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How to make an appropriate payment for severance allowance and retrenchment allowance?

The article written by Lawyer Nguyen Van Quynh – Associate and Mr. Ngo Nhat Minh – Paralegal of Phuoc & Partners is published on Saigon Economic Times dated 4/7/2013.

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What are severance allowance and retrenchment allowance?

The Labour Code clearly stipulated the cases where the employer is obliged to pay  severance allowance and retrenchment allowance to the employee. However, upon access to the novelties of LC 2012, most employers feel confused in calculating severance allowance or retrenchment allowance for employees.

LC 1994

At first, in accordance with LC 1994, employees are paid severance allowances in one of the following 3 cases: (i) employees terminating their labour contracts as per such cases as contract expiry, contractual job accomplishment, mutual agreement of the two parties on termination of the labour contract …; employees unilaterally terminating the labour contracts because of legitimate reasons; employees constantly failing to complete jobs; employees on long-term sick leave; due to natural calamities or force majeure that makes employers downsize production and manpower;

(ii) employees that have worked in a state-owned enterprise before establishment of the labour contract regime will be paid the same severance allowances as those signing the labour contracts; and (iii) employees terminating their labour contracts because of the fact that the enterprise, agency, organization ends its operations in such cases as dissolution by the competent authority’s decision, the court’s bankruptcy declaration, operation license expiry, withdrawal or recovery of the enterprise’s operation license or business registration license by the competent governmental authority due to its legal violations.

While employees are paid retrenchment allowances in such cases[1] as (i) the enterprise’s division, separation, merger, consolidation, transfer of the management right or the right to use the property when the next employer does not use all of the available labour force; and (ii) termination of labour contracts with employees in accordance with Article 17 of LC 1994, i.e. the case where employees that have regularly worked for an enterprise for a full period of 12 months or more are laid off due to corporate restructuring or technological changes and the enterprise cannot arrange them any new job.

Thus, the Labour Code 1994 is very clear in solving the problem of paying severance allowance or retrenchment allowance to employees, i.e. they are entitled to only one of such two types of benefits, as the case may be.

Labour Code 2012

Meanwhile, concerning severance benefit, among other cases, Articles 48.1 and 36.10 of the Labour Code 2012 requires the employer to pay it to the employees who have worked for a full period of 12 months or more and are fired by organizational restructuring, technological changes, or economic reasons or by consolidation, merger, division, separation of any enterprise or cooperative.

Notwithstanding the foregoing, Article 49.1 of the Labour Code 2012 also requires the employer to pay retrenchment allowance to the employees who have regularly worked for a full period of 12 months or more and are fired by organizational restructuring, technological changes, or economic reasons as stated by Article 44 of the Labour Code, or by consolidation, merger, division, separation of any enterprise or cooperative as stipulated by its Article  45 of such Labour Code.

If only based on the above provisions, it can be understood that the Labour Code 2012 has extended rights for employees while increasing financial obligations on employers. With the same circumstances as organizational restructuring, technological changes or economic reasons or consolidation, merger, division, separation of any enterprises, cooperatives, if the employer cannot arrange a new job for employees that have regularly worked for an enterprise for a full period of 12 months or more, he/she then must pay them the two types of severance allowance and unemployment allowance at the same time, not just a sum of retrenchment allowance.

The employer’s trouble not only lies in paying the two types of severance allowance and unemployment allowance at the same time but also in understanding and applying such Code. According to  Article 49.2 of the Labour Code 2012,  the working time for retrenchment allowance calculation is the actual total time spent on working for the employer by the employee less the aggregate of his/her time of participation in unemployment insurance in accordance with the Law on Social Insurance and the working time entitled to severance allowance from the employer. Regardless of the period during which employees and employers participate in unemployment insurance, the working time for calculating severance and retrenchment allowances are identical because it is the actual total time the employee spent on working for the employer. Thus, with such Article 49.2 of the Labour Code 2012, many employers will assume that they will not pay retrenchment allowance to employees once they have paid severance allowances to them in accordance with the law. If it is understood from this angle, the employer will be more beneficial as severance allowances only count as half of a monthly salary corresponding with each year of employment[2]  while retrenchment benefits equal to a monthly salary for each year of employment, but their payment must be made at least as two months’ salary[3].

Evidently with this case, the employer will feel wavering on how to execute his/her obligations in accordance with the law:

Option 1: the employer must pay the employee two types of benefits, severance allowance corresponding to half of a monthly salary and retrenchment allowance corresponding to one month’s salary, i.e. a total of 1.5 months’ salary for each year of employment.

Option 2: the employers pay only retrenchment allowance except for severance allowance to employees on the basis of half of a monthly salary for each year of employment.

Option 3: the employers who pay only retrenchment allowance on the basis of one month’s salary for each year of employment without paying attention to the working time for severance allowance calculation.

A clearer regulation is needed

Bringing this controversial issue to a specialist of the local Department of Labour, Invalids and Social Affairs for consultation, we gather the input that there is currently no guidelines by the Government or the Ministry of Labour, War Invalids and Social Affairs on the provisions on severance allowances and retrenchment allowance but this does not eliminate the possibility of mistake in the stage of drafting the Labour Code 2012. However, according to the principle of favoring employees as a general and unofficial guideline by the Ministry of Labour, War Invalids and Social Affairs, the employer is required to pay both severance and retrenchment allowances in the involved cases.

Assuming that there is a real mistake in the stage of drafting LC 2012, it seems that it will take a long time to clear it because the Labour Code 2012 can only be amended, supplemented, replaced by the National Assembly’s normative legal documents and the process of doing so cannot take place overnight.

To our way of thinking, the state agencies need to quickly enact specific regulations guiding application of the severance allowance and retrenchment allowance to the case where “the employer unilaterally terminate labour contract of the employees because of corporate reorganization, technological changes, or economic reasons or merger, consolidation, division, separation of enterprises, cooperatives” in such a way so as not to trouble the enterprises while ensure the legitimate rights and interests of both parties, the employees and the employers.

[1] Article 31 of LC 1994

[2] Article 48.1 of LC 2012

[3] Article 49.1 of LC 2012