Introduction
The Vietnamese labor law is oriented employee-friendly to the greatest extent and in most cases is interpreted to the disadvantage of the employer. It has an effect particularly in labor law-related disputes which are in most cases decided in favor of the employee. The employment contract has to be based on the standard contract drawn up by MOLISA which, however, can and should be adjusted to individual requirements of particular enterprises in order to do justice to the interests of employers and employees. Here, a particular attention should be directed to non-competition clauses and such which ensure the protection of company secrets. However, the statutory provisions must not be violated in order to avoid nullity of the labor contract. Since the Vietnamese law is still immature, enterprises and subordinate agencies can by all means have a direct influence on its development by pointing to inconsistencies. Legal bases can be found in various statutes, but the core law is the Labor Code of 02 July 2012. Moreover, the labor law-related issues are regulated by the National Insurance Act, the Vocational and Further Education Act, the Trade Union Act as well as the Act on Vietnamese Working Abroad and numerous implementing regulations of the government and competent ministries. The Vietnamese law does not now industry-wide multi-employer agreements yet. Practice-oriented are rather collective work agreements in which the wage level, social security contributions, working hours and breaks, safety at work and rights to strike as well as the bonus system are regulated and which have to be signed by a trade union representative and the principal of the company. Enterprises with more than ten employees are obliged to issue the so-called Internal Labor Rules and to register them with MOLISA. They have to regulate the following contents:
– working hours and rest periods;
– regulations within the company;
– health and safety at work;
– protection of the property and confidentiality of company secrets;
– specific examples of behaviors meaning a violation of these provisions;
– punishments to be expected in case of infringement (e.g. official rebuke)
Contract termination
In respect of contract termination it is advisable even in extreme cases to take the line of a reasonable amicable settlement. Moreover, the agreement to terminate a contract, contrary to termination according to the law, is the more common and most practicable variant and should contain the following items:
• the amount of the compensation to which the employee is entitled and possible benefits in kind;
• the commitment of the employee to retire from the company;
• the waiver of further claims on the part of the employee against the employer.
• The Vietnamese labor law knows also a distinction between a termination with notice (periods of notice of 3, 30 and 45 days, depending on whether a seasonal contract or a fixed-term or permanent contract is involved) and without notice (no periods of notice) and stipulates different reasons for termination: compulsory redundancy as well as individual- and behavior-related terminations.
The principal preference of employees is reflected in particular in the area of contract termination. A dismissal of an employee requires a termination notice and the adherence to appropriate periods of notice (which, however, in most cases does not even take place in practice). In such case, the employer is obliged to pay out a half of monthly salary per year of employment. If the employer wishes to give a notice unilaterally, then the trade union has to be involved as a rule. In order to mitigate against the strict termination procedure, it is advisable to use in most cases the contracts of employment for a limited period of time (they may, though, be extended once) or outsource certain activities completely.
Payments to the employee after termination of the employment relationship
According to Article 42 of the Labor Law, when unilaterally and illegally terminating the labor contract, the employer has to allow the employee to be back to work and pay salary, social insurance, health insurance during the period which the employee is not allowed to work, together with at least two-month salary according to the labor contract. If the employee does not want to continue working, the employer is required to additionally pay the employee job loss allowance. If the employer does not want the employee to continue working, and the employee so agrees, they have to negotiate on an additional compensation package but it must equal to at least 2-month salary according to the labor contract.
When formulating an individual contract of employment, a collective work agreement and internal company regulations, attention should be paid that apart from detailed description of the duties of employees, in addition, all reasons for termination coming into consideration are to be listed scrupulously because otherwise a termination turns out to be impracticable even in case of serious misconducts.
Examples of compulsory redundancies:
• organizational or technology restructuring processes
• changes in the company’s ownership structure (mergers, transfer of ownership etc.); and
• economic reasons.
An individual- or behavior-related reason for dismissal is a repeated violation of duties defined in the contract of employment, but the personal fault has to be proven by the employer.
Furthermore, unauthorized absence from work (five days within a month or 20 days in total within a year) or absence from work due to a long-lasting illness, events of force majeure and absence from work after 15 days from the date of temporary delay in implementing the labor contract also entitle employee with termination. However, other disciplinary measures had to be taken before. The relevant amount of compensation varies depending on specific reason for termination.
Guidance for the implementation of unemployment insurance
Circular 32/2010/TT/-BLDTBXH guiding the Social Insurance Law relating to unemployment insurance issued on 25 October 2010. It provides details to when it whether a reason for refusing work offered is “plausible”. Also it provides clarification around the strict requirements that a person must follow in order to be entitled to unemployment benefits. Circular 32 states, that where the number of 10 or more employees is reduced, the company still has to continue to pay unemployment insurance contributions. In case the unemployed moves that person is then required to submit a prescribed “request for transfer” to their existing labor body from where they are receiving benefits. That body contacts the new body who pays the benefits in the future.
Probation period
According to Article 29 of the Labor Code, the employer or the employee is allowed to terminate the employment during the probation period without notice and compensation.
Social insurance contributions
In 2009, the social and health insurance contributions amounted in total to 25% of the gross basic salary and were paid by both the employer and the employee. However, by 2014 the contributions are supposed to rise to 33.5%. The Vietnamese labor law grants maternity leave of 6 months. However, the work can be resumed four months after the birth at the earliest, but the ability to work has to be confirmed in health aspects by a medical certificate. The statutory retirement age is in principle 55 (women) and 60 years (men). Apart from the old-age security fund, since 1.1.09 an unemployment fund exists with the duty of the employers and employees to pay contributions amounting currently to 1% of the basic salary. The spirit and purpose of this fund is to abolish the obligation to severance payment. Furthermore, at the beginning of 2009 several amendments with regard to the Personal Income Tax (PIT) have been enacted. On the one hand, the PIT is calculated now from the gross salary, and on the other hand it has to be paid by the employer, which, at the end of the day, gives the enterprises more security. In order to save labor costs, some enterprises make recourse to an illegal trick. Two contracts of employment are concluded with an employee in order to pay social security contributions at a lower salary. However, be cautious of this practice. Moreover, foreign investors are advised to double-check whether the Vietnamese firm that is to be taken over has met its obligations to pay social security contributions in order to avoid being responsible for outstanding payments in the aftermath. The employer is obliged to pay the cost of treatment in case of an accident at work, but it is eventually borne by the social insurance, provided that it has been paid.
Wage costs and non-wage labor costs
Due to the inflation, the salaries leapt in 2008 indeed. However, meanwhile Vietnam can come up with comparably low labor costs again, which, in view of labor-intensive manufacturing processes particularly with regard to manufacturing clothes, shoes, toys or furniture is an enormous incentive for international investors to divert to the newly industrializing Southeast Asian country. Even the neighboring country China is not able to keep up with Vietnam’s wage level and occasions even 50 – 70% higher costs, with the productivity being described as slightly lower or comparable.
Meanwhile, the wages in the capital Hanoi adjusted to those of the economic center Ho Chi Minh City which had always been highest throughout Vietnam. It is due primarily to the high number of foreign investors that group mainly around these both cities. In respect of low labor costs, particularly Da Nang (central Vietnam) is an extremely attractive location for foreign investors because, among other things, it has a big port and an international airport which is to be expanded yet in the future.
According to MOLISA, the minimum wages will be raised each year until 2015in order to ensure adjustment to constantly rising prices. Current minimum wages (as of 01 January 2015) are different from region to region and range between 2,150,000 and 2,750,000 dongs in the suburbs or Hanoi, Ho Chi Minh City, Hai Phong etc., whereas they amount to 3,100,000 dongs inside Hanoi and Ho Chi Minh City. This minimum wages apply both to domestic and foreign-invested companies.
In practice, the minimum wages are usually higher, and in particular from Western employers a higher level is expected. According to HR Solutions Vietnam, the earnings of workers in the manufacturing industry at Western companies that want to retain their employees ranged between $ 100 and 150 (2009). In Vietnam, it is quite common to change jobs several times in order to receive a higher income. However, only regular job changes every year to three years bring the employees actual salary increases. The remunerations rise sharply just in particularly searched-for areas, and the better qualified the faster. Studies of employment agencies such as Navigos and Mercer showed a salary growth rate of 16.5% or 15.3% (2008), and for 2009 an increase of 13.1% was forecasted. The highest rises took place in the real property and financial services segments. However, this development involves the danger for Vietnam to lose in the future its status of a country with low labor costs. Apart from political stability and security, it is one of the most important factors of the location advantage that Vietnam can currently offer. Principally, depending on levels of turnover, it is common in Vietnam to pay a 13th salary and, depending on performance, even a 14th salary which is paid out at the “Tet” festival in January or February. Most of the job changes take place at this time as well. Considering the high labor turnover rate, enterprises with foreign capital should definitely give thought to the subject of employee retention. Suitable for this purpose is e.g. the defrayal of both social insurance portions or the introduction of an additional health insurance. Furthermore, it is important to observe a respectful contact with each other and to encourage the sense of unity by uniform T-shirts etc.
Raising the bar for auditors
The Decree 16/2011/ND-CP amended changes in two areas. A. qualifications: now the auditors are required to hold a university degree specializing in economies, finance, banking, accounting or auditing, not just a Bachelor degree anymore. B. experience: the amendments require at least 5 years working in finance and accounting enterprises. Now clarifying that the experience must be gained after graduation and before the year in which an auditor registers for the exam to be issued with an auditor certificate by the Minister of Finance. It came into effect on 20 April 2011.
Workforce shortage
In principle, Vietnam has a young and diligent working population thirsting for education. However, there is a severe shortage of skilled workers. Whereas unskilled workers, due to small workload in some areas, are quasi forced to relocate in order to find work, skilled workers are reluctant to accept greater distances to commute to work or even to relocate. The standard of education has still to be characterized as inadequate (frequent lack of foreign language skills, lack of communication of technical depth and lack of key qualifications, such as particularly quality awareness), and according to newspaper reports not even a third of working Vietnamese is educated. The motivation, even at the management level, leaves partly much to be desired – e.g. an extremely great stress is put in Vietnam to punctual work stoppage. Meanwhile, the country has to realize that the current situation in respect of the existing inadequate qualification is rather hindering the economic development. The requirements on the workforce will increase yet in the future so that quite a few things have to change in the education sector in order for Vietnam to be able to keep up with the needs of the industry and for the gap between supply and demand to stop to increase yet further.
The workforce shortage becomes apparent particularly in the booming IT sector and the service sector (legal services, banks and logistics). In particular, there are practically no local lawyers with international experience. As a general rule: The more responsible the vacancy to be filled the more difficult it is to find suitable personnel. Another problem appears in view of the fact that the job titles are not used uniformly, so that an accountant may quickly become a financial manager. That is why it is strongly advisable for employers to double-check before the recruitment whether the qualification profile of the applicant corresponds to the required skills; moreover, they should not rely on certificates only because their significance is very limited. Alternatively to the workforce educated in the country presents itself the possibility, depending on the area of activity (technical or management area), to divert either to workforces educated in the former GDR or to so-called Viet Kieus (Vietnamese who spent their life mostly abroad). Here, on the other hand, appears the problem that these highly qualified and cross-culturally educated people mostly aspire after self-employment and are less interested in an activity as an employed person. Furthermore, in case of short-term employments, the possibility for foreign employers to have own employees flown in from abroad presents itself. In case of permanent employments, however, this option could often prove to be too expensive because they would have to meet expenses for accommodation allowances, school fees etc. Currently, the foreign investors have no choice but to apply the “training on the job” method and to take care for the apprenticeship of the employees themselves. Since headhunting for qualified workforces is common practice in other enterprises, it should be prevented by means of suitable security mechanisms, although it can never be completely excluded despite all security measures, that an employee trained by the company leaves it early. However, already the obligation to refund the training cost is practically unenforceable. As the labor costs are indeed forced up as a result, but the number of well-trained employees does not increase, this strategy should be reconsidered. The number of qualified workers is far higher in the south in the area of the industry zones than in the north, not to mention Central Vietnam. It is due to already completed employee qualification by the enterprises. Since the restriction of the percentage of foreign employees at an enterprise of 3% at the maximum has been abolished in June 2008, it is definitely advisable to fill higher positions with expatriates. Here, the Vietnam-based foreigners who have started a new life in Vietnam are particularly suitable because in most cases no expenses for flights home or fees for international schools have to be defrayed. However, Vietnamese employees also can be extremely advantageous, especially if official and unofficial cultivation of contacts with relevant local authorities is involved. Considering the rigorous and complicated termination procedure, the enterprises should consult professional and experienced institutions when searching for personnel and negotiating contracts.
Another important issue which must not be underestimated is family ties. It is not uncommon that Vietnamese staff taking care of the recruitment of future employees readily gets relatives on board. However, since in case of doubt the family hierarchy remains the decisive factor, difficulties when establishing the internal organizational structure of the company are bound to occur. That is why the recourse to relatives should be avoided even if the qualification is correct. The current difficult economic situation caused that the loyalty to the employer increased forcedly. The high labor turnover rate of 15% is, however, to be attributed not only to the wish for a better salary, but is rather due to dissatisfaction of the staff with the management style of some companies.
Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.
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