Question 38: What conditions must the Employer fulfil to terminate LCs with Employees in case the enterprise’s structure is changed? What are the Employer’s obligations in case LCs are terminated due to the above reason?

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The basis for terminating LCs due to changes in the structure

As prescribed by law, the Employer may terminate LCs with Employees due to changes in the structure regardless of which type of LC they have[1]. However, the termination of LCs in this case must fulfil the following conditions:

  1. Condition 1 – there is a change in the structure

As prescribed by the above regulation, the reason for “changes in structure” will include the following cases[2]:

  • Change the organisational structure, re-organise labour force; and
  • Change products, or product structure.

Now, the Labor Code and its guiding documents do not have specific guidelines on how to interpret the case of “changes in structure”, but normally the case of changing products or the product structure will be applied to enterprises in the field of production rather than services. Regarding the case of changing the organisational structure or re-organising labour force, Article 11 Decree 39/2003/NĐ-CP dated 18/4/2003 previously prescribed that “changing the organisational structure” would include the merger or dissolution of some departments in the enterprise – today local labour management agencies and competent courts still apply what is interpreted by Decree 39/2003/NĐ-CP. However, the law does not provide any legal interpretation of the term “department” being merged or dissolved. In reality, the term “department” is interpreted and applied in many different ways. The first point of view contends that a “department” is a group of Employees with the same function or who are working towards the same goal. The second point of view defines the term “department” in a broader sense; accordingly, a “department” may include only 01 Employee with a separate function and independent in the enterprise (such as IT Employees, in-house counsels etc.).

Therefore, although there is a precedent to refer to the regulations of Decree 39/2003/NĐ-CP, it should be noted that the Employer must present reasonable explanations based on the features of its enterprise to convince the court in case a labour dispute may occur.

If the Employer plans to terminate the LC with 01 Employee due to the reason of “changes in structure” rather than all the Employees in the department, the Employer’s risks Employees initiating a lawsuit against the Employer since the reason “changes in structure” explained by the Employer to terminate LCs is not in line with labour law. In actual court hearings, the court often gives arguments which are more beneficial to Employees to protect their interests when the current labour law does not have specific and transparent explanations about the concept above, it is very likely the court will issue a judgment that the termination of LCs with these Employees is against the spirit of labour law. The Employer must then accept the Employees back to work and pay salaries, SI, HI premiums for the days they are not allowed to work plus at least 2 months’ contract salary[3].

2. Condition 2 – comply with the procedure for terminating LCs due to changes in structure

In case the Employer has grounds to determine that the termination of LCs is due to changes in structure, and this affects the employment of many Employees, the Employer must strictly comply with the procedure for terminating LCs as follows[4]:

  • Employers must build and implement options to use their labour force[5]; if there are new vacancies, the Employer should prioritise re-training these Employees for the new positions. In case the Employer cannot find new jobs for them, then they can terminate LCs with Employees. The options to use labour forces must be built by consulting the executive board of the grassroots trade union or of the superior trade union where the grassroots trade union is not yet formed[6];
  • If the Employer cannot find new jobs or has prioritised re-training Employees but they cannot meet the requirements of the new vacancies, or the Employees do not agree to work part time, which gives the Employer no choice but to terminate LCs with them (02 or more Employees), then the Employer must consult the executive board of the trade union;
  • The Employer is also obliged to give a 30-day prior notice, counting from the date of the notice, to inform the provincial labour management agency of this decision before terminating LCs with 02 or more Employees. The content of the notice must include all items required by law[7];
  • Upon the expiration of 30 days, if the provincial labour management agency does not have any opinions about the notice, the Employer may issue the decision to terminate LCs with the Employees and discharge his obligations to them as prescribed by labour law.

With the 2 conditions above, it is risky for the Employer to rely on the reason of “changes in structure” to terminate LCs with Employees in accordance with labour law. Accordingly, if the Employer’s arguments are not strong enough to justify the reason “changes in structure” or the Employer does not fully comply with the procedure for terminating LCs, the lay-off due to changes in the enterprise’s structure may be considered illegal. Even if the Employer has fulfilled the two conditions above, there is a chance that they will be still sued by the Employees because they interpret the reason “changes in structure” in a different way while the current labour law does not have a clear explanation about this issue. In practice, the Employer therefore will often negotiate the termination with the Employees[8] rather than terminating LCs for the reason of “changes in structure” since negotiating the termination with the Employees is the best and safest option to help prevent any lawsuit in the future. Accordingly, when the Employer negotiates the termination with the Employees and gets their acceptance, they must pay the following amounts to the Employees (a time limit of maximum 7 days from the termination date):

  • unpaid salary up to the date of termination;
  • salary for the annual leaves that the Employees have not used;
  • Severance allowance (for every year of service the Employee is entitled to half a month’s salary, based on the average contract salary of the 6 preceding consecutive months prior to termination). If the Employees have worked for full 12 months or above[9]; in which, the working time as a basis to calculate severance allowance will be the total time the Employee has spent working for the Employer less the time of his participation in UI as regulated by the SI Law and the working time for which the Employer has paid severance allowance if any; and
  • A supportive amount to help the Employees find other jobs as agreed by Employers and Employees (if the budget allows, to ensure the negotiations with Employees are successful).

The Employer’s responsibilities to Employees upon termination of LCs due to changes in structure

In case the Employer thinks they can fulfil the 2 conditions to terminate LCs with the Employees due to changes in structure as analysed above, the Employer is obliged to pay the Employees the outstanding amounts within the maximum time limit of 30 days from the date of termination, including:

  • unpaid salary up to the date of termination;
  • salary for the annual leaves that the Employees have not used;
  • Allowance for job loss[10], for every year of service the Employee is entitled to one month’s salary but no less than 2 months’ salary, based on the average contract salary of the 6 preceding consecutive months prior to termination; in which, the working time as a basis to calculate job loss allowance will be the total time the Employee has spent working for the Employer less the time of his participation in UI as regulated by the SI Law and the working time for which the Employer has paid severance allowance if any.

[1]Articles 36.10 and 44.1 Labor Code

[2]Article 44.1 Labor Code and Article 13.1 Decree 05/2015/NĐ-CP

[3]Article 42 Labor Code

[4]Article 44 Labor Code

[5]Article 46.1 Labor Code

[6]Article 46.2 Labor Code

[7]Article 7.2 Circular 47/2015/TT-BLĐTBXH dated 16/11/2015

[8]Article 36.3 Labor Code

[9]Article 48 Labor Code

[10]Article 49 Labor Code