SEVERANCE ALLOWANCE
Topic 20:
SEVERANCE ALLOWANCE
Senior Lecturer, Dr. Lê Thị Thúy Hương
SUMMARY OF THE CASE AND COURT DECISION
[Judgment No. 08/2019/LĐ-PT dated August 29, 2019, of the People’s Court of Bình Dương Province]
Summary of the Case:
Mr. Lê Anh commenced employment at TM Manufacturing and Trading Joint Stock Company (abbreviated as TM Company) on December 4, 2001, with a two-month probationary period. In January 2002, TM Company and Mr. Anh entered into a six-month fixed-term employment contract. In July 2002, TM Company signed another employment contract with a one-year term. Subsequently, the parties renewed the employment contract annually. On March 1, 2010, Mr. Anh and TM Company executed an indefinite-term employment contract. On September 25, 2017, Mr. Anh submitted a resignation letter. On October 31, 2017, TM Company issued a decision approving Mr. Anh’s resignation.
During his tenure at TM Company, Mr. Anh’s salary varied due to multiple changes in job positions, and he could not recall the exact amounts. However, under the indefinite-term employment contract dated March 1, 2010, his basic salary was 5,800,000 VND per month.
On June 1, 2017, TM Company executed an annex to the employment contract, setting Mr. Anh’s total income at 52,100,000 VND per month, comprising basic salary, allowances, and benefits, specifically: basic salary of 7,500,000 VND per month (used as the basis for social insurance contributions); allowances (for responsibility, position, and additional duties) and benefits (meal allowance) totaling 44,500,000 VND per month. The average salary for the six consecutive months prior to Mr. Anh’s resignation was 52,100,000 VND per month.
After resigning, Mr. Anh received full payment of his salary, allowances, and benefits as agreed. However, he had not received severance allowance due to a failure to reach an agreement with TM Company on the salary basis for calculation. Despite negotiations, the parties could not resolve the issue, leading Mr. Anh to file a lawsuit, demanding that TM Company pay him a severance allowance of 129,000,000 VND (for the period from 2001 to 2009), calculated based on an average salary of 47,305,000 VND per month (the average actual income for the six consecutive months prior to his resignation).
Court Decision:
In Labor Judgment No. 01/2019/LĐ-ST dated May 20, 2019, the People’s Court of TA Town upheld all claims of the plaintiff, Mr. Lê Anh. Accordingly, TM Company was ordered to pay Mr. Lê Anh a severance allowance of 129,000,000 VND.
The appellate court upheld the aforementioned trial labor judgment.
COMMENTARY
I. Introduction
Severance allowance is an amount paid by an employer to an employee upon termination of the employment relationship. This payment serves multiple purposes. Primarily, it is regarded as financial support for the employee upon job termination, facilitating stability during the transition to new employment. Additionally, the severance allowance includes an element of additional reward, recognizing the employee’s contributions throughout their tenure with the employer.
The regulations governing severance allowance are enshrined in the 2019 Labor Code and its implementing legal documents. However, in practice, the application of the severance allowance regime does not always align with legal requirements.
Through an analysis of the legal issues surrounding the severance allowance regime in Judgment No. 08/2019/LĐ-PT dated August 29, 2019, of the People’s Court of Bình Dương Province (“Judgment 08/2019/LĐ-PT”), the author aims to clarify matters related to this regime based on the provisions of the 2019 Labor Code. Although the court applied the 2012 Labor Code at the time of adjudication, the provisions of the 2019 Labor Code remain largely unchanged from those of the 2012 Labor Code. For the sake of consistency with current legal research, the author will analyze the case in accordance with the 2019 Labor Code.
II. Legal Issues
- Conditions for Entitlement to Severance Allowance
Pursuant to Article 46 of the 2019 Labor Code and Article 8 of Decree No. 145/2020/NĐ-CP, an employee is entitled to severance allowance upon satisfying the following conditions:
First, the employee must have worked regularly for the employer for a period of at least 12 months.
To clarify this provision, if an employee works for less than 12 months at an enterprise or agency, they are not eligible for severance allowance. This exclusion applies to cases involving seasonal employment contracts or contracts for specific tasks with a duration of less than 12 months, which are typically used for temporary work completed within a few days, a few months, or up to just under 12 months. Such contracts may also apply to temporary replacements for individuals performing military service, other civic duties mandated by law, maternity leave, or situations where an employee is detained, imprisoned, or where the employment contract is temporarily suspended by mutual agreement of the parties.
Second, the employment contract between the employee and the employer must terminate lawfully, including:
(i) Cases of automatic termination of the employment contract as stipulated in Clauses 1 through 7, Clause 12, and Clause 13 of Article 34 of the 2019 Labor Code.
Specifically, these cases include: expiration of the employment contract; completion of the work specified in the employment contract; mutual agreement to terminate the employment contract; the employee being sentenced to imprisonment or prohibited from performing their previous job by a court decision; or the employee’s death or declaration of disappearance by a court [Article 34 of the 2019 Labor Code].
However, in two specific scenarios—where the employee qualifies for a monthly pension or is dismissed as a disciplinary measure—although these are also considered terminations of the employment contract, the law stipulates that the employee is not entitled to severance allowance [Clause 1, Article 46 of the 2019 Labor Code].
The rationale for this exclusion is as follows: in the case of dismissal due to disciplinary action, the employee has committed a serious breach of labor discipline warranting the highest form of penalty, and since this stems from the employee’s fault, it is reasonable to deny them severance benefits. In the case of an employee retiring with a monthly pension, lawmakers argue that the employee already has a steady income and no longer needs to seek new employment, rendering severance allowance unnecessary.
Nevertheless, this reasoning is not entirely persuasive. Lawmakers appear to have overlooked the second purpose of severance allowance, which is to recognize the employee’s contributions during their tenure with the employer. From this perspective, employers should still be required to pay severance allowance, particularly to employees reaching retirement age. Such employees have often dedicated many years of service, significantly contributing to the employer’s benefit, and thus arguably deserve even greater recognition and reward.
(ii) Cases where the employee lawfully terminates the employment contract unilaterally under Article 35 of the 2019 Labor Code; or
(iii) Cases where the employer lawfully terminates the employment contract unilaterally under Article 36 of the 2019 Labor Code.
In Judgment No. 08/2019/LĐ-PT, Mr. Anh submitted a resignation letter. Given that the employment contract he had signed with TM Company was an indefinite-term contract, pursuant to Point a, Clause 1, Article 35 of the 2019 Labor Code, if Mr. Anh wished to unilaterally terminate the employment contract, he was required to provide TM Company with 45 days’ prior notice. In this case, Mr. Anh submitted his resignation on September 25, 2017. If he were to unilaterally terminate the contract, he would have needed to wait the full 45 days, meaning he could only lawfully cease work on November 10, 2017. However, on October 31, 2017, TM Company issued a decision approving Mr. Lê Anh’s resignation.
Consequently, Mr. Anh’s situation does not fall under Point a, Clause 1, Article 35 of the 2019 Labor Code regarding unilateral termination by the employee. Instead, it may be considered under Clause 3, Article 34 of the 2019 Labor Code, as a mutual agreement to terminate the employment contract (Mr. Anh submitted a resignation request, and TM Company accepted it by issuing the decision).
Therefore, pursuant to Clause 1, Article 48 of the 2019 Labor Code, Mr. Anh’s resignation satisfies the conditions for entitlement to severance allowance. Specifically, (i) he worked at TM Company for 16 years (from 2001 to 2017); and (ii) his employment contract terminated by mutual agreement. When compared to the conditions analyzed above, Mr. Lê Anh meets the requirements for severance allowance eligibility.
- Amount and Duration for Severance Allowance Entitlement
Regarding the amount of severance allowance, Clause 1, Article 46 of the 2019 Labor Code stipulates that the entitlement level is “one-half month’s salary for each year of employment.” Under this provision, the severance allowance is calculated based on the employee’s contribution to the enterprise, reflected through two factors: the actual duration of employment with the employer and the employee’s salary.
At the same time, current labor law provisions on severance allowance for employees whose employment relationships terminate under qualifying conditions—entitling them to half a month’s salary per year of work—build upon regulations from previous legal frameworks concerning severance allowance. Despite variations across different periods in political, economic, cultural, and social contexts, the Vietnamese State has consistently prioritized protecting employees’ rights by establishing the severance allowance regime upon termination of employment relationships.
Regarding the duration for calculating severance allowance, Clause 2, Article 46 of the 2019 Labor Code provides: “The working time used to calculate severance allowance is the total actual time the employee has worked for the employer, minus the period during which the employee participated in unemployment insurance as prescribed by unemployment insurance laws, and the working time for which the employer has already paid severance allowance or job-loss allowance.”
Thus, not all time worked for an employer is included in the calculation of severance allowance under Clause 1, Article 46 of the 2019 Labor Code. Since Vietnam implemented the mandatory unemployment insurance regime (effective January 1, 2009), the period of employment during which unemployment insurance contributions were made is excluded from the severance allowance calculation.
The aforementioned provisions on entitlement levels for employees demonstrate the employer’s responsibility toward employees when they lose their jobs and income. Furthermore, these provisions underscore the State’s role in labor management.
(i) Calculation of Severance Allowance:
Under the provisions of the 2019 Labor Code, employers are obligated to pay severance allowance to employees upon their resignation. The calculation of severance allowance is based on the employee’s contribution to the enterprise, determined by two factors: the actual duration of employment with the employer and the employee’s salary.
The method for calculating severance allowance is specified in Article 14 of Decree No. 145/2020/NĐ-CP, as follows:
Severance Allowance = Total working time at the enterprise eligible for severance allowance × Salary used as the basis for calculation × 1/2
(ii) Total Working Time at the Enterprise Eligible for Severance Allowance:
Pursuant to Point c, Clause 3, Article 14 of Decree No. 145/2020/NĐ-CP, “the working time used to calculate severance allowance or job-loss allowance is calculated in years (full 12 months); for any additional months, a period from 1 month to less than 6 months is counted as half a year, and a period of 6 months or more is counted as one full year of work.” The working time for calculating severance allowance is the total actual time the employee has worked for the employer, excluding the period during which the employee participated in unemployment insurance as prescribed by law and any working time for which the employer has already paid severance allowance.
In other words, for employees who have participated in unemployment insurance, upon resignation, they are entitled to benefits from the insurance agency based on the period of insurance contributions. The employer is only responsible for paying severance allowance for the period during which the employee worked for them but did not participate in unemployment insurance. Therefore, the time used to calculate severance allowance does not encompass the entire duration of the employee’s work under the employment contract.
This includes:
– The actual working time of the employee for the employer, encompassing the time the employee worked for the employer; the probationary period, apprenticeship, or training to work for the employer; the time spent studying at the employer’s direction; the time off with benefits as prescribed by the Law on Social Insurance; the weekly rest periods under Article 110, paid leave under Articles 111, 112, 115, and Clause 1 of Article 116 of the 2019 Labor Code;
the time off for union activities as regulated by trade union laws; the time off due to work stoppage or leave not caused by the employee’s fault; the time off due to temporary suspension of work; and the time spent in detention or custody but reinstated to work following a determination by a competent state authority that no crime was committed.
– The period during which the employee participated in unemployment insurance includes: the time for which the employer made unemployment insurance contributions as required by law and the time for which the employer paid an amount equivalent to the unemployment insurance contribution level concurrently with salary payments, as stipulated by law.
(iii) Salary Used as the Basis for Calculating Severance Allowance:
Clause 3, Article 46 of the 2019 Labor Code stipulates: “The salary used to calculate severance allowance is the average salary under the employment contract for the six consecutive months prior to the employee’s resignation.” The average salary under the employment contract for the six consecutive months before resignation refers to the wages or salary as per the employment contract, calculated as an average over the six months immediately preceding the termination of the employment contract. This includes the base salary or wages corresponding to rank, position, regional allowances, and position allowances. However, allowances such as meal allowances, fuel allowances, and similar benefits are not included in the basis for calculating severance allowance.
Furthermore, the salary used to calculate severance allowance is the average salary under the employment contract for the six consecutive months prior to resignation, not the regional minimum wage. For example, if the average salary for the six months before resignation is 5,000,000 VND, the severance allowance for each year of work would be one-half month’s salary, equating to 2,500,000 VND per year of service.
Regarding the calculation of severance allowance, pursuant to Article 46 of the 2019 Labor Code, employees are entitled to severance allowance based on their total actual working time for the employer, minus the period during which they participated in unemployment insurance and any working time for which the employer has already paid severance allowance.
Severance allowance is a payment intended to provide partial support to employees upon termination of employment, ensuring their livelihood during the process of seeking new employment. In essence, the payment of severance allowance encompasses several elements: compensation for wages that may not have fully reflected the labor exerted by the employee; a reward for diligently fulfilling the contract upon its liquidation; a gesture of goodwill, responsibility, and appreciation from the employer to the employee after a long period of collaboration; and a form of profit-sharing after both parties (through capital, management, and labor) have contributed to creating value greater than the initial input.
Moreover, it carries significant social importance, serving as an effective tool to assist employees in stabilizing their lives while searching for new employment opportunities. In summary, severance allowance can be understood as an amount that the employer must pay to the employee upon resignation in most cases of lawful termination of the employment contract [University of Law, Ho Chi Minh City (2022), Labor Law Textbook, op. cit., p. 205].
The working time used to calculate severance allowance is the total actual time the employee worked for the employer, excluding the period during which the employee participated in unemployment insurance as prescribed by the Law on Social Insurance and any working time for which the employer has already paid severance allowance.
III. Conclusion
Severance allowance is an amount that the employer must pay to the employee upon termination of the employment contract, carrying profound significance as recognition of the employee’s contributions to the employer’s overall development. From this perspective, severance allowance serves as a form of reward for the years of dedication the employee has given to the enterprise.
Simultaneously, severance allowance also functions as support for the employee in the initial period following the termination of the employment contract, particularly when the employee has not yet secured new employment. Therefore, whether the employment contract is unilaterally terminated by the employer or the employee, the general principle is that the employee is entitled to this severance allowance. This also represents a preferential benefit that labor law specifically affords to employees.
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