TERMINATION OF EMPLOYMENT CONTRACTS DUE TO CHANGES IN ORGANIZATIONAL STRUCTURE OR WORKFORCE REORGANIZATION

Organizational restructuring and workforce reorganization are inevitable requirements in the operation and development of enterprises, particularly in the context of a constantly changing market that compels enterprises to adjust their management models and reorganize their workforce in order to maintain operational efficiency. Vietnamese labor law recognizes the employer’s right to dismiss employees in such circumstances as a mechanism to balance the employer’s freedom to conduct business with employees’ right to employment protection. However, the current legal framework still contains a number of legal gaps, giving rise to potential legal risks for both parties to the employment relationship. This article analyzes the current legal framework, identifies several common legal issues, and provides recommendations to minimize legal risks in practice.

Legal framework governing the termination of employment contracts due to organizational restructuring and workforce reorganization

Article 34 of the 2019 Labor Code provides for the circumstances in which an employment contract may be terminated, including the case where an employer dismisses an employee pursuant to Articles 42 and 43 of the Labor Code. Specifically, Clause 1 of Article 42 recognizes the employer’s right to dismiss employees in the event of changes in organizational structure or technology, including the ground of “organizational restructuring and workforce reorganization.”

From a legal perspective, dismissing employees due to organizational restructuring and workforce reorganization is not a case of unilateral termination of an employment contract by the employer. Article 34 of the 2019 Labor Code also distinguishes this circumstance from unilateral termination of an employment contract. While unilateral termination arises from the intention of one party, dismissal under Article 42 originates from the enterprise’s objective business and operational needs and may affect multiple employees simultaneously.

Accordingly, the law prescribes a more stringent sequence of procedures to safeguard the lawful rights and interests of employees, as follows:

Step 1: The enterprise issues a decision on organizational restructuring and workforce reorganization, clearly specifying the necessity for, and reasons underlying, such organizational restructuring and workforce reorganization.

Step 2: Where organizational restructuring and workforce reorganization affect the employment of multiple employees, the employer must prepare and implement a labor utilization plan containing the following principal contents:

• The number and list of employees who will continue to be employed, employees who will receive retraining in order to continue working, and employees who will be transferred to part-time positions;
• The number and list of employees who will retire;
• The number and list of employees whose employment contracts will be terminated;
• The rights and obligations of the employer, employees, and relevant parties in implementing the labor utilization plan;
• Measures and financial resources to ensure the implementation of the labor utilization plan.

When preparing the labor utilization plan, the employer must consult with the employee representative organization at the grassroots level, where such an organization exists. After the plan has been approved, the employer must publicly notify employees of the labor utilization plan within 15 days.

Note: Where new positions become available, priority must be given to retraining employees so that they may continue to be employed

Step 3: After the labor utilization plan has been approved, the employer shall consult with the employee representative organization at the grassroots level, where such an organization exists and the affected employees are its members. At least 30 days prior to the termination of the employment contracts, the employer must notify both the provincial-level People’s Committee and the employees of the intended termination.

Step 4: Following such notification, the employer issues a decision terminating the employment contracts, clearly stating that the reason for termination is organizational restructuring and workforce reorganization.

Step 5: The enterprise settles all statutory entitlements and benefits for the employees.

• Within 14 working days from the date of termination of the employment contract, both parties are responsible for fully settling all amounts relating to their respective rights and interests. This period may be extended but must not exceed 30 days.
• Where the employer is unable to provide alternative employment and therefore must dismiss employees, the employer shall pay a redundancy allowance, provided that the employee has worked regularly for the employer for at least 12 months.
• The employer is responsible for:

– Completing the procedures for certifying the employee’s social insurance contribution period and unemployment insurance contribution period, and returning such documents together with any other original documents retained by the employer;

– Providing copies of documents relating to the employee’s employment history at the employee’s request. All costs of copying and delivering such documents shall be borne by the employer.

Legal Issues in the Legal Framework and Practical Application of the Termination of Employment Contracts due to Organizational Restructuring and Workforce Reorganization

Although the conditions and procedures governing the termination of employment contracts due to organizational restructuring and workforce reorganization have been specifically prescribed by law, the current legal framework still contains a number of legal gaps, resulting in inconsistent interpretations and applications among the parties to the employment relationship as well as dispute resolution authorities. The most notable issues include the following:

Absence of Clear Definitions of “Organizational Restructuring” and “Workforce Reorganization“

The current legal framework does not provide official definitions of the terms “organizational restructuring“ and “workforce reorganization,” resulting in varying interpretations by the parties to the employment relationship as well as by dispute resolution authorities. Previously, Article 11 of Government Decree No. 39/2003/ND-CP dated 18 April 2003, detailing and guiding the implementation of a number of provisions of the Labor Code concerning employment, defined “organizational restructuring“ as the merger or dissolution of certain divisions within an entity. However, this Decree has expired, and as of the present time, no legislation governing labor or employment has retained or replaced this definition. Meanwhile, the concept of “workforce reorganization“ has never been specifically explained or guided under any legal normative document.

The absence of statutory definitions of “organizational restructuring“ and “workforce reorganization“ means that the applicability of Article 42 of the 2019 Labor Code is largely determined based on the interpretation adopted by the competent dispute resolution authority in each individual case. In practice, when resolving disputes concerning the ground of “organizational restructuring,” courts generally examine the employer’s documentary evidence—such as decisions on the merger or dissolution of departments or internal restructuring—to determine whether the termination falls within the circumstances prescribed under Article 42 of the Labor Code. With respect to “workforce reorganization,” courts usually assess the lawfulness of the dismissal based on whether the employer can demonstrate that the workforce rearrangement genuinely resulted in a reduced demand for labor, rather than merely changing the title or formal organizational structure of the enterprise.

Having regard to the legislative purpose of Article 42 of the 2019 Labor Code, “organizational restructuring and workforce reorganization“ may be understood as the employer’s adjustment and reorganization of its internal organizational structure and workforce in order to meet management and business operation requirements, which may directly affect the employment of a certain group of employees.

The Procedure for Terminating Employment Contracts Is Not Sufficiently Rigorous

The preparation of a labor utilization plan is, in principle, determined by the employer based on its organizational, production, and business needs. Under the current legal framework, the employer is only required to consult with the employee representative organization at the grassroots level and provide prior notice to the provincial-level People’s Committee at least 30 days in advance. The employer is not required to obtain approval or authorization from any competent authority or organization before implementing the dismissal. Accordingly, these procedures are primarily procedural notification requirements and do not establish any mechanism for reviewing or supervising the employer’s decision before employees are dismissed. In many cases, although the employer has fully complied with all statutory procedures, the workforce reduction is not subject to any substantive review by a competent authority before the employer proceeds with the termination of the employment contracts.

This also demonstrates that the current legal framework has not established a sufficiently effective supervisory mechanism to safeguard the lawful rights and interests of employees, particularly vulnerable groups of employees, such as pregnant female employees, employees on maternity leave or raising children under 12 months of age, and employees who are receiving medical treatment due to illness, occupational accidents, or occupational diseases.

Absence of Clear Legal Consequences Where the Employer Unlawfully Dismisses Employees

From a legal perspective, dismissal of employees under Article 42 of the 2019 Labor Code does not constitute a case of unilateral termination of an employment contract by the employer under Article 36, but rather an independent ground for termination arising from the employer’s need to reorganize its business operations. Accordingly, the application of Article 41 of the Labor Code to determine the legal consequences where an employer unlawfully dismisses employees under Article 42 is not entirely appropriate from a legal standpoint, as Article 41 governs only cases of unlawful unilateral termination of employment contracts.
Nevertheless, in practice, in order to safeguard the lawful rights and interests of employees, dispute resolution authorities often apply Article 41 by analogy to require employers to compensate employees or reinstate them to their former positions. However, this approach has primarily developed through judicial and practical application rather than being expressly provided for under the Labor Code.
As a result, both employers and employees face difficulties in identifying the appropriate legal basis to be applied when disputes arise.

No Clear Criteria for Determining Whether the Obligation to “Give Priority to Retraining” Has Been Fully Fulfilled

Clause 1 of Article 42 of the 2019 Labor Code provides that, where changes in organizational structure or technology result in the availability of new positions, the employer must give priority to retraining employees so that they may continue to be employed.
However, the current legal framework merely imposes the obligation to “give priority to retraining” without specifying the content, scope, or extent of such obligation.
Specifically, the law does not clarify issues such as the duration for which retraining must be provided; the standards that such retraining must satisfy; the degree of similarity required between the new position and the employee’s previous position; whether the employee is obliged to accept the new position. Similarly, where an employee refuses the position offered by the employer, it remains unclear whether the employer is entitled to immediately dismiss the employee or is required to continue offering alternative positions.
The absence of these criteria means that the determination of whether an employer has fulfilled its obligation to give priority to retraining is largely left to the discretion of the competent dispute resolution authority on a case-by-case basis.

Notes and Recommendations for employers and employees

Recommendations for Employers

• Before implementing any organizational restructuring or workforce reorganization (including the dissolution, merger, or internal restructuring of departments) that may result in employee dismissals, employers should prepare comprehensive documentation evidencing the necessity of the restructuring. The purpose is to demonstrate that the restructuring arises from objective business needs rather than serving as a pretext to legitimize the termination of the employment contract of a particular employee. Such documentation may include business performance reports, organizational restructuring plans, and resolutions or decisions of the enterprise’s competent internal management bodies.
• Employers should strictly comply with all statutory procedures governing the termination of employment contracts, even where the dismissal affects only a single employee. They should also retain complete records and supporting documents evidencing compliance with all legal obligations, including acknowledgements or confirmations from competent state authorities where applicable.
• Before deciding to dismiss affected employees, employers should give priority to offering suitable alternative positions and providing retraining to enable employees to continue working. This approach not only minimizes the risk of disputes but also serves as evidence of the employer’s good faith should a dispute subsequently arise.
• Employers should exercise particular caution when dismissing vulnerable employees, such as pregnant employees or employees undergoing treatment for occupational diseases, in order to minimize the risk of being regarded by dispute resolution authorities as acting in bad faith or failing to adequately protect employees’ legitimate interests.

Recommendations for Employees:

• Upon receiving a notice of termination of the employment contract on the ground of organizational restructuring or workforce reorganization, employees are entitled to request that the employer provide the legal grounds and supporting evidence demonstrating that the restructuring is genuine and not merely a formal measure intended to circumvent the employer’s legal obligations relating to the termination of employment contracts.
• Employees should proactively verify whether the employer has fully complied with all statutory procedures and possesses documentary evidence demonstrating such compliance. These documents constitute important legal grounds for employees to exercise their rights to lodge complaints or initiate legal proceedings seeking compensation where there are reasonable grounds to believe that their lawful rights and interests have been infringed.
• Where the employer proposes retraining or offers an alternative position, employees should request that the employer set out the details of the retraining program, the proposed position, salary, and working conditions in writing. Such documentation will constitute important evidence in determining whether the employer has fully discharged its statutory obligation to give priority to retraining in the event of a subsequent dispute.

Employee’s Guide to Unilateral Termination of Labor Contracts↗

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