Key changes in new Labour Code to provide more clarification and rights

Richard Stapley-Oh, KPMG partner, head of legal

Vietnam was required to amend its Labour Code to implement the key principles of the core International Labour Organization conventions as part of its accession to new-generation free trade agreements like the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the EU-Vietnam Free Trade Agreement.

The new Labour Code seeks to prevent businesses from evading their responsibilities as employers by classifying their relationship as a “service agreement” or neglecting to record their agreement in writing. The definition of an “employee” under the new Labour Code states that it means a person who works for an employer under an agreement, and is paid, managed, and supervised by the employer.

Under the current Labour Code, this definition specifies that the individual is working under a labour contract, but this will be omitted in the new version so that individuals working in employment-type relationships without formal labour contracts will still be entitled to statutory protection.

The new Labour Code has also relaxed formal requirements for labour contracts, so more types of documents may constitute a labour contract, again extending statutory protection to more people. The term “labour contract” has been broadened to cover communications (such as electronically generated documents) that contain elements to create labour relations.

Term of employment

Under the current Labour Code, absent special circumstances, employers must enter into a contract for a minimum term of 12 months with an employee. Under the new Labour Code, employers will have much more flexibility in determining the work term, because there will be no minimum period for a definite-term contract under normal circumstances.

The category of “seasonal or project-based work” has been abolished under the new Labour Code, so in general, a definite-term contract will have no minimum period and may last up to 36 months.

Foreign employees and those past retirement age are also now explicitly permitted to enter into multiple definite-term contracts, while in the past, the rule that an employer had to offer an employee an indefinite-term contract after the parties had already entered into two definite-term contracts appeared to also apply to these groups.

Working hours and age

Despite lobbying from the business community to expand the cap on overtime hours, Vietnam has made only very conservative changes. The monthly overtime limit will increase from 30 to 40 hours but the annual overtime cap of 200 hours and 300 hours for special circumstances remains unchanged.

The list of special circumstances has been expanded to include jobs that cannot be delayed; production and processing in the electronics industry, and a business requirement for highly qualified employees to work overtime due to short supply.

The retirement age will increase by four months for women and three months for men for each year starting from 2021 to reach 62 years for men by 2028, and 60 years for women by 2035.

Probation

The new Labour Code allows parties to include a probationary period into a labour contract or as a separate agreement. In case of the latter, termination during the probationary period will terminate the labour contract.

Additionally, a new probation period of up to 180 days has been introduced for executive positions, whereas under the current law, a maximum probation period of only 60 days applies.

Stronger termination rights

Employers are in a much stronger position regarding employee terminations. Under the new Labour Code, a foreign employee’s labour contract will automatically terminate once his or her work permit expires.

This avoids the situation where an employee may be prohibited from working in Vietnam, yet at the same time, continue to have rights under a Vietnamese labour contract. The labour contract will also automatically terminate when an employee reaches the retirement age. Presently, an employee must not only reach the specified age, but must also have contributed to social insurance for at least 20 years to trigger the termination.

The new Labour Code has also introduced new grounds for unilateral termination for employers including circumstances when employees i) are absent from work for five or more consecutive days without proper reason; and ii) provide false information when entering into the labour relationship.

Under the present law, employers are required to commence dismissal procedures that involve holding a disciplinary hearing with the presence of a trade union representative and the employee for grounds (ii) and (iii), and practically speaking, it is rarely possible for an employer to dismiss an employee for providing false information at his or her hiring as it is difficult to prove this conduct has caused direct financial damage to the employer.

Employees similarly have stronger termination rights under the new Labour Code. Similar to the practice in many developed jurisdictions, employees can resign by simply providing advance notice, whereas under the current law, employees working under a definite-term contract must additionally have a legal reason to resign.

Employees will also have the right to unilaterally terminate the labour contract without any advance notice in cases of abuse or sexual harassment.

Trade unions

A fundamental change introduced by the new Labour Code is the right of employees to form trade unions independent from the Vietnam General Confederation of Labour, which currently regulates all trade unions in Vietnam.

The effect of this change is that there may now be multiple trade unions within one enterprise. The frequency of periodic dialogue sessions will be reduced to once a year with the requirement that the scope of such dialogues to include compulsory matters such as an employer’s unilateral termination.

The new Labour Code also built in provisions allowing parties to a collective interest-based dispute the right to strike if the dispute is not successfully resolved through the conciliation process without having to escalate the complaint to arbitration or the courts.

Foreign employees

The new Labour Code retains the two-year term of a work permit, but only permits one renewal of the work permit. After this, the employee will have to make a fresh application.

Foreigners married to Vietnamese citizens are now exempt from a work permit. In addition, foreign owners or shareholders of a limited liability company or members of the board of directors of joint stock companies can apply for a work permit exemption if they meet the threshold requirements for capital contribution, to be prescribed by the Vietnamese government.

Harassment and equality

Finally, the new Labour Code contains additional provisions to ensure gender equality and clearer rules on employment of minors. Of note is the inclusion of the definition of sexual harassment, the requirement put in place policies to prevent and address sexual harassment, and the inclusion of it as a ground of dismissal.