18 Apr, 2019

Investments in the not-so-far east Vietnam – Part 7: Labor Law in Vietnam

While European companies are eagerly awaiting the entry into force of the Vietnam-EU Free Trade Agreement, the legal framework for foreign investment in Vietnam is steadily improving. With improved and clearer regulations for investment and entrepreneurship in Vietnam, the country is becoming increasingly interesting for international investors, especially as Vietnam is already one of the most sought after FDI locations in the region.

Step by step and with a special focus on the concerns of companies interested in investing, we will explain the key legal bases in Vietnam under the title “Investments in the not-so-far east”.

Part 7: Labor Law in Vietnam

Vietnamese labor law is clearly committed to creating stable working conditions with fixed minimum standards with regard to remuneration, dismissal protection, leave entitlements, occupational safety and health and social insurance.

These regulations in labor law are instrumental in allowing the Vietnamese people to participate in the upswing of recent decades, especially in the production and agricultural sectors, and to prevent precarious employment and the use of cheap labor in Vietnam.

In addition to these labor law principles, foreign companies in Vietnam are notably aware of the legal framework regarding the employment of foreigners in Vietnam and the labor law implications of corporate transactions.

The legal framework for employment relationships is based on the Vietnamese Labor Law of 2012 (No. 10/2012 / QH13), as well as on the Social Security Act 2014 (No. 58/2014 / QH13) and the Health Insurance Act 2014 (No. 25/2008 / QH2012, 46/2014 / QH13). These laws are supplemented by a series of implementation guidelines and regulations.

General employee protection

Employment contracts must always be completed in writing in order to be effective. The employee is entitled to receive his own copy. The written form requirement does not apply if the employee is to act only temporarily for a period of less than three months (see Article 16 (2) ArbG). The employment contract does not have to be written in Vietnamese, but this is common when hiring Vietnamese workers in Vietnam, so personnel planning should also include the appropriate translation effort.

With regard to the admissibility of fixed-term employment contracts, Vietnamese employment law seeks to limit the risk of misuse of fixed-term chain-work contracts to the detriment of workers, while at the same time taking into account the employer’s need to overcome short-term staffing shortages. In principle, employment relationships can be limited to a period of at least twelve months up to a maximum of 36 months, with a one-time extension option. In justified cases, in particular for seasonal work and special tasks requiring only a short-term recruitment of particularly qualified workers, short-term employment contracts with a term of less than twelve months may also be concluded.

The working hours, which in principle can be fixed internally by the employer, must – for full-time employment contracts – remain limited to a maximum of ten hours per working day and a maximum of 48 hours per working week. The Labor Law proposes a 40-hour week as the target (see Art. 104 (2) ArbG). In addition, a maximum of six working hours per day apply to particularly hazardous or physically demanding work. Overtime is limited by law to four hours per day and a maximum of 200 hours per year. With a special regulatory approval, the overtime for an employee can be extended to up to 300 hours per year (see Art. 106 ArbG).

In addition, the employer is entitled to certain, relatively short breaks (see Art. 108 ff. ArbG) and in principle 12 days paid per year of employment. The amount of the leave entitlement varies slightly depending on the length of employment (see Art. 111 ff. ArbG).

Termination of the employment contract by the employer must also be measured against comparatively strict conditions. In particular, no arbitrary termination by the employer is possible. Instead, notice of termination must always be substantiated, with Articles 38 and 39 ArbG specifying precisely which circumstances may entitle the employer to terminate the contract.

By contrast, in personnel practice in Vietnam, reciprocal dissolution agreements are often resorted to in order to terminate the employment relationship even without the existence of a statutory reason for dismissal. However, under no circumstances should the employee be forced or deceived.

The main causes of redundancy are the repeated absence of the employee’s benefits beyond the operational and employment performance targets, long-term incapacity for work of more than one year, criminal offenses committed by the employee and rationalization in the event of production decline or termination. However, especially in the latter cases of redundant workers, the job cuts must first be negotiated and agreed with the relevant union and the Vietnamese Labor Office.

In case of dismissal by the employer, the employee is entitled to the payment of a severance payment, which is on a regular basis at half the monthly salary per month worked (see Art. 48 ArbG).

With regard to the dismissal possibilities of the employer and other disciplinary measures (eg warning, wage restraint, downgrading), it should be noted that such measures can only take effect in companies with ten or more employees if the employer, in consultation with the relevant trade union and Employment Agency has issued internal labor standards. These working directives must relate to various aspects, such as work and break times, safety and hygiene requirements, work methodology, management and disciplinary procedures.

Remuneration and insurance

The Vietnamese labor market is overlaid by a general minimum wage legislation. According to Art. 91 ArbG and the ordinance No. 141/2017 / ND-CP issued to it, state employees currently have a minimum wage of VND 1.39 million (corresponding to approximately EUR 50) per month, while the minimum wage in the private sector is regional is different. At present, the minimum wage is between VND 3.98 million (corresponding to approximately EUR 142) in regions of Group I, and in particular the urban areas, and VND 2.76 million (corresponding to approximately EUR 64) in the predominantly rural regions of the Group IV. The minimum wage level is renegotiated on a regular basis by the national minimum wage council.

In addition to the obligation to pay minimum wages, the employer is also obliged to deduct various social and insurance contributions from wages. There is compulsory social insurance in Vietnam for sickness benefits, maternity and unemployment benefits and, since 2016, also for insurance against accidents at work and occupational diseases. Overall, the employer’s share is 22% of the salary, the employee share is 10.5% of the salary. The compulsory insurance is also for foreign workers.

Foreign workers in Vietnam

For foreign entrepreneurs who want to get involved in Vietnam, the question of the possibility and authorization of employment of foreign workers in Vietnam always plays a major role.

In principle, foreign workers need a work permit and can only receive it if a priority test shows that no Vietnamese worker is also suitable for the job. In practice, however, it is often sufficient to justify the need for foreign language skills at a native language level for a certain position.

In addition, Regulation No 11/2016 / ND-CP sets out the precise conditions for the employment of foreign workers in Vietnam, although conditions have eased significantly in 2016.

Without further preconditions, short-term employees are provided with a business visa with a term of up to three months. In addition, workers with a higher education qualification and at least three years’ professional experience may also be granted a work permit with a duration of up to 24 months with the possibility of renewal.

Above all, however, the exceptions and exemptions of the regulation are important. For example, experts, consultants and temporary technical assistants may work in Vietnam without a work permit. For shareholders in Vietnamese companies, board members, directors, representatives, licensed foreign lawyers and other key corporate decision makers, exemptions may be applied for.

Conclusion: Labor compliance is of great importance

It is not just a company’s productivity that depends on a proper and legally compliant personnel policy. Especially foreign companies in the Far East are increasingly under the scrutiny of human rights organizations and the Western media when it comes to compliance with labor standards and ensuring good and stable working conditions. In this respect, compliance with the labor law standards described here also plays a role in the PR strategy of an investor in Vietnam.

Even if a foreign company considers acquiring an existing Vietnamese operation, detailed due diligence on employment matters is particularly important. While employment contracts can be adjusted within a narrow range if necessary, the investor in question must ensure before the transaction that the company does not conceal any legal, tax, underwriting or salary-related legacy liabilities.

Written by Erik Ahrens from our partner Germela (https://www.germela.com/)

Read more: Part 6: Special tax law in Vietnam