Multiple options of labor costs reduction for employers during the Covid-19 pandemic

labor costs reduction for employers

With the significant impact of the Covid-19 pandemic on business operations, many employers are trying to find the most efficient ways for labor costs reduction. Under the prevailing laws and regulations, we would like to propose some options as follows:

1. Agreement on termnation of labor contract:

Pursuant to Clause 3, Article 34, Labor Code 2019: “Agreement on termination of labor contract by both parties” is one of the scenarios of labor contract termination.

To reduce labor costs, the employer can choose to negotiate and sign an agreement on termination of labor contract with his employee. Accordingly, relevant rights and obligations of each parties shall be implemented in line with such agreement. In this case, the employer is responsible for offering severance pay to the employee who has worked on a regular basis for a period of at least 12 months with an amount determined by half a month’s salary allowance for each year of work. The qualified period of work as the basis for calculation of severance allowance shall be the total period during which the employee actually worked for the employer minus the period over which the employee participated in the unemployment insurance in accordance with unemployment insurance laws and the period for which severance allowance or redundancy allowance has been paid by the employer. Of note, the regulations on unemployment insurance took effect since 01 January 2009.

This could be the least risky option for the employer’s consideration. However, this one shall be difficult to be applied to a large number of employees. The employer could negotiate and sign an agreement on termination of labor contract with a certain number of employees in need.  

2. Agreement on reduction of working hour and wage for a specified period:

Instead of contract termination, the employer can choose to negotiate with the employee on a reduction of working hour along with decrease of wagefor a specified period after which they can remain the same as specified in the labor contract. Given this option does not cut down the number of employees, it can still optimize the labor costs by reducing financial burden for the employer in a certain amount of time.

Clause 1 and 2, Article 22, Labor Code 2019 stipulate the procedure of amendment of labor contract: “During execution of labor contract, a party must, in case of any requests of amendment or supplement, notify to the another at least 03 working days in advance”. On that basis, for the purpose of reduction of working hour and wage with the employee, the employer must give advance notice at least 03 working days on this matter. Then, the two parties come to an agreement in form of an addendum to the labor contract or sign a new labor contract to record the said reduction in a certain period. In this case, an addendum is more favorable as signing a new labor contract will terminate the current one. Also, there are limited times to sign definite labor contract under the labor law of Vietnam.

This approach provides the employer with an advantage of not only maintaining the human resources for business operation until the pandemic is fully controlled and the market is recovered, but also sharing difficulties with the employee in a highly respectful manner. Like the aforementioned contract termination, this option would be considered well-managed and at low risk to the employer because it is agreed by both parties prior to execution.

3. Putting the employee on furlough and making salary payment according to furlough scheme:

Another approach for the employer to choose to reduce the labor costs is to put the employee on furlough and make salary payment according to furlough scheme. Under Clause 3, Article 99, Labor Code 2019, the employee might be furloughed due to “deadly pandemic”. The Official Letter 264/QHLDTL-TL dated 15 July 2021 of The Ministry of Labour, Invalids and Social Affairs (OL 264) provided guidance on furlough cases due to the impact of Covid-19 epidemic as follows:

  • The employee must be on furlough during the quarantine period as requested by the competent authorities.  
  • The employee must be on furlough due to the blocked workplace or place of residence as requested by the competent authorities.
  • The employee must be on furlough due to the fact that the employer suspenses the business operation for the purpose of pandemic prevention as requested by the competent authorities.
  • The employee must be on furlough due to suspension of business operation as its owner or the other employees has/have been quarantined or not back to work yet.

In the above-mentioned scenarios, employee’s furlough payment shall be made in accordance with Clause 3, Article 99 of Labor Code as well as OL 264, specifically:

  • In case of furlough less than or equal to 14 working days, the salary payment for that period shall be negotiated not less than the region-based minimum wage.
  • In case of furlough more than 14 working days, the salary payment for that period shall be negotiated as long as the payment for the first 14 working days must not be less than the region-based minimum wage.

 (Region-based minimum wage shall be based on the employer’s location, the employee working at which location shall apply for minimum wage of such location. E.g.: Cu Chi district, Hoc Mon district, Binh Chanh district, Nha Be district under Ho Chi Minh City applying for VND 4,420,000 per month).

Putting the employee on furlough and salary payment for it shall not cut off the number of employees. This approach still optimizes the labor costs for a specified period. Also, since this option is fully guided by The Ministry of Labour, Invalids and Social Affairs, the legal risks could be eliminated if this guidance is fully and properly followed. Therefore, this option should be taken into consideration by the employer.  

4. Unilateral termination of labor contract due to the pandemic:

Covid pandemic

Termination of labor contract due to Covid pandemic

Point c, Clause 1, Article 36, Labor Code 2019 stipulates: “The employer has the right to unilateral termination of labor contract in the following events: pandemic, etc, after all possible remedies have been exhausted by the employer, but still resulting in workforce reduction”. Also, Decision 447/QĐ-TTg dated April 1st, 2020 of the Prime Minister determined that Covid-19 is a deadly pandemic. As a result of it, the employer might consider this approach of unilateral termination of labor contract, which will reduce the number of the employees along with labor costs.

In case of unilateral termination of labor contract, the employer is responsible for offering severance pay to the employee who has worked on a regular basis for a period of at least 12 months with an amount determined by half a month’s salary allowance for each year of work. The qualified period of work as the basis for calculation of severance allowance shall be the total period during which the employee actually worked for the employer minus the amount of time over which the employee participated in unemployment insurance in accordance with the unemployment insurance laws as well as minus the period for which severance allowance or redundancy allowance has been paid by the employer. In addition, a prior notice must be given to the employee specified as follows:

  • At least 45 day prior notice with regard to indefinite term labor contracts;
  • At least 30 day prior notice with regard to definite term labor contracts from 12 to 36 months.
  • At least 03 working day prior notice with regard to definite-term labor contracts less than 12 months.

However, this option also has potential risks to the employer, speficially as follows:

Under Point c, Clause 1, Article 36, Labor Code, unilateral termination of labor contract due to Covid-19 shall only be considered when all the remedies have been exhausted by the employer, but workforce reduction is still unavoidable.

Currently, the prevailing laws and regulations as well as the trial in practice do not have any specific guidance or explanation on the concept of “all the remedies have been exhausted by the employer but workforce reduction is still unavoidable”. In this case, disputes are possible to arise because the employee’s interests are significantly affected. When the disputes are resolved at a relevant Court, both the employee and the Court can put questions ” Have all the remedies been exhausted by the employer?”, “Why the employer has not taken the other necessary options instead of unilateral termination?” or “The measure taken by the employer shall be considered a remedy?” etc. Finding reasonable answers to these questions is not so simple, which would require the employer to carefully prepare persuading explanations along with supporting evidence. It should also be noted that it is the employer’s obligation to give explanation of unilateral contract termination in labor cases.

According to Official Letter 1064/LDTBXH-QHLDTL dated March 25th, 2020 of The Ministry of Labor, War Invalids and Social Affairs, “In case the employer has difficulties in raw material sources and market which leads to insufficient job arrangements to his employees, the employer may temporarily reassign other tasks to the employees rather than those specified in the labor contract according to the provisions of Article 31, Labor Code; if the lengthy furlough scheme impacts the company’s payment ability, the employer and the employees may agree to suspension of the labor contract in accordance with the provisions of Article 32, Labor Code; if the employer has to cut back on production resulting in workplace reduction, the labor arrangement specified at Article 38 or Article 44, Labor Code is allowed to make”

Read more:  Types of employment contract in Vietnam

On the principle of protection of employees and from a viewpoint that employees are always considered as the weaker side in the labor relationship, the aforesaid Official Letter can be understood as follows: Due to the impact of the Covid-19 pandemic causing the employer difficulties in material sources and markets resulting in insufficient job arrangement for employees, the employer must take a sequence of the following steps: (i) reassign other tasks to the employee, (ii) negotiate with the employee on temporary suspension of labor contract and (iii) lastly unilaterally terminate the labor contract due to the pandemic. Hence, in case of any disputes, the Court would properly think that the employer shall be required to take all these steps. Skipping any of those might be considered as not complying with the procedures aforementioned leading to an illegal termination of labor contract. As a result of it, the employer may face extremely adverse legal consequences.

In view of the foregoing, unilateral contract termination with the employee due to pandemic should not be of top priority. The employer should take this approach into consideration before taking advantage of it.

5. Termination of labor contract due to change in corporate structure, labor rearrangement:

Clause 1, Article 42, Labor Code 2019 stipulates the structural and technological change cases, including: corporate structure change, labor rearrangement; change in production and business processes, technologies, machinery and equipment associated with the employer’s production and business operation; change in products or products structure. These changes are rarely introduced during the Covid-19 pandemic. Therefore, the employer can choose to terminate the labor contract for the reason of changing the corporate structure or rearranging the labor resouces.

According to the Articles 42, 43, 44, 45, 47, Labor Code 2019, in case of contract termination with an employee, the employer must follow the tasks mentioned below:

  • Developing and implementing the labor resources plan: When developing the labor resources plan, the employer must consult with the employee representative organization at the grassroots level where the employer is located if applicable. The labor resources plan must be announced to the employees in public within 15 days from the approval date.
  • The labor contract termination can only be performed upon consulting with the employee representative organization at the grassroots level where the employees are members, and a 30 days prior notice of termination must be given to the People’s Committee of the province as well as to the employee.
  • A written notice of contract termination must be given to the employee when the labor contract is terminated.
  • Making payment of redundancy allowance to the employee: the employer is responsible for offering redundancy pay to the employee who has worked on a regular basis for a period of at least 12 months with an amount determined by a month’s salary allowance for each year of work but no less than 02-month salary. The qualified period of work as the basis for calculation of redundancy allowance shall be the total period during which the employee actually worked for the employer minus the amount of time over which the employee participated in unemployment insurance in accordance with the unemployment insurance laws as well as minus the period for which severance allowance or redundancy allowance has been paid by the employer

Like the unilateral termination of the labor contract due to pandemic, the option of contract termination due to change in corporate structure, labor rearrangement also contains many risks for the employer, specifically:

  • The prevailing laws and regulations do not have a clear explanation for the case of “change in corporate structure, labor rearrangement”. Due to impacts on interests of the employee, it is likely that he/she will file a lawsuit to the Court to resolve the dispute. Obviously, the Court has many different interpretations of “change in corporate structure, labor rearrangement”, and if the explanation of the employer does not coincide with the opinion of the Court, the termination of the labor contract may be illegal unfortunately.
  • The laws and regulations stipulate that the employer must consult with the employee representative organization at the grassroots level where the employer located and must inform the People’s Committee of the province as well as the employees within 30 days in advance. Obviously, while the social distancing measures due to the Covid-19 pandemic are in process nationwide, the consulting with the employee representative organization, informing and waiting for the Provincial People’s Committee’s approval would not be easily and quickly done.
  • Moreover, some employers have not yet established the employee representative organizations at the grassroots level, therefore, the consultation with this organization even more difficult. Per Departments of Labor – Invalids and Social Affairs perspectives, it is necessary to seek for all employees’ opions in case the employee representative organization of at the grassroots level has not yet been established.
  • According to Official Letter 1064/LDTBXH-QHLDTL dated March 25th, 2020 of The Ministry of Labor, War Invalids and Social Affairs, “In case the employer has difficulties in raw material sources and market which leads to insufficient job arrangements to his employees, the employer may temporarily reassign other tasks to the employees rather than those specified in the labor contract according to the provisions of Article 31, Labor Code; if the lengthy furlough scheme impacts the company’s payment ability, the employer and the employees may agree to suspension of the labor contract in accordance with the provisions of Article 32, Labor Code; if the employer has to cut back on production resulting in workplace reduction, the labor arrangement specified at Article 38 or Article 44, Labor Code is allowed to make”

On the principle of protection of employees and from a viewpoint that employees are always considered as the weaker side in the labor relationship, the aforesaid Official Letter can be understood as follows: Due to the impact of the Covid-19 pandemic causing the employer difficulties in material sources and markets resulting in insufficient job arrangement for employees, the employer must take a sequence of the following steps: (i) reassign other tasks to the employee, (ii) negotiate with the employee on temporary suspension of labor contract and (iii) lastly unilaterally terminate the labor contract due to the pandemic. Hence, in case of any disputes, the Court would properly think that the employer shall be required to take all these steps. Skipping any of those might be considered as not complying with the procedures aforementioned leading to an illegal termination of labor contract. As a result of it, the employer may face extremely adverse legal consequences.

In view of the foregoing risks, the unilateral termination of labor contract with the employee due to change in corporate structure, labor rearrangement should not be of top priority. The employer should take this approach into consideration before taking advantage of it.

6. In combination of the aforesaid options for labor costs reduction

As mentioned, each option has different pros and cons. Therefore, the employer may combine them to use in each specific case. Accordingly, the employer may negotiate and sign a termination agreement with a specific number of the employees in need. For the remainder, the priority options which are at low risk: (i) Negotiating to reduce working hour and wage for a specified period or (ii) putting the employees on furlough and making salary payment according to furlough scheme.

The 02 remaining options (i) unilaterally terminating the labor contract due to pandemic and (ii) terminating the labor contract due to change in corporate structure, labor rearrangement should not be given priority to applied because of many potential risks to the employer.

Conclusion:

The aforesaid is our advice on “Multiple options of labor cost reduction for employers during the COVID-19 Pandemic”, which should be used for reference only. It is not considered as the guideline for any specific parties or scenarios. The implementation of these approaches in practice should depend on the nature of each case and characteristics of each company. In addition, professional legal advisory shall be essential to ensure compliance with the laws on labor.

Author: Mr. Vo Quoc An

To find out more about labor & employment services, please contact us via email info@alb-partners.com or phone: +84 907 008 722 (Mr. Steven Long – Manager of Corporate & Investment Department).

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