Facing economic difficulties because of the Covid-19 Pandemic, many enterprises have had to consider cost reduction, in which personnel costs are listed in the group of expenses considered for cutting. To reduce personnel costs for existing employees, the dismissal of employees due to structural change is one of the options that enterprises often choose. However, this is also the reason leading to litigation disputes arising between the employees and the enterprises because the employees believe that the enterprise did not follow the legal procedure and unilaterally terminated the contract illegally. Therefore, to minimize the risk of disputes arising as well as of the lawsuits from employees when the enterprise plans to change its organizational structure, this article points out some issues to keep in mind when implementing through this article.

1. Reason for terminating the labor contract

The first notable issue is the reason for the labor contract termination due to structural change. The Labor Law currently stipulates three circumstances that are considered as structural and technological changes in Article 42 of the Labor Code (2019), including:

  • Changes in the organizational structure, and personnel rearrangement.
  • Changes in processes, technology and equipment associated with the employer’s business sectors.
  • Changes in products or product structure.

However, the criteria and determination methods for these cases have not been guided explicitly in any legal document. Therefore, (in practice) in resolving labor disputes, it is very difficult to prove the reason for the labor contract termination due to structure changes for enterprises because some dispute settlement authorities require enterprises to prove that

  • This change is necessary due to actual needs; and
  • The enterprise has made efforts in arranging new jobs and retraining employees to continue using it, but cannot solve the problem and has to dismiss employees.

2. The Labor use plan

The second notable issue is that in case of a structural change that affects the employment of several employees, the enterprise must elaborate and implement a labor use plan. The labor use plan must mention the following main content:

  • The number and list of employees to be retained, employees to be retrained for further employment, and employees to be working on part-time basis;
  • The number and list of employees to retire;
  • The number and list of employees whose labor contracts must be terminated;
  • Rights and obligations of the employer, employees, and relevant parties regarding the implementation of the labor use plan;
  • Measures and financial sources for the plan implementation.

3. Discuss with The Representative organization of the employees

The third notable issue is that in the process of elaborating and approving the labor use plan, an enterprise should hold a meeting to discuss with the representative organization of the employees at the grassroots and the meeting must be recorded in the minutes, clearly stating the opinions of the representative organizations of employees at the grassroots.

In fact, in some cases, when elaborating the labor use plan, it is only for the sake of formality: giving documents to the head of the representative organization of the employees at the grassroots to sign and stamp without actually organizing a meeting to discuss and approve the labor use plan or hold a meeting without stating the opinion of the representative organization of employees at the grassroots. The consultation of the representative organization of the employees at the grassroots is a formality stemming from the lack of independence and ineffectiveness of the representative trade union organizational in the grassroots; as well as the enterprise’s subjectivity in understanding and complying with the legal procedures.

This shortcoming has caused the labor contract termination during the restructuring process of enterprises to be determined by the dispute settlement authorities as illegal unilateral termination of labor contracts.

4. Notification of Dismissal due to structural changes

The fourth notable issue is the notification to the People’s Committee and the provincial Department of Labor, Invalids and Social Affairs when several employees are dismissed due to structural change. Article 42.6 of the Labor Code (2019) notes that when dismissing several employees in case of restructuring, enterprises must notify this at least 30 days in advance to the provincial People’s Committee. Although, according to the above regulations, enterprises should notify the labor use plan to the competent agency to acknowledge, the competent state authorities not only receive the notice but also provide additional guidance on the labor use plan. This has created the acknowledgment of having to ask for approval from the competent state authorities on the plan’s content. After receiving written approval (this may take time in practice), the enterprise can proceed to the next steps.

5. Notification obligation to employees

The last notable issue that the enterprises should keep in mind is the notification obligation to employees when labor contracts are terminated due to structural changes. Article 44.2 and Article 42.6 of the Labor Code stipulate that enterprises are obliged to publicly announce the labor use plan to employees within 15 days from the date of approval and must notify 30 days in advance employees when dismissing employees due to structural changes.

Any minor mistake in the process of dismissing employees due to a structural change can lead to the possibility of the enterprise being considered as acting illegally when unilaterally terminating the contract. This is because the termination of labor contracts for structural change-related reasons is still a unilateral termination in nature. Therefore, although it is not explicitly required by the Labor Law, enterprises should still notify employees in advance in line with Clause 2, Article 36 of the Labor Code (2019) when dismissing employees due to structural changes – i.e., still notify employees at least 30 days in advance in regard to fixed-term contracts and at least 45 days for indefinite-term contracts.

Overall, this article notes that businesses need to comply with and implement when conducting a structural change that leads to the dismissal of many employees. This is to avoid the termination of the labor contract to be considered an illegal unilateral termination of the contract.

The article is based on laws applicable at the time noted as above and may no longer be appropriate at the time the reader approaches this article as the applicable laws and the specific cases that the reader may wish to apply may have changed. Therefore, the article is for referencing only.


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