THE TERMINATION OF EMPLOYMENT CONTRACT DUE TO STRUCTURAL AND TECHNOLOGICAL CHANGES
Topic 18:
THE TERMINATION OF EMPLOYMENT CONTRACT DUE TO STRUCTURAL AND TECHNOLOGICAL CHANGES
Senior Lecturer, Dr. Lê Thị Thúy Hương
SUMMARY OF THE CASE AND THE DECISION OF THE COURT
[Decision No. 06/2022/LĐ-PT dated 29 July 2022 of the Đồng Nai Provincial People’s Court on the dispute regarding unilateral termination of employment contracts due to changes in organizational structure and workforce reorganization.]
Case summary:
Mrs. Trần Tích signed an indefinite employment contract with V Vietnam LLC (hereinafter referred to as “Company V”) in the position of Director of Product Registration for the Asia region, with a monthly salary before her termination of VND 213,091,000.
Due to Company V’s changes in organizational structure and workforce reorganization as stipulated in Resolution No. 181A-19/QĐ-BVN dated 6 December 2019 issued by the Board of Members, the position of coordinating international product registration for aquaculture products in Asia, the Middle East, and Latin America—Aquaculture, under Mrs. Tích‘s management as Director, was eliminated.
All activities related to product registration for the aquaculture division previously carried out at Company V would henceforth be handled by the Group V’s Head Office in France under the direct supervision of Mr. Philippe (Mrs. Tích’s immediate superior). As a result, on 12 March 2020, Company V issued Resolution No. 13-20V/QĐ-VBVN terminating Mrs. Tích‘s employment as of 29 March 2020.
Claiming that Company V’s termination of her employment contract was unlawful, Mrs. Tích filed a lawsuit requesting:
(i) Company V to reinstate her under her employment contract and pay wages for the days she was not allowed to work, calculated from 29 March 2020 to 19 November 2021, and continuing until Company V reinstates her to her original position (1 month and 20/23 days), amounting to VND 4,234,025,522.
(ii) Compensation for 2 months’ salary, totaling VND 426,182,000.
(iii) Contributions to social insurance and health insurance for Mrs. Tích.
The Court’s Decision:
(i) First instance (Decision No. 01/2021/LĐ-ST): The court ruled that Company V’s termination of Mrs. Tích’s employment contract was unlawful. Company V was ordered to fulfill all of Mrs. Tích’s requests from items (i) to (iii).
(ii) Appellate court (Decision No. 06/2022/LĐ-PT): The appellate court rejected Mrs. Tích’s claims against Company V.
COMMENTARY
I. Introduction
In the practical operation of enterprises, there are times when businesses, driven by the desire to enhance labor productivity and ensure work efficiency, may implement processes for organizational restructuring, workforce reorganization, or changes in product structure or technology.
These actions may result in one or more employees being rendered redundant. While the law encourages businesses to maintain labor relations with these employees through work rearrangement or retraining before assigning them to new positions, there are numerous cases where businesses either cannot or choose not to continue employing these individuals. In such instances, the law permits businesses to reduce redundant employees through the act of terminating their employment contracts.
The question arises: Do businesses exploit this right to unlawfully terminate labor relations with employees? The commentary on Decision No. 06/2022/LĐ-PT of the Đồng Nai Provincial People’s Court regarding the dispute over unilateral termination of employment contracts due to organizational restructuring and workforce reorganization (hereinafter referred to as “Decision No. 06/2022/LĐ-PT”) will shed light on some legal issues surrounding termination of employment contracts due to structural or technological changes by enterprises under current labor laws.
II. Legal Issues
- Cases of Structural or Technological Changes
The term “structural or technological changes” was first introduced in Article 17 of the 1994 Labor Code (as amended and supplemented in 2002, 2006, and 2007). Specifically, Clause 1, Article 17 of the 1994 Labor Code states:
“In cases where employees who have worked continuously in an enterprise for a period of one year or more lose their jobs due to structural or technological changes, the employer is obligated to retrain them for new positions. If new jobs cannot be arranged, the employer must pay severance allowances, with one month’s salary paid for each year of service, but not less than two months’ salary.”
However, the 1994 Labor Code did not define what constitutes “structural or technological changes.” This term was later reiterated in Article 44 of the 2012 Labor Code and Article 42 of the 2019 Labor Code.
Clause 1, Article 42 of the 2019 Labor Code enumerates cases of structural or technological changes as follows:
(a) Changes in organizational structure and workforce reorganization;
(b) Changes in products and product structure; or
(c) Changes in processes, technology, machinery, and equipment related to the employer’s sector or industry.
These cases were previously stipulated in guiding documents under the 2012 Labor Code, such as Decree No. 05/2015/NĐ-CP and Decree No. 148/2018/NĐ-CP.
While cases (b) and (c) are explicitly defined and seldom lead to confusion, case (a) still gives rise to differing interpretations and may result in the misapplication of this provision in practice.
If interpreted broadly, the phrase “changes in organizational structure” could encompass two scenarios:
(i) Internal changes in an enterprise’s organizational structure; and
(ii) Organizational changes involving the division, separation, merger, consolidation, acquisition, etc., of enterprises.
However, scenario (ii) is already regulated under Article 43 of the 2019 Labor Code and is generally referred to as the reorganization of an enterprise. According to Clause 31, Article 4 of the 2020 Law on Enterprises, “Reorganization of an enterprise includes division, separation, merger, consolidation, or conversion of the type of enterprise,” which aligns with the cases regulated under Article 43 of the 2019 Labor Code. Therefore, “changes in organizational structure” as mentioned in Point (a), Clause 1, Article 42 of the 2019 Labor Code should solely refer to internal organizational changes within an enterprise.
Previously, case (a) mentioned above was explained in great detail, whereby “changes in organizational structure” were understood as “merging or dissolving certain departments of the unit.” According to Clause 3, Article 11 of Decree No. 39/2003/ND-CP dated 18 April 2003, providing detailed guidance on the implementation of several provisions of the 1994 Labor Code on employment, enterprises were required to substantiate that they had, in fact, merged or dissolved one or more of their departments to demonstrate organizational restructuring.
This meant that a department within the enterprise had to no longer exist (either being merged into another department or dissolved), which consequently resulted in employees in those departments being rendered redundant due to the absence of jobs. For further reference, see the reasoning of the Supreme People’s Court in the Supervisory Decision No. 06/2006/LD-GDT dated 4 April 2006 in the case “Dispute regarding the unilateral termination of an employment contract” between Nguyễn Văn Quý and Coca-Cola Company.
Thus, it could be concluded that, in the past, the merger or dissolution of a department and the resulting unemployment of employees were two critical criteria for identifying whether an enterprise’s restructuring fell under changes in organizational structure.
From 2015 to the present, labor law no longer provides detailed explanations of changes in organizational structure as above. Specifically, this was omitted starting with the implementation of Decree No. 05/2015/ND-CP dated 12 January 2015, which provides detailed regulations and guidance on several contents of the 2012 Labor Code. Instead, Point (a), Clause 1, Article 13 of Decree No. 05/2015/ND-CP, and now Point (a), Clause 1, Article 42 of the 2019 Labor Code, only briefly define case (i) as “changes in organizational structure and workforce reorganization.”
From one perspective, such a generalized regulation could offer flexibility and initiative for enterprises when applying it. However, the question arises whether the two terms “changes in organizational structure” and “workforce reorganization” are separate and independent cases or whether the latter is merely a consequence of the former. Accurately understanding the relationship between these two terms is of great importance and determines whether this provision is correctly interpreted and applied in practice.
Let us analyze the two hypotheses to better understand how different interpretations may lead to different applications of the law.
Firstly, if “changes in organizational structure” and “workforce reorganization” are understood as two separate and independent cases, it means that the law recognizes “workforce reorganization” as a case of structural change, in addition to “changes in organizational structure.” Since the 2019 Labor Code and its guiding documents do not define “workforce reorganization,” this phrase could be interpreted as synonymous with personnel rearrangement. If so, to satisfy Article 42 of the 2019 Labor Code, an enterprise would only need to demonstrate that it is rearranging personnel within a specific department or unit.
After such rearrangement, employees would be made redundant due to the absence of work under the employment contract, with no other jobs available to maintain their employment relationship. Proving this is not particularly difficult for enterprises. Moreover, such an interpretation risks abuse, allowing enterprises to exploit the situation as a pretext for terminating employment contracts rather than making genuine structural changes.
Secondly, if “workforce reorganization” is understood as a consequence of “changes in organizational structure,” then only one case could satisfy the condition of “changes in organizational structure” under Article 42 of the 2019 Labor Code. This would be when an enterprise can demonstrate that it has undergone structural changes, meaning that at least one department or unit within the enterprise has ceased to exist (either dissolved or merged). Consequently, the enterprise would proceed with workforce reorganization, resulting in the redundancy of employees in that department or unit.
When considering the phrasing of Point (a), Clause 1, Article 42 of the 2019 Labor Code, the second interpretation appears more substantiated. Therefore, although current regulations no longer explicitly require enterprises to “merge or dissolve certain departments” when applying “changes in organizational structure,” enterprises must still provide evidence demonstrating that they have implemented “changes in organizational structure” before proceeding with “workforce reorganization” to satisfy Point (a), Clause 1, Article 42 of the 2019 Labor Code.
In Decision No. 06/2022/LĐ-PT, Mrs. Tích held the position of Director of Product Registration – Aquaculture Division for the Asia region at Company V, directly managing four staff members: Mrs. Tường, Mrs. Ngọc, Mrs. Thu, and Mrs. Khánh. At the beginning of 2020, under the directive of Group V in France (the owner of Company V), all product registration activities for the aquaculture division in Asia, the Middle East, and Latin America were transferred to Group V’s Head Office, under the management of Mr. Philippe. Consequently, the Product Registration – Aquaculture Division for the Asia region at Company V ceased operations, leading to the elimination of Mrs. Tích’s position.
According to Point (a), Clause 1, Article 42 of the 2019 Labor Code, it is evident that Company V underwent structural changes, specifically the dissolution of the Product Registration – Aquaculture Division for the Asia region in line with Group V’s overall directive. Following these structural changes, Company V proceeded with workforce reorganization, resulting in the elimination of the positions held by Mrs. Tích and Mrs. Khánh.
- Regarding Procedures and Processes for Terminating Employment Contracts Due to Structural or Technological Changes
Under current legal regulations, in order to terminate employment contracts for redundant employees based on structural or technological changes, enterprises must carry out the following fundamental procedures:
2.1. Developing and Implementing the Workforce Utilization Plan
Clause 3, Article 42 of the 2019 Labor Code stipulates that, in cases where structural or technological changes impact the employment of multiple employees, employers are required to develop and implement a Workforce Utilization Plan (the Plan).
While the 2019 Labor Code and its guiding documents do not specify the exact number that qualifies as “multiple employees,” it is commonly understood that this refers to two employees or more. Clause 3, Article 13 of Decree No. 05/2015/NĐ-CP explicitly states: “…from two employees or more…” At the time of adjudicating this case, the court applied the 2012 Labor Code, and since Company V terminated the employment of Mrs. Tích and Mrs. Khánh, Company V was obligated to develop the Plan.
Although the legal provisions are not overly detailed, certain requirements must be observed to ensure the lawful development and implementation of the Plan:
Firstly, the Plan must be based on the enterprise’s decision regarding structural or technological changes.
On 2 December 2019, Company V submitted an opinion survey to the Board of Members to collect opinions on restructuring at the company, accompanied by a draft of the Plan. Based on the Board of Members’ consensus on restructuring the company, on 6 December 2019, the Chairman of the Board of Members issued Decision No. 181A-19/QĐ-VBVN approving the company’s restructuring according to the Plan. The court found this Decision to align with Company V’s operational framework as stipulated in Articles 12 and 13 of Company V’s Charter and comply with Point (c), Clause 1, Article 75 of the 2014 Law on Enterprises.
Secondly, the content of the Plan must adhere to the provisions of Article 44 of the 2019 Labor Code.
According to Decision No. 06/2022/LĐ-PT, when developing and implementing the Plan, Company V fully outlined the details, including: the list and number of employees currently employed; employees retained for continued employment; employees undergoing retraining for continued employment; employees leaving their jobs with social insurance entitlements; employees transitioning to part-time work; employees whose employment contracts were terminated; measures and financial resources to ensure the implementation of the Plan, amounting to VND 600,000,000.
Thus, sufficient evidence was provided to demonstrate that the content of Company V’s Plan adhered to the provisions of Article 44 of the 2019 Labor Code. Under this Plan, the list of employees retained for continued employment included 194 individuals, while the list of employees whose contracts were terminated after restructuring included 2 individuals—Mrs. Tích and Mrs. Khánh.
Thirdly, enterprises must consult with the representative organization of employees at the establishment (where such an organization exists) when developing the Plan.
Current laws do not clearly stipulate how the employee representative organization should participate in developing the Plan, nor do they clarify whether this organization has the authority to co-develop the Plan with the enterprise or merely provide input after the Plan has already been formulated by the enterprise. In practice, trade unions usually participate at the level of providing comments, and this lack of clarity in the law limits the role of trade unions in developing the Plan and determining the number of redundant employees.
In Decision No. 06/2022/LĐ-PT, the court merely noted: “When developing and implementing the labor Plan, the participation of the grassroots Trade Union organization was in accordance with Article 46 of the Labor Code,” without delving into how the trade union at Company V contributed to the Plan’s development.
Fourthly, enterprises must publicly inform employees of the Plan within 15 days from the date of its approval.
This requirement has been applicable since the 2019 Labor Code came into effect. However, this case occurred under the 2012 Labor Code, which did not require enterprises to publicize the Plan to employees. Consequently, Company V’s failure to notify Mrs. Tích about the elimination of her position was not considered a violation of this requirement.
Fifthly, where new positions are available, priority must be given to retraining redundant employees for continued employment.
Under Clause 3, Article 42 of the 2019 Labor Code, retraining redundant employees is no longer a mandatory obligation for enterprises prior to terminating employment contracts. Instead, it is given “priority” if the enterprise can arrange and assign new jobs for those redundant employees.
This approach is reasonable, as requiring an enterprise to mandatorily retrain employees before termination, even when no other positions are available, would unnecessarily consume time, effort, and resources for both parties. Additionally, the retraining may not align with the employees’ skills for seeking new employment. However, the question arises as to whether the term “priority” under Clause 1, Article 42 of the 2019 Labor Code should be interpreted as equating to the responsibility of retraining employees before assigning them to new jobs.
Regarding the requirement to retrain redundant employees, the opinions of the first-instance and appellate courts in this case diverged. The first-instance court held that Company V acted improperly by not prioritizing retraining Mrs. Tích for continued employment, especially since the company continued hiring new personnel before and after terminating Mrs. Tích’s employment. This indicated that Company V still had recruitment needs but did not prioritize retaining Mrs. Tích.
In contrast, the appellate court found that Company V acted correctly, based on the following reasoning:
– Firstly, Company V did not recruit new personnel to replace or perform equivalent roles to those eliminated positions of Mrs. Tích and Mrs. Khánh.
– Secondly, while Company V did hire additional personnel before and after Mrs. Tích’s termination, the roles filled were unrelated to the expertise and qualifications required for Mrs. Tích’s prior position. Thus, the company could not reassign Mrs. Tích to those roles and was compelled to terminate her employment.
The appellate court accepted Company V’s argument that the company lacked “new jobs” suitable for Mrs. Tích, which negated the necessity to prioritize retraining her for continued employment.
2.2. Consulting the Employee Representative Organization before Terminating Employment
Under Clause 6, Article 42 of the 2019 Labor Code, prior to terminating employment contracts due to structural or technological changes, employers must consult with the representative organization of employees at the establishment where the affected employees are members.
Company V had an established grassroots trade union. On 30 December 2019 and 8 January 2020, the company held meetings with the Executive Board of the grassroots trade union to discuss the development and implementation of the Plan, as well as the termination of Mrs. Tích’s employment. According to the court’s assessment, Company V adhered to the procedures stipulated in Articles 42 and 44 of the 2019 Labor Code. The court explicitly stated: “The company carried out proper procedures, restructuring in accordance with the 2014 Law on Enterprises and Articles 44 and 46 of the 2012 Labor Code.” Notably, Articles 44 and 46 of the 2012 Labor Code are largely similar to Articles 42 and 44 of the 2019 Labor Code.
2.3. Executing Advance Notice Procedures
Under the 2019 Labor Code, employers are required to provide a 30-day notice to the provincial-level People’s Committee and the affected employees when terminating employment due to structural or technological changes. This adjustment in the 2019 Labor Code differs from the 2012 Labor Code, which only required advance notice to the provincial labor management authority and did not explicitly mandate advance notice to employees.
In such cases, the required notice period for employees does not depend on the type of employment contract, as it would in cases of unilateral termination of contracts by employers.
In Decision No. 06/2022/LĐ-PT, Company V fulfilled the 30-day advance notice requirement to the provincial labor management authority, which was the Management Board of Đồng Nai Industrial Zones. The case was adjudicated under the 2012 Labor Code, where this notice to provincial authorities was mandatory.
Regarding advance notice to employees, while the 2012 Labor Code at the time of this case did not require it, Company V argued that it still provided sufficient notice to Mrs. Tích, equivalent to the period required for unilateral termination of an indefinite employment contract (45 days). Specifically, though Company V issued Resolution No. 13-20V/QĐ-VBVN terminating Mrs. Tích’s contract on 12 February 2020, the resolution explicitly stated: “The employment of the below-listed employee will terminate as of 29 March 2020…” This ensured Mrs. Tích’s official termination date was 45 days after the resolution was issued.
In practice, Mrs. Tích stopped reporting to work at Company V after 12 February 2020, but the company continued to pay her salary and other benefits until 29 March 2020. Based on these facts, the appellate court accepted Company V’s argument, concluding that “Company V’s termination of Mrs. Tích’s employment contract… adhered to the advance notice requirements and did not violate legal regulations.”
- Addressing Severance Compensation for Employees Terminated Due to Structural or Technological Changes
Under Article 49 of the 2019 Labor Code and Article 14 of Decree No. 145/2020/NĐ-CP, when terminating employment contracts with employees who have worked for at least 12 months due to structural or technological changes, enterprises are obligated to provide severance compensation (SC) according to the following formula: for each year of an employee’s service (excluding the time already covered by unemployment insurance), one month’s salary under the employment contract is paid, with a minimum payout equivalent to two months’ salary.
The salary used to calculate SC is the average salary of the six consecutive months prior to the employee’s termination under the employment contract. Additionally, the funds for severance compensation and severance allowances are accounted for as part of the employer’s production, business, or operational expenses.
Similar to severance allowances applied in most termination cases, SC is paid from the enterprise’s financial resources. However, the amount specified for SC is double that of standard severance allowances because SC includes severance allowances as part of its calculation. Furthermore, SC incorporates an additional compensation element for employees who are passively forced to leave their jobs.
According to Decision No. 06/2022/LĐ-PT, Mrs. Tích worked continuously at Company V from 5 June 2006 to 29 March 2020, giving her 15 years of service at Company V. Although the decision does not specify how Company V addressed Mrs. Tích’s SC, applying the formula would show that Mrs. Tích accumulated 3 years and 6 months of service before 1 January 2009 (the implementation date of the unemployment insurance system). As such, Mrs. Tích would be entitled to SC equivalent to at least 3.5 months’ salary.
In her lawsuit, Mrs. Tích did not request a review of SC entitlement. Consequently, both the first-instance and appellate courts did not consider this issue. Decision No. 06/2022/LĐ-PT merely stated that Company V adequately addressed the compensation and policies for employees terminated, including Mrs. Tích. This allows for the inference that Company V complied with legal requirements regarding SC.
III. Conclusion
In summary, termination of employment contracts due to structural or technological changes represents a distinct category of contract termination by employers, governed by specific and unique procedures. These procedures differ significantly from the standard unilateral termination rights of employers. This type of termination is frequently applied by enterprises. Therefore, to prevent misinterpretation and misuse of legal provisions—especially cases where employers deliberately misconstrue the term “changes in organizational structure” to arbitrarily terminate employees—laws must provide clearer and more explicit guidelines for this basis.
If you need legal consulting, please Contact Us at NT International Law Firm (ntpartnerlawfirm.com)
You can also download the .docx version here.
“The article’s content refers to the regulations that were applicable at the time of its creation and is intended solely for reference purposes. To obtain accurate information, it is advisable to seek the guidance of a consulting lawyer.”
LEGAL CONSULTING SERVICES
090.252.4567NT INTERNATIONAL LAW FIRM
- Email: info@ntpartnerlawfirm.com – luatsu.toannguyen@gmail.com
- Phone: 090 252 4567
- Address: B23 Nam Long Residential Area, Phu Thuan Ward, District 7, Ho Chi Minh City, Vietnam