furthermore, the enterprise needs to note that when terminating a labor contract with an employee, the enterprise is responsible for fully settling all related financial obligations to the employee within 14 working days from the date of termination, extending no more than 30 days in some cases, and fulfilling other obligations as stipulated in Article 48 of Labor Code 2019.

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The above is an overview of Terminating a Labor Contract: The Correct Process According to the Law. If you have difficulties in finding a Law Firm to advise and support in the relevant legal field, please contact us. Phuoc & Partners is a professional consulting firm established in Vietnam and currently has nearly 100 members working in three offices in Ho Chi Minh City, Hanoi and Danang. Phuoc & Partners is also rated as one of the leading consulting firms specialising in business law in Vietnam that has leading practice areas in the legal market such as Labor and Employment, Taxation, Merger and acquisition, Litigation. We are confident in providing Clients with optimal and effective service.

[1] Article 36 of Labor Code 2019

[2] Article 45.1 of Labor Code 2019

[3] Article 177.4 of Labor Code 2019

[4] Article 36.1(a) and Article 63.2(b) of Labor Code 2019

[5] Article 42.3, 42.6, 48.1, 63.2(c) of Labor Code 2019 và Article 41.1 of Decree 145/2020/ND-CP