Amidst the economic market fluctuations, Vietnam has been undergoing a pronounced wave of retrenchment, persisting from late 2022 until the present with no signs of stopping hitherto. Widespread retrenchment has occurred across diverse fields, notably in technology and manufacturing (such as food and beverage, garment, footwear, furniture etc.) One of the circumstances that employers retrench numerous employees is due to changes in structure, technology within their enterprises. However, in effecting the termination of labour contracts consequent to changes in structure, technology, employers are encountering a plethora of legal difficulties, namely (i) substantiating the demand for changes in structure, technology within their enterprises, (ii) ensuring the employer’s obligations in the event of retrenchment due to changes in structure, technology, especially the obligation to resolve employment for employees prior to termination, and (iii) complying with complicated and lengthy legal procedures under the Vietnamese labour laws.
Herein, we intend to discuss difficulties potentially resulting in the aforementioned potential legal risks, particularly concerning the termination of labour contracts with affected employees due to changes in structure, technology.
Under the Vietnamese labour laws, the employment of employees may be affected, leading to the termination of labour contracts in cases of division, separation, consolidation, merger; selling, leasing, converting business types of enterprises, transfer of ownership and use rights of the employers’ assets; changes in structure, technology and changes due to economic reasons.[1] Among which, changes in structure, technology have commonly referred to as grounds for mass layoffs.
Changes in structure, technology shall encompass:[2]
(i) Changes in the organizational structure, personnel rearrangement;
(ii) Changes in processes, technology, equipment associated with the employer’s business lines; or
(iii) Changes in products or product structure.
In the event of changes in structure, technology affecting the employment of employees, enterprises are entitled to retrench employees after fulfilling their obligations and procedures as prescribed[3]. Accordingly, such retrenchments are merely a consequence of changes in structure, technology. Therefore, to substantiate that retrenching employees in this case is in accordance with law, the employer must initially establish that there is a genuine demand for implementing changes in structure, technology; such demand is real and derives from the actual production and business activities of the enterprise.
Under the Vietnamese labour laws, not all events that fall within the categories of changes in structure, technology affecting the employment of employees can automatically be used as grounds for retrenching the affected employees. Subsequently, the employees are retrenched when the employers cannot resolve vacancies for employees. Regarding the inability to resolve vacancies for the employees, the employer is obligated to substantiate:[4]
(i) the employers have no available vacancies to assign work for employees under the labour contracts;
(ii) the employers cannot create suitable “new positions” to prioritize training the affected employees for continued employment (regardless of whether such new positions fit in the expertise and the scope of works set out in the labour contracts or not); and
(iii) cannot arrange employees to any other positions.
On that basis, the Vietnamese labour laws require that in cases of changes in structure, technology affecting the employment of numerous workers, the employer must prepare and implement a Labor Utilization Plan (the “LUP”) that addresses reasons, quantity and list of affected workers, the rights and obligations of the parties, resettlement measures and financial resources to ensure the implementation of the LUP.[5]
The determination of whether the grounds for retrenchment are adequate or not is subject to the views, interpretation and application of laws of competent state authorities and dispute resolution agencies from time to time and on case by case basis. In 2020, a company in Hanoi retrenched its employees but failed to prove the adequacy and necessity to trigger the technological changes, as well as failed to prioritize retaining the employees. As the case was brought to court settlement, the court ruled in favour of the employees and ordered the Hanoian company to reinstate some employees and provide training and reassign opportunities for other employees.[6]
Thus, the termination of labour contracts with affected employees caused by changes in technologies, structure in all cases invariably entails onerous obligations on the side of the employers.
Regarding statutory procedures for retrenchment due to changes in structure, technology, the employer shall perform relatively complex ones, which include the following fundamental steps:
Step 1: Having dialogue(s) and exchanging opinions regarding making the LUP
(i) preparing a draft of the LUP;[7]
(ii) preparing for the dialogue at the workplace regarding making the LUP;[8]
(iii) holding the dialogue at the workplace regarding making the LUP;[9]
(iv) notifying the key points of the dialogue;[10]
(v) consulting the organization representing the employees at the grassroots level (if any) on the LUP;[11] and
(vi) publicly notifying the LUP.[12]
Step 2: Having dialogue(s) and exchanging opinions regarding the termination of labour contracts due to changes in structure, technology
(i) preparing for the dialogue at the workplace regarding terminating labour contracts of the affected employees[13];
(ii) holding the dialogue at the workplace regarding terminating labour contracts of the affected employees;[14]
(iii) notifying the key points of the dialogue;[15] and
(iv) consulting the organization representing the employees at the grassroots level (if any) on terminating labour contracts of the affected employees.[16]
In practice, the labor authority requires the employers to exchange opinions with the organization representing the employees at the grassroots level and hold dialogue(s) at the workplace regarding making the LUP and terminating labour contracts of affected employees as separate procedures.
Step 3: Notifying the provincial People’s Committee (the “PC”) and retrenched employees of retrenchment
(i) notifying the affected employees of the termination of labour contracts;[17]
(ii) notifying the PC of the termination of labour contracts (together with the contents of the LUP);[18] and
(iii) issuing termination decision/notification to the affected employees.[19]
The Vietnamese labour laws require full and strict compliance by employers to the whole statutory procedures when carrying out retrenchment due to changes in structure, technology. Furthermore, the total timeline of the above-mentioned process, excluding the time required for settling amounts payable to terminated employees, can take up to several months in practice.
The retrenchment due to changes in structure, technology harbors significant risks, given the ambiguous regulations and complicated legal procedures. Therefore, employers must comply with the laws and accept certain potential risks when deciding to carry out these procedures. Some employers prioritize the option of mutually terminating labour contracts with the employees, although it is not an easy option due to being dependent on the will of the employees.
[1] Arts 34.11, 42, 43 of the Labour Code 2019
[2] Art 42.1 of the Labour Code 2019
[3] Arts 34.11, 42 of the Labour Code 2019
[4] Arts 42.3, 42.5 of the Labour Code 2019
[5] Arts 42.3, 44.1 of the Labor Code 2019
[6] https://www.linkedin.com/pulse/global-layoff-handbook-vietnam-edition-letsgonex-z93pc
[7] Art 44.1 of the Labor Code 2019
[8] Art 63.2 of the Labour Code 2019; Arts 38.1, 38.2, 38.3, 38.4, 41.1 of Decree 145/2020/ND-CP; Part II, Item 2.IV of Guidance No. 11/HD-TLD dated 14 March 2024 of the Vietnam General Confederation of Labor
[9] Arts 39.4, 41.1(c), 41.1(d) and 41.1(dd) of Decree 145/2020/ND-CP
[10] Art 44.2 of the Labour Code 2019; Art 41.1(e) of Decree 145/2020/ND-CP
[11] Art 44.2 of the Labour Code 2019
[12] Art 44.2 of the Labour Code 2019
[13] Arts 63.2(c) and 42.6 of the Labour Code 2019; Art 41.1 of Decree 145/2020/ND-CP
[14] Arts 63.2(c) and 42.6 of the Labour Code 2019; Art 41.1 of Decree 145/2020/ND-CP
[15] Arts 63.2(c) and 42.6 of the Labour Code 2019; Art 41.1 of Decree 145/2020/ND-CP
[16] Arts 63.2(c) and 42.6 of the Labour Code 2019; Art 41.1 of Decree 145/2020/ND-CP
[17] Art 42.6 of the Labour Code 2019
[18] Art 42.6 of the Labour Code 2019
[19] Art 45.1 of the Labour Code 2019
Disclaimer: This Legal Update is intended to provide updates on the Laws for information purposes only, and should not be used or interpreted as our advice for business purposes. LNT & Partners shall not be liable for any use or application of the information for any business purpose. For further clarification or advice from the Legal Update, please consult our lawyers: Mr Nguyen Xuan Thuy at thuy.nguyen@lntpartners.com.
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