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Termination Of Labor Contract Due To Covid-19

Due to the impact of Covid-19, many enterprises’ production and business activities have been seriously affected, leading to reduced revenues and prolonged losses. Some enterprises operating in the fields of services, production and trading of non-essential items have also suspended operations due to the local social distancing policy. To reduce the financial burden, laying-off employees is being opted by many enterprises. However, termination of the labor contract in this case should be considered and conducted with caution to avoid labor related legal consequences related.

This article applies only to employees who are working under valid ‘labor contracts’  and have not committed disciplinary violations. In current circumstance, as termination of the labor contract is not due to the fault of the employee, enterprises may consider terminating the labor contract through the following options: 

(1) Convincing the employee to sign the termination agreement

(2) Unilaterally terminating the labor contract citing the pandemic and

(3) Terminating the labor contract citing structural and technological changes.

Enterprises may choose from one among these options depending upon the individual case and actual situation of the business.

Agreement to terminate the labor contract

This is considered the safest option for enterprises to terminate labor contracts. Since the enterprise reaches an agreement with the employees on the termination of labor relationship,and the rights and obligations thereto with mutual will and consent. In this case, enterprises can explain employees the reasons for the termination proposal as well as the hardships of the company to obtain employees’ cooperation and understanding. Termination of the labor contracts under an agreement will help enterprises limit the legal consequences which may arise later had such termination violated labor laws. Thus, employees and employer may reach an agreement on the termination of the labor contracts through mutual agreement.

However, in the case of non-consenting employees, enterprises might have to take other measures as explained below to terminate the labor contract.

Unilateral termination of labor contracts citing pandemic reasons

Currently, Point c, Clause 1 of Article 36 of the Labor Code 2019 allows enterprises to unilaterally terminate labor contracts in the event of natural disasters, fires, epidemics, enemy-inflictes destruction, relocation, or narrowing production and business at the request of the state agencies by proving that all remedies were sought but they are still having to lay-off employees.

On April 1, 2020, the Prime Minister issued ‘Decision No. 447/QD-TTg’ on the announcing Covid-19 preventive measures. In addition, the Prime Minister’s document ‘No. 914/CD-TTg’ dated July 6, 2021 was issued to strengthen the measures for covid-19 safety and prevention. It aimed at implementing the dual objective of ‘C.E.No. 1691/VPCP-KGVX’ of the Government dated July 7, 2021 for the application of ‘Directive No. 16/CT-TTg’ issued by the prime minister on March 31, 2020. Thus, enterprises affected by Covid-19 and subjected to the rules issued in the above documents are likely to cite this as the reason for unilateral termination of the labor contract.

However, to apply this, the enterprises needs to prove that it had sought all remedies but was still forced to lay-off employees. It should be noted that there are currently no guidelines on measures for enterprises to overcome the impact of Covid-19.

Currently, the ‘Ministry of Labor, War Invalids and Social Affairs’ has issued ‘Official Letter No. 1064/LDTBXH-QHLDTL’ on March 25, 2020 laying down guidelines for payment of stop-work salaries and the settlement of employees’ suspensions caused by the Covid-19 epidemic. According to this document, if an enterprise is facing difficulties in procuring raw materials, or low market demand leading to job cuts, the enterprise may temporarily transfer their employees to work in a job outside the labor contract. If the prolonged suspension is affecting the economic situation of the enterprise, the enterprise and its employees may agree to postpone the peformance of the labor contracts as prescribed in Article 32 of the Labor Code. In case an enterprise has to cut-down production, which may lead to employee lay-offs, the enterprise may unilaterally terminate the labor contract citing epidemic reasons or let the employee quit in case of structural or technological changes.

However, ‘Official Letter No. 1064’ does not specify whether enterprises can apply one of the above measures or if such measures must be applied in the order of:

(i) Transferring workers to other jobs, then suspending the labor contract and finally terminating the labor contract on the basis of one of the two grounds mentioned above. In case the enterprise decides to take measures in this order, it could take a long time to terminate the labor contract amidst difficulties caused by the epidemic. For this option, enterprises need to fulfill the necessary conditions required for unilateral termination of the labor contract. Fulfillment of the conditions is important because the legal consequences of illegal unilateral termination will not only force the company to re-instate the terminated employee but also to pay compensation.

Termination of labor contracts because of structural or technological changes

Similar to terminating labor contracts due to epidemics, the ‘Official Letter No. 1064’ also lets enterprises dismiss employees on grounds of structural and technological changes. It should be noted that taking this measure also poses legal risks that enterprises should keep in mind before putting into practice.

According to the provisions of the Labor Code, the structural and technological changes include the following:

– Change of organizational structure or labor reorganization

– Changing internal processes, technologies, machinery, production and business equipment associated with the industry, or production and business lines of employers and

– Changing the product or production structure.

If due to the impact of covid-19, an enterprises has changed any of the above, it can  terminate the labor relationship with the employees being laid-off on those grounds. However, in practice, enterprises often choose to terminate on the basis of “organizational restructuring, or labor reorganization”. In order to apply this ground, the enterprise must have sufficient information to prove that the enterprise made changes in organizational structure, or re-organized labor, or constructed a new employer’s plan. At the same time, the enterprise’s decision must be cleared only after exchanging opinions with the representative organization of employees at the place where the employees are working. The enterprise must also give 30 days’ prior notice to the Provincial People’s Committee and to the employees.

Hence, terminating labor contracts is not an easy issue for enterprises as many enterprises are struggling to maintain their existence due to the situation caused by the covid-19 epidemic. Currently, some enterprises are willing to accepts violations related to pay time, unpaid leave, unpaid work, unilaterally terminating contracts, severance etc. to reduce economic burden. Therefore, enterprises should carefully select an appropriate legal basis and initiate dialogue with their employees in a flexible and respectful manner to conduct the termination of labor contracts with such employees in an amicable way without causing any legal issues.

Writing time: 17:00 August 19,2021.

The article is based on applicable law at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable law has changed and the specific case that the reader wishes to apply. Therefore, the article is only worth referencing.