Understanding the methods of terminating labor contracts and key factors to consider

In an employment relationship, the process begins with recruitment and proceeds through the signing, performance, and termination of the labor contract each being an essential stage in the relationship between the parties. Among these, the termination of the labor contract is a particularly significant transition. From the employer’s perspective, terminating a labor contract requires strict compliance with legal regulations to ensure the lawful rights and interests of the employee, and to avoid legal disputes stemming from unlawful termination. However, in practice, there are numerous cases where labor contracts are terminated without following the proper procedures, resulting in serious legal consequences for the employer. To support employers in gaining a comprehensive understanding, this article outlines several common methods of terminating labor contracts in accordance with current laws and analyzes important factors that employers should consider to ensure legality and minimize risks. 

1. Option 1: Mutual Agreement to Terminate the Labor Contract

1.1. Advantages: 

From a legal perspective, this is a safe option and poses minimal risk for the employer, provided that the employer fully settles all benefits owed to the employee within 14 days from the date of termination of the labor contract (Article 48.1 of the Labor Code 2019). 

1.2. Limitations: 

a. This option cannot be implemented without the employee’s consent, except in cases where the employer terminates the employee pursuant to Section 3 (Dismissal) or unilaterally terminates the labor contract under Section 4 below. 

b. The employer may need to spend a significant amount of time persuading the employee to agree to the termination. Additionally, to increase the effectiveness of this approach, the employer may consider offering an additional support payment (alongside the statutory payments upon termination in accordance with Article 48 of the Labor Code 2019) to encourage the employee to consent to the mutual termination. 

2. Option 2: Disciplinary Dismissal

2.1. Advantages: 

Pursuant to Clause 8, Article 34 of the Labor Code 2019, an employee subject to disciplinary dismissal shall have their labor contract terminated. The employer has the right to enact a disciplinary decision even if the employee disagrees with the disciplinary action. 

2.2. Limitations: 

a. The employer must have a legitimate basis for imposing disciplinary action. This basis should be direct, clear, and specifically applicable to the employee’s case. In particular: 

• If the relevant regulations are unclear, open to multiple interpretations, or if the grounds require substantial reasoning or argument, there is still a risk that the disciplinary action may be deemed improper. 
• Even though the employer has the right to issue a disciplinary decision, the employee may disagree with the rationale and initiate a lawsuit, claiming the disciplinary action is unlawful. In such a case, the final judgment will depend on the dispute resolution authority. 
• The dispute resolution authority will assess the legality of the disciplinary procedure by comparing the employee’s actual behavior with relevant legal provisions and the internal labor regulations. In labor law cases, authorities often interpret unclear rules in favor of the employee. 
• Therefore, regardless of how the employer intends to interpret the employee’s conduct, they should also consider the likely approach of the dispute resolution body in practice. 

b. In addition to establishing a valid basis for disciplinary action, organizing a disciplinary hearing will consume time and resources from multiple departments. 

c. The employer must strictly comply with the lawful procedure for disciplinary action as prescribed in Article 122 of the Labor Code. 

d. Consequences of unlawful disciplinary action: the employer may be required to revoke the disciplinary decision, restore any rights and benefits to the employee (if applicable), and/or compensate the employee in accordance with the current labor law. 

3. Option 3: Termination of employment due to structural changes or labor restructuring 

3.1. Advantages: 

This is a termination option that allows the employer to lawfully terminate the labor contract with the employee (Article 34.11 of the Labor Code 2019). 

3.2. Limitations: 

To justify termination on the grounds of structural changes or labor restructuring, the employer must satisfy the following conditions: 

a. The reason for the termination must fall within the categories defined by law as structural changes or labor restructuring (Article 42.1.a of the Labor Code 2019). Accordingly: 

• The Labor Code 2019 does not provide a specific definition of what constitutes “structural changes” or “labor restructuring.” This determination depends on the employer’s own business needs and decisions. Therefore, the employer must rely on the particular characteristics of their business operations to establish a rationale that can both persuade the employee and withstand scrutiny from the competent authorities in the event of a dispute. 
• The employer must develop a logical and well-documented explanation demonstrating that they genuinely no longer require the employee for the position previously agreed upon in the labor contract. The rationale and supporting documentation must be carefully considered and prepared on a case-by-case basis. 

b. To apply this option, the employer must comply with and carry out the following steps: 

(i). Develop and implement a labor utilization plan in accordance with the law. If there are new job positions available, priority must be given to retraining employees for continued employment. 

Regarding the development and implementation of the labor utilization plan: According to Article 44 of the Labor Code 2019, the labor utilization plan must include the following main contents: 

• • • The number and list of employees to be retained, employees to be retrained for continued employment, and employees to be shifted to part-time work; 
    • The number and list of employees who will retire;
    • The number and list of employees whose labor contracts must be terminated;
    • The rights and obligations of the employer, employees, and other related parties in implementing the labor utilization plan; 
    • Measures and financial sources to ensure the implementation of the plan. 

When developing the labor utilization plan, the employer must consult with the grassroots employee representative organization, if one exists at the workplace. 

The labor utilization plan must be publicly announced to the employees within 15 days from the date it is approved. 

(ii). The employer may only proceed with terminating an employee due to structural changes or labor restructuring after consulting with the grassroots employee representative organization (if the employee is a member of such an organization at the workplace) and providing at least 30 days’ prior notice to the provincial People’s Committee and the affected employee. 

(iii). The employer must conduct a workplace dialogue in accordance with the procedures prescribed by law (Article 63.2.c of the Labor Code 2019, Article 41 of Decree No. 145/2020/ND-CP). 

(iv). After completing the above steps, if the employer is still unable to arrange suitable employment and must terminate the employee, the employer must pay job-loss allowance to the employee (Article 42.5 and Article 47 of the Labor Code 2019). 

c. Some issues employers need to pay attention to 

(i). Employers should not use leased labor to replace employees who are terminated due to organizational restructuring, as this would conflict with the reason for termination, which is the inability to provide employment. 

In this case, the employer could be seen as not having made a genuine organizational change or labor restructuring. The risk is that the employer might be considered to have unilaterally terminated the labor contract unlawfully, leading to the employer’s obligation to compensate the employee according to Article 41 of the Labor Code 2019. 

If the employer uses leased labor to replace an employee who was terminated due to organizational restructuring, the employer could face an administrative fine ranging from 40,000,000 VND to 50,000,000 VND (Article 13.2.d of Decree 12/2022/ND-CP). 

(ii). The conditions analyzed in Section 3.2.b.(i) and (ii) above are mandatory. Failure to comply may result in an administrative fine ranging from 5,000,000 VND to 10,000,000 VND (Article 12.3.a and Article 12.3.b of Decree 12/2022/ND-CP). 

(iii). Providing advance notice to employees 

According to Article 43 of the Labor Code 2019: “Termination of employment due to the reasons specified in this article can only be carried out after giving the employee 30 days’ notice.” This means that when terminating an employee due to organizational restructuring, the employer is not required to give the advance notice typically required for unilateral termination (at least 30 days for fixed-term contracts or at least 45 days for indefinite-term contracts). 

However, to mitigate potential risks, the employer should still adhere to the advance notice period corresponding to the type of labor contract signed with the employee, even though the law does not mandate this in the case of termination due to organizational changes. 

4. Option 4: Employer’s right to unilaterally terminate the labor contract 

4.1 Advantages:

This is an option where the employer can terminate the labor contract with the employee without the employee’s consent (Article 34.10 of the Labor Code 2019). 

4.2 Disadvantages:

a. Employers can only exercise this right in certain specific cases, as outlined in Article 36 of the Labor Code 2019. These cases include: 

• The employee consistently fails to complete the work as stipulated in the labor contract, which is determined based on the criteria for evaluating the completion of work as per the employer’s regulations. 
• The employee is ill or injured and has been under treatment for 12 consecutive months for indefinite-term contracts, or 6 consecutive months for fixed-term contracts of 12 to 36 months, or more than half the term of a contract for fixed-term contracts of less than 12 months, and the employee’s ability to work has not been restored. 
• Due to natural disasters, fires, dangerous diseases, enemy threats, or production and business relocation or contraction as required by competent government authorities, where the employer has exhausted all remedies but still needs to reduce the workforce.
• The employee fails to appear at the workplace after a suspension of the labor contract as per Article 31 of the Labor Code 2019. 
• The employee reaches the statutory retirement age. 
• The employee voluntarily abandons work without a valid reason for 5 or more consecutive working days. 
• The employee provides false information as per Clause 2 of Article 16 of the Labor Code 2019, which affects the recruitment process. 

b. Notification responsibilities and notice period for unilateral termination of labor contract 

(i). As a principle, to legally unilaterally terminate the labor contract, the employer must meet two conditions: having a valid basis for termination and complying with the notification requirements. There have been many cases where, although the employer met the condition for unilateral termination, they did not notify the employee in accordance with the required notice period, in which case the termination is considered unlawful. 

(ii). Regarding the notice period, depending on the circumstances that the law allows the employer to unilaterally terminate the contract under Article 36.1 of the Labor Code 2019, the notice periods are as follows: 

• • • At least 45 days for indefinite-term contracts. 
    • At least 30 days for fixed-term contracts lasting from 12 to 36 months. 
    • At least 3 working days for fixed-term contracts of less than 12 months and in cases specified in Clause 1, Article 36 of the Labor Code 2019. 

(iii). The Labor Code allows employers to not provide notice in cases where the employee has reached retirement age or the employee voluntarily abandons work without a valid reason for 5 or more consecutive working days. 

(iv). For specific sectors or professions such as: 

• • • Aircraft crew members; aircraft maintenance technicians, aviation repair workers; flight operations personnel.
    • Company managers under the provisions of the Enterprise Law; the Law on Management and Use of State Capital in Production and Business Activities in Enterprises.
    • Crew members working on Vietnamese ships operating abroad or those leased by Vietnamese enterprises to work on foreign vessels. 

According to Article 7 of Decree 145/2020/ND-CP, the notice periods are as follows: 

• • • At least 120 days for indefinite-term contracts or fixed-term contracts of 12 months or more. 
    • At least one-quarter of the contract duration for contracts under 12 months. 

c. Consequences of unlawful unilateral termination of the labor contract: 

If the employer unilaterally terminates the contract unlawfully, they must fulfill the compensation obligations as per Article 41 of the Labor Code 2019. Specifically: 

(i). Case 1: If the employer rehires the employee to work under the original labor contract, the employer must pay the employee the following: 

• • • Wages, social insurance, health insurance, and unemployment insurance for the days the employee was not able to work. 
    • An amount equivalent to at least 2 months’ salary under the labor contract. 
    • An amount corresponding to the salary for the days where no advance notice was given, if applicable. 

(ii). Case 2: If the employee does not wish to continue working, the employer must pay the employee the following: 

• • • The amounts listed in Case 1. 
    • Severance pay. 

(iii). Case 3: If the employer does not want to rehire the employee and the employee agrees, the employer must pay the employee the following: 

• • • The amounts listed in Case 1. 
    • Severance pay. 
    • An amount equivalent to at least 2 months’ salary under the labor contract

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