Foreign companies wanting to do business in Vietnam must ensure they follow the provisions of the Labor Code, which contains the legal framework for the rights and obligations of employers and employees with respect to working hours, labor agreements, social insurance, overtime, strikes, and termination of employment contracts, to name a few.
Here we discuss:
- Foreign employees
A Vietnamese entity is permitted to recruit foreign workers in order to work as managers, executive directors, and experts where local hires are not yet able to meet production and business requirements. Unlike in certain other Asian countries, Vietnamese representative offices are also able to hire staff directly.
[tips title="Important Tip"]To demonstrate the necessity of a foreign employee, 30 days prior to recruiting the foreign employee, the entity must publicly announce recruitment for this position to Vietnamese job seekers in a Vietnamese newspaper or online portal.[/tips]
Evidence of this announcement must be presented in the application for a work permit for a foreign employee. The other option is to recruit foreigners through a government-owned employment service center.
When hiring foreign staff in Vietnam, there are a number of procedures and legal frameworks that must be understood.
Employment Contracts in Vietnam
As per the new labor code which took effect in January 2021, there are now only two types of labor contracts:
- Indefinite term - A contract in which two parties do not determine the term and the time for its
- Definite term - Two parties determine the term as a period of 12 months to 36 months and the time for its termination.
If an employee continues working after the expiration of his or her definite term labor contract, the contract must be renewed within 30 days after the expiry date or it will become an indefinite term labor contract. In addition, e-contracts are now officially recognized and have the same validity as those in written form. A verbal labor contract is also recognized as long as its valid for less than one month.
A labor contract must contain provisions such as the scope of work, working hours, rest breaks, wages, job location, term of contract, occupational safety and hygiene conditions and social insurance.
Both employer and employee can unilaterally terminate a contract. A 45-day notice is required for indefinite term contracts and a 30-day notice for definite term contracts. In some cases, the employer will be required to discuss the termination with the executive committee of the trade union.
Companies which employ ten or more people must have a copy of company rules or internal labor regulations registered with the provincial labor department. Company working rules include contents such as working and rest hours, rules and orders in the company, labor safety, hygiene in the workplace, protection of assets, business and technology confidentiality, and sanction methods to name a few.
Severance and Payment in Vietnam
If a labor contract is terminated, employers may be liable for a severance payment to the employee in question. The nature of severance payment is dependent on the salary of a given employee, the amount of time that the employee in question has been working in their current position, and the amount of time the employee has been covered under social insurance.
Eligibility for severance payments is open to all employees who have been working for a company for 12 months or longer. Severance payments will be required in instances where an employer or employee can prove that one or more general termination triggers or unilateral termination provisions have occurred during employment.
Under the Vietnamese Labor Code, severance compensation shall amount to half a month’s wages for every year
that the employee has been working. For example, an employee that had been with a company for three years would be eligible for one and a half months’ pay.
Grounds for the Unilateral Termination of Contracts in Vietnam
Source: Limitations as prescribed under Law No. 10/2012/QH13
*Article 33 allows for a 15 day grace period for all employees returning to work following a temporary suspension of their contracts.
Types of Bonuses
Bonuses are given to employees based on company earnings and performance and as a way of boosting company morale and productivity. There are various kinds of bonuses that a company may grant its employees throughout the year.
For example, a 13th month’s salary is usually given as a kind of “annual bonus” by both local and foreign companies in Vietnam to employees that have worked with the company for at least one year. Employees that have worked at a company for less than one year are typically given a bonus that is prorated and based on their actual employment period.
In addition, there is also a special bonus called the “Lunar New Year” bonus (or “Tet Bonus”) that is often paid to employees prior to their leaving for the Lunar New Year holiday.
The amount of any Tet Bonus will be dependent on both company and employee performance, but the bonus typically ranges from smaller amounts of money (up to an entire month’s salary) to larger amounts of money (up to an entire year’s salary) depending on the company progress and goals.
Apart from the larger annual bonuses mentioned above, employees may also be given smaller bonuses for public holidays or other special days (e.g., International Labor Day or National Day). Senior management and other valued employees may be given bonuses during these days as well, including in the form of share certificates with a vesting period, for which the corresponding stock can be sold only after the employee had worked for the company for a certain amount of time.
All salaries and bonuses are subject to PIT in Vietnam.
Allowances and Benefits
Apart from salary and bonuses, an employee may be entitled to several kinds of allowances and monetary or non-
monetary benefits designed to retain staff. Some of these are subject to PIT. Taxable benefits include:
- Housing rent;
- Payments for power, water, and associated services for employees that amount to more than 15 percent of their total taxable income;
- Transportation allowances;
- Premiums for life insurance;
- Health care services;
- Entertainment fees; and
- Sports/athletics fees or membership fees to golf clubs, tennis courts, and other exclusive clubs.
Prefixed lump sum amounts (or “khoan chi” amounts) for telephone calls and services, stationery, uniforms and per diem allowances are not subject to taxes if the amounts are within the levels set out under the relevant regulations.
Foreigners that work in Vietnam are also exempted from PIT on various benefits such as relocation allowances for moving into the country, airfare to their home country, and education fees for their children.
Vietnam's Labor Code 2021
Vietnam approved an amended Labor Code, which came into effect in January 2021. The amendment to the labor regulations is a step towards aligning with international labor standards particularly as Vietnam integrates into the world economy as noted by the International Labor Organization (ILO).
Most of the code remains the same however, changes have been introduced to probationary employment, mandatory work rules, notice requirements, and other provisions generally suited to employees.
We look at key aspects of the new code.
Key provisions of the labor code
Working hours: While the working hour limit remains the same as 48 hours per week, the new code states that normal working hours cannot exceed eight hours a day or 48 hours per week. However, if the employer and employee agree on an overtime deal, the overtime cannot exceed 12 hours a day, 40 hours a month and 200 hours a year. For industries such as textile and clothing, footwear and electronics in which seasonal orders during certain times of the year require an extensive workload, an overtime cap of 300 hours has been specified.
Labor contracts: The amended labor code now lists only two types of labor contracts as compared to three earlier. Definite-term contracts, which cannot have a term longer than three years, and indefinite-term contracts. The definite contract can only be renewed once. Foreigners who have work permits (valid for two years) will also be able to renew only once. Seasonal contracts will no longer be permitted from 2021.
Termination: In a boost to employees, employees will be able to immediately terminate a contract for mistreatment, pregnancy and if the employer fails to pay salary on time. As per the current labor policy employees are subject to minimum notice requirements (30 days for definite term, 45 days for indefinite term).
Unions: Vietnam will now allow independent trade unions to operate as opposed to currently being supervised by the state-run Vietnam General Confederation of Labor (VGCL). The independent union will still be required to get permission from state authorities to operate. This is partly seen as Vietnam enters into free trade agreements which require the opening of trade union rights. Nevertheless, further guidance will be required on how this will happen practically.
Retirement age: Vietnam will also increase the retirement age for men to 62 from the current 60 and increase the same for women to 55 from the current 50. However, workers may retire later or sooner depending on the situation. For example, employees working in dangerous environments or involved in heavy lifting can retire sooner, while those who work in the private sector or in high skilled jobs can retire later. The maximum extension for this will be five years. However, the increase in retirement age will be done gradually for men and women by 2028 and 2035 respectively. The increase in retirement has been done to avoid a labor shortage from 2040 and to address social insurance deficits.
Discrimination: The new code has safeguards protecting employees from discrimination at the workplace. This includes protection from sexual harassment and discrimination based on skin color, race, nationality, ethnic group, gender, marital status, pregnancy, political views, disability, HIV status or if in a trade group. The amended labor code also enhances protections for younger workers.
In addition, the government will not regulate salary policies at individual companies that are negotiated between the employer and employees, however, rules on minimum wages must be followed.
Employees will also be entitled to an additional day off either preceding or after September 2 – the Vietnamese National Day.
Decree 145 – Implementing the labor code
To help implementation, the government issued Decree 145/2020/ND-CP (Decree 145) on guiding the implementation of the labor code which will be effective February 1, 2021.
While the decree is several pages long, we highlight some key points:
Sexual harassment: The decree is more specific on sexual harassment guidelines in the workplace. This includes any form of sexual harassment including physical, verbal or non-verbal harassment such as body language, display of sexual activity directly or electronically. The workplace has also been defined to include anywhere where the employee actually works including work-related locations such as social activities, workshops, business trips, phone conversations, vehicles, and so on.
Labor supervision: Once a company begins operations, the employer must make a labor-management book at the head office or branch or representative office about the basic information about employees. Any changes to labor must be reported every six months to the labor department.
Termination of labor contract: For unilateral termination, employers must give prior notice of at least 120 days for labor contracts with indefinite term or a fixed-term contract of 12 months or more. For labor contracts less than 12 months, prior notice of at least a quarter of the term of the contract must be given.
Overtime: Employee consent must be obtained if the employer plans overtime work regarding the term, locations, and overtime work.
Female employees: To make it easier for female employees, those that have children under 12 months of age, will be allowed to take a 60-minute break every day from work to breastfeed. Female employees will also be allowed a 30-minute break during their menstruation period. The number of days regarding the time off can be agreed by both parties but must be a minimum of three working days per month.
If female employees do not have time to take the aforementioned breaks and are allowed to keep working, the employee is required to pay additional wages for the work, which is separate from overtime pay.
The amended labor code will help Vietnam match international standards as it becomes a part of several free trade agreements including the European Vietnam Free Trade Agreement (EVFTA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
The new code will have an impact on businesses and employers should seek to obtain assistance with regards to their labor practices to ensure their policies are legally compliant.