Question 26: Upon agreeing to terminate LCs before the term expiry, if Employers pays Employees their salaries for the remaining months until LC expiry, which payment must Employers make – one-off or monthly?

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Upon agreeing to terminate LCs before the term expiry, how shall Employers fulfil their financial obligations to Employees?

Under the labour law, Employers and Employees may agree on the termination of LCs[1]. Actually, when LCs are terminated, Employers and Employees will sign an agreement on terminating LC, which specifies the financial obligations Employers fulfil to Employees prior to the termination of LCs. The financial obligations include as follows:

  1. Amounts that Employers must pay to Employees upon agreeing to terminate LCs

Pursuant to the Labor Code, within 7 working days of the date of terminating LCs, the two parties shall fully pay the amounts related to the interests of each party. The amounts paid by Employers to Employees include[2]:

  • Salaries as per LCs signed between Employers and Employees;
  • Salaries corresponding to the number of annual leave days untaken by Employees[3]; and
  • Severance allowances for Employees who have regularly worked for Employers for 12 months or more, each working year will be entitled to an allowance worth half month salary for the employment period for Employers without UI payment by Employees[4].

In addition to the said amounts, upon agreeing to terminate LCs, Employers will normally pay Employees an additional sum in support of their seeking new jobs. In return, Employees will agree to terminate the labour relationship with Employers and agree to exempt Employers from all legal obligations and liabilities (if any) in connection with the labour relationship under signed LCs.

2. PIT and compulsory payments of SI, HI and UI

Upon agreeing to terminate LCs ahead of time and settling the statutory financial obligations to Employees, Employers will deduct and retain the following amounts before paying Employees:

  • Employees’ PIT

The monetary amount received by Employees from Employers upon termination of LCs, excluding any statutory severance allowance (if any), is the income from salaries or wages subject to PIT under the PIT Law[5]. Therefore, Employers as the organisations who pay income subject to PIT will deduct and withhold the PIT payable by Employees in accordance with the PIT Law.

  • Compulsory SI, HI and UI

Pursuant to the insurance law, on a monthly basis or every 3 months, every 6 months according to the payment method by the taxpaying unit, it will deduct from Employees’ salary a compulsory payment of SI, HI and UI at the required rate to transfer to the collection account of the SI agency[6]. Thus, upon termination of LCs, Employers will deduct from Employees’ salary the compulsory premiums of SI, HI and UI payable by Employees in accordance with the law and pay to the SI agency.

Must Employers make one-off or monthly payments in case of any agreement to pay Employees their salaries for the remaining months until their LC expiry?

In principle, the termination of LCs ahead of time will be agreed upon by Employers and Employees. Therefore, in reality, Employers may agree to pay Employees their salaries for the remaining months until LC expiry. In this case, depending on the agreement between the parties, Employers may pay Employees their salaries for the remaining months in one of the two ways: (1) paying as a one-off amount in the salary period upon termination of LCs; or (2) paying on a monthly basis until LC expiry.

  • For the one-off payment plan for the remaining months of the LC in the salary period upon termination of LCs, the LCs will be deemed as completely terminated at that time, and the two parties will not pay compulsory premiums for the remaining period. However, if you choose the one-off payment option when you terminate LC, the total income of the Employee will be taxed according to the partially progressive tariff, and therefore the tax amount payable to the tax authority will be higher. In cases where Employees receive net salaries after taxes and costs, the PIT payable by Employers will be much higher than the payable monthly PIT. Similarly to the case where Employees receive gross salaries before taxes and costs, the payment of such PIT on monthly salaries (higher than the previous partially progressive tariff) may result in the fact that Employees will not accept the payment plan.
  • For the monthly salary payment plan until LC expiry, the PIT will be progressively calculated on the monthly salary Employees receive normally. The payable PIT will then be lower than the PIT of the total remaining months of the LC. Therefore, if Employees receive gross salary before taxes and costs, they will tend to opt for this payment plan rather than the one-off payment plan. However, in terms of labour relationship, there arises a problem as follows:
  • The payment of monthly salaries until LC expiry means that the labour relationship between Employees and Employers still exists until LC expiry. This leads to the fact that the purpose of LC termination ahead of time is not completely fulfilled.
  • For compulsory insurance types, due to the existence of the labour relationship between Employees and Employers, the two parties may be obliged to pay compulsory insurance types; and
  • The current labour law does not allow Employees to enter into LCs with Employers without actually performing the jobs as agreed in the contract. Therefore, The fact that Employers pay Employees their monthly salary until LC expiry while they actually no longer work for Employers may be considered to be in noncompliance with the Vietnamese labour law.

Thus, the said two plans (1) and (2) have their own advantages and disadvantages, and the choice of the actual salary payment plan will depend largely on the negotiation and agreement between Employers and Employees. However, the plan (1) will ensure LCs between Employees and Employers are completely terminated, avoiding the legal risks that may arise for Employers involved in the termination of LCs.

[1]Article 36.3 Labor Code

[2]Article 47 Labor Code

[3]Article 114 Labor Code

[4]Article 48 Labor Code

[5]Article 2.2 Circular 111/2013/TT-BTC dated 15/08/2013

[6]Article 31.1.2 of Decision 595/QD-BHXH dated 14/04/2017