Vietnam: Layoff Rules Eased; More Wages Subject to Tax

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By Lien Hoang

Feb. 4—Under new labor rules, employers in Vietnam will have more scope to terminate workers but will also be required to pay additional taxes on employee benefits.

Effective March 1, wages, salaries, allowances and such incentive payments as meals and holidays will all be subject to income and social insurance taxes. Currently, incentives are exempt from employment taxes, so employers have tended to bulk up incentive pay to minimize taxes due on pensions, health insurance, unemployment and other benefits.

Layoffs During Recessions

The government published labor rule changes on Jan. 12 under Decree 5, which also gives employers more leeway to downsize during times of “economic crisis or recession,” a direct result according to practitioners of industry lobbying after the Great Recession of 2008-2009. Vietnam was not among the hardest-hit economies at the time, but the downturn eventually led to decreased demand for production in the country, which relies heavily on rubber, electronics and other exports.

Under Decree 5, a foreign-owned factory located in Vietnam, for example, could justify layoffs when its parent company is suffering a recession, even if that downturn is not being felt in Vietnam. Considerable ambiguity remains about what authorities will accept as “economic reasons that affect business,” however.

“It's hard to terminate the labor contract unilaterally with the employee without any suitable reason and procedural compliance,” said Nguyen Thi Quynh Nhu, a senior associate at Grünkorn & Partner Law. “Usually we recommend our clients try to find a mutual agreement with the employee.”

Decree 5 also allows layoffs when firms are reorganizing their business or labor structure; changing products, technology, machinery or business lines; or responding to national reforms or free trade agreements.

More Permanent Hires

While the new downsizing rules seem to favor employers, other parts of the decree will help workers. Policymakers are pushing companies to hire people permanently by limiting the use of short-term contracts. There are three types of labor contracts used in Vietnam: seasonal, definite term (12 to 36 months) and indefinite term. According to Nhu, it is common for foreigners to sign definite-term contracts with locals and then extend them repeatedly as needed. Decree 5 allows only a single extension.

In another victory for workers, Decree 5 specifies that companies that are 15 days behind on salary must pay employees interest that is no less than the central bank's rate for one-month deposits. The salary delay should last no more than one month, the decree says, and only “in special cases due to natural disaster, fire, or other unforeseen reasons where employers have sought remedies but cannot pay on time.”

Decree 5 also requires employers to hold collective bargaining sessions at least once a year and to notify both unions and employees five days in advance of disciplinary meetings. Companies must also consult union representatives when firing staff based on performance reviews.

To contact the reporter on this story: Lien Hoang in Ho Chi Minh City at

To contact the editor responsible for this story: Rick Vollmar at

For more information on Vietnamese HR law and regulation, see the Vietnam primer.