LABOR ARTICLES

What enterprises should pay attention to
labor contract termination due to structure change?

What enterprises should pay attention to labor contract termination due to structure change?
What enterprises should pay attention to labor contract termination due to structure change?

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 disputes as well as the risk of lawsuits from employees when the enterprise plans to change its organizational structure, we would like to point out some issues to keep in mind when implementing through this article.

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 structureal and technologicalchanges 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 (i) this change is necessary due to actual needs and (ii) the enterprise has made efforts in arranging new jobs and retraining employees to continue using but cannot solve the problem and have to dismiss employees.

The second notable issue, in case of the structure 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 have to 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.

The third notable issue, in the process of elaborating and approving the labor use plan, is that the 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, ie: 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 organization of the employees at 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.

The fourth notable issue isthe 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. According to Article 42.6 of the Labor Code 2019, when dismissing several employees in case of restructuring, enterprises must notify 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, but in fact, 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.

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 change. 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 illegally unilaterally terminating the contract because, in essence, the termination of Labor contracts for the reason of structural change is still unilateral termination in nature from the enterprises. Therefore, although it is not required by the labor law, enterprises should still notify employees in advance according to Clause 2, Article 36 of the Labor Code 2019 when dismissing employees due to structural changes – ie. still notify employees at least 30 days in advance for fixed-term contracts and at least 45 days for indefinite-term contracts.

The above are some of the contents that we note that businesses need to comply with and implement when conducting a structural change that leads to the dismissal of many employees to avoid the termination of the labor contract of the enterprise being considered illegal unilateral termination of the contract.

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 for reference.