INSIGHTS

03 REASONS FOR LOSING A UNILATERAL TERMINATION OF LABOR CONTRACT LAWSUIT DUE TO RESTRUCTURING

June 10, 2019 Labor & Employment

Lay-offs due to restructuring are very common in today’s business climate. However, this can also result in many lawsuits filed by the employees against the company by claiming that the restructuring was unlawful and the company had illegally unilaterally terminated the labor contracts. Here are 03 mistakes that companies often make during the restructuring process which will often result in losing a lawsuit at Court. Other issues associated with restructuring can be found in LeTran’s Insight HERE.

1Failure to prove “having actual changes to the organizational structure”

The labor law currently prescribes three cases considered as “having changes to the organizational structure and technology” (Article 13.1 of Decree No.05/2015/ND-CP), including:

Changes to the organizational structure or reorganization of workforce;

Changes to products or product structure;

Changes to processes, technologies, machines or equipment used for production and business, which are related to the business lines of employers.

However, there is a lack of specific guidance on the criteria and methods that would verify qualifying cases. Further, experience in actual cases has shown that justifying termination of labor contracts due to “having changes to organizational structure” is not a simple process.

A recent case illustrating this difficulty was Appellate Judgment No.14/2017/LD-PT dated September 25, 2017 of the People’s Court of Binh Duong Province relating to a dispute on unilateral termination of a labor contract between Ms. Le Thi C (the employee – plaintiff) and Company N (the employer – defendant). Company N argued that “the Company terminated the labor contract with Ms. C due to its difficulties in production and business which caused the Company to downsize its business and lay-off workers”. To verify these claimed changes to organizational structure resulting in lays-offs, Ms. Le Thi C requested the People’s Court of Binh Duong Province to collect the following evidence from relevant authorities: (i) a list of employees of Company N covered by social insurance and changes to such lists (increase/decrease in number of listed employees) from the Social Insurance Authority of Binh Duong Province, (ii) the quantity of goods exported by Company N into other countries, before and after the point in time Company N terminated the labor contract with Ms. Le Thi C, from the Customs Department of Binh Duong Province and (iii) verification of the financial reports of Company N with the Tax Department of Binh Duong Province. As requested, the People’s Court of Binh Duong Province collected evidence from the relevant authorities in order to determine whether the reason for Company N to terminate the labor contract with Ms. Le Thi C was actually due to restructuring. In the end, the People’s Court of Binh Duong Province ruled as follows:

“[…] Considering the appeal requirements of the plaintiff – Ms. Le Thi C:

For the appeal request by the representative of the plaintiff that requested the Appeals Court to collect evidence, which is the list of employees of Company N covered by social insurance and changes to such lists (increase/decrease in number of listed employees), from the Social Insurance Authority of Binh Duong Province upon the supposition that the first-instance Court did not fully collect evidence of the case: As requested, the Appeals Court requested in writing the Social Insurance Authority of Binh Duong Province to provide information of decrease/increase in number of employees of Company N covered by social insurance within the period from March 2015 to March 2016. The Social Insurance Authority of Binh Duong Province provided such information in its responding Official Letter No.3968/BHXH-TTKT dated September 13, 2017 as follows: From March 2015 to July 2015, the number of employees of Company N was stable i.e. having 173 – 176 employees; in August 2015, the number of employees was 158 persons i.e. a decrease of 15 employees; in September 2015, the number of employees decreased by 03 employees; in October 2015, the number of employees stood at 139 persons i.e. continuing its decrease by 16 employees; from November 2015 to January 2016, the number of employees remained at 139 persons, and then in February and March 2016, the number of employees continually decreased by 4 and 3 persons respectively. As such, from August 2015 to March 2016, the number of employees of Company N decreased from 173 employees to 132 employees, and no increase was recorded.

For the request of the plaintiff’s representative regarding collecting evidence from the Customs Department of Binh Duong Province to verify the quantity of the goods exported by the defendant to foreign countries before and after the point in time the defendant terminated the labor contract with the plaintiff: The Court accordingly issued Decision No.03/QD-CCTLCC dated September 07, 2017 to the Customs Department of Binh Duong Province to request documents and evidence which record the number of containers of goods exported by Company N from April 2015 to March 2016. The Customs Department of Binh Duong Province responded to the Court by Official Letter No.2264/HQBD-GCQL dated September 14, 2017 together with a statistical report as follows: From April 2015 to July 2015, the defendant exported 03 containers of goods per month; from August 2015 to March 2016, the defendant exported 02 containers of goods per month (except for December 2015 in which the defendant exported 03 containers of goods because this was the last month of the year).

In addition, the plaintiff’s representative also requested that the Court collect evidence from the Tax Department of Binh Duong Province to verify the financial reports of Company N. However, the defendant’s representative has stated that, from 2015 until the hearing, the Tax Department of Binh Duong Province had not conducted taxation finalization at the Company. On the other hand, the evidence collected from the Customs Department and the Social Insurance Authority of Binh Duong Province are sufficient to conclude that from August 2015 to March or April 2016, the defendant downsized its production, reduced the quantity of exported goods and proceeded with labor restructuring. Therefore, it is not necessary to collect further evidence from the Tax Department of Binh Duong Province at the request of the plaintiff’s representative as the Appeals Court has sufficient grounds to conclude that Company N downsized its production and proceeded with labor restructuring; there is no indication that the company terminated labor contracts with older employees in order to recruit new ones.”

(Click HERE to see full contents of Appellate Judgment No.14/2017/LD-PT)

The above case shows that in order to use “restructuring” as the cause for labor contract termination, enterprises must prove both the “necessity” and “actuality” of the restructuring.

Company N needs to carry out restructuring and lay-off of workers on the grounds that “the Company faces difficulties in production and business, which results in the Company downsizing its business and laying-off workers”. The “difficulties in production and business” are evidenced by the decline in the quantity of goods exported by Company N to foreign countries according to the information provided by the Customs Department of Binh Duong Province.

Company N did actually decrease its number of employees from 173 persons to 132 persons during the period from August 2015 to March 2016, and did not recruit any new ones.

It should be noted that some enterprises take advantage of “restructuring”, using it as the sole reason to terminate labor contracts with employees. For example, an enterprise dissolves one of its functional departments to lay off the employees of such department. Afterwards, the enterprise establishes a new department under a new name with same function as the dissolved one. In such cases, it is not considered valid “restructuring” under the law. A case in 2018 illustrates a reorganization of a company’s workforce (although not an acceptable restructuring, which will be discussed later). Referring to the judgment of the People’s Court of Ca Mau Province in its Appellate Judgment No.15/2018/LD-PT dated July 05, 2018 relating to a dispute on unilateral termination of the labor contract between Mr. Nguyen Thanh S (the employee – plaintiff) and Company C (the employer – defendant), the Court stated: “[…] Concerning changes to organizational structure and reorganization of the workforce of the Company: The evidence showed that the Company did reorganize its workforce because: before restructuring, the Company had 267 employees in total; after restructuring, the Company operated effectively with 240 employees; the Company did neither establish any new departments nor recruit any new employees, it only changed the names of existing departments and reorganized the workforce to meet its situation and operations. This proved that the Company had made actual changes to its organizational structure and had actually reorganized its workforce.” (Click HERE to see full contents of Appellate Judgment No.15/2018/LD-PT)

2Not formally consulting with the Executive Committee of the Grassroots Trade Union and instead only carrying out the consultation informally

Returning to above-mentioned Judgment No.15/2018/LD-PT of the People’s Court of Ca Mau Province, although Company C successfully proved that it had actual changes to its organizational structure and workforce organization, Company C lost the lawsuit because Company C did not hold a meeting to consult with the Executive Committee of the Grassroots Trade Union during the creation of the labor utilization plan. Instead, the Company did it informally, i.e: giving documents to the President of the Grassroots Trade Union for her signature and stamp without actually holding a meeting to consult with the members of the Executive Committee of the Grassroots Trade Union to obtain their consent to the labor utilization plan (this fact was confirmed by every member of the Executive Committee of the Grassroots Trade Union and illustrated by the meeting minutes between the members of the Executive Committee of the Grassroots Trade Union and the People’s Court of Ca Mau Province). This resulted in the signed and stamped documents by the President of the Grassroots Trade Union becoming invalid because it did not represent the opinions of the Executive Committee of the Grassroots Trade Union who protect the involved employees’ rights and interests. Specifically, the People’s Court of Ca Mau Province stated that:

“[…] At the time of creating the restructuring plan (on May 09, 2016), there was no list of the expected employees to be laid-off. However, on May 16, 2016, the Members’ Council, the Board of Management and the Head of the Organizational Department met the managers and heads of other departments and units to finalize the list of employees of every department and unit for the purpose of creating a labor utilization plan for restructuring (Evidence No.46) without the participation of the collective labor representative organization. Therefore, when creating the restructuring plan, the Company strictly followed the correct process i.e. holding a meeting with the Executive Committee of the Grassroots Trade Union on May 09, 2016 to approve the restructuring plan. However, when creating the labor utilization plan (which is the more important step), there was no document proving that the Company met and consulted with the collective labor representative organization at the grassroots level.

In fact, after finishing the meeting on May 16, 2016 (Evidence No.46), the Members’ Council approved Resolution No.06 on May 17, 2019. During that time, there was no document recording any consultation between the Company and the Executive Committee of the Grassroots Trade Union, and, therefore, was not compliant with Resolution No.05 issued by the Company and Article 44.3, Article 46.2 of the 2012 Labor Code.

Although the labor utilization plan and the list of laid-off employees had the signature of Ms. Tham (the President of the Grassroots Trade Union) and stamp of the Executive Committee of the Grassroots Trade Union, there were no meeting minutes recording that the Executive Committee of the Grassroots Trade Union took part in making the labor utilization plan. As per the meeting minutes dated May 24, 2018 between the People’s Court of Ca Mau Province and the members of the Executive Committee of the Grassroots Trade Union of the Company, every member of the Executive Committee of the Grassroots Trade Union confirmed that they were not invited by the Company to participate in creating the labor utilization plan.

In the hearing, the Company represented that after finishing the meeting with managers, heads of departments and units on May 16, 2016, the Company gave the list of employees to be laid-off to Ms. Tham to get her signature. The Company further argued that Ms. Tham having signed said list proved that the Company consulted with the Executive Committee of the Grassroots Trade Union. However, on the contrary, it shows that the management board of the Company decided everything by themselves, and Ms. Tham’s signature was a formality only and did not represent the opinion of the Executive Committee of the Grassroots Trade Union who protect the legitimate rights of the involved employees. It is the Company’s responsibility to cooperate with the Executive Committee of the Grassroots Trade Union, but the Company failed to do so. This act violated Article 192.5 of the Labor Code. Therefore, the Company could not lay off the employees without the consulting with the collective labor representative organization at the grassroots level.”

This problem is not confined only to Company C but it is widespread practice for several other enterprises to informally consult with the Executive Committee of the Grassroots Trade Union. This is a result of the dependent and inefficient operation of the Grassroots Trade Union as well as the subjectivity of the enterprises in application and compliance with the statutory procedures. The mistake made by Company C converted the employment termination during restructuring of Mr. Nguyen Thanh S and other employees to an illegal unilateral termination. Mr. Nguyen Thanh S and other laid-off employees filed lawsuits against Company C, and Company C was forced by the People’s Court of Ca Mau Province to reinstate such employees and provide significant compensation under the enforceable judgements (click HERE to see more relevant judgements).

3Failure to notify the State labor management authority at the provincial level of laying-off numerous employees

Under Article 44.3 of the 2012 Labor Code, if restructuring results in laying-off numerous employees, the employer must notify the State labor management authority at the provincial level of such lay-offs at least 30 days in advance. This notification obligation is ambiguous and leads to legal disputes.

Returning to the above-mentioned case between Ms. Le Thi C and Company N adjudicated by the People’s Court of Binh Duong Province, when laying off Ms. Le Thi C, Company N sent an official letter to the Department of Labor – Invalids and Social Affairs of Binh Duong Province to request guidance on lay-off procedure and relevant regulations. Ms. Le Thi C considered this letter as a consultation document, not a notification as required by law, so she claimed that Company N did not fulfil its notification obligation towards the State labor management authority at the provincial level as provided in Article 44.3 of the 2012 Labor Code. However, after contemplating the contents of the letter sent by Company N to the Department of Labor – War Invalids and Social Affairs of Binh Duong Province, the People’s Court of Binh Duong Province concluded that Company N did fulfil its notification obligation as required by law. Specifically:

“[…] Whereas, the contents of Official Letter No.01.15/CV-LD dated July 21, 2015 and Decision on labor reorganization dated July 21, 2015 sent by the defendant to the Department of Labor – Invalids and Social Affairs of Binh Duong Province on July 22, 2015 stated that: “…now, by this letter, Company N presents the lay-offs in Company N due to downsizing its production and business to the Department of Labor – Invalids and Social Affairs of Binh Duong Province; the expected number of laid-off employees are as follows…..the above are the expected number of laid-off employees to meet the Company’s current and upcoming production scale, and the Company looks forward to the Esteemed Body’s consideration and specific guidance on necessary procedures and regulations regarding our lay-offs, at the earliest date”. Thus, the contents of the letter provided the provincial labor management authority with the reasons, the expected number of laid-off employees as well as concurrently presenting a request for guidance on procedures and regulations related to the lay-offs. The request for guidance on relevant procedures does not negate the contents of the labor lay-off notification to the Department of Labor – Invalids and Social Affairs. In addition, on July 21, 2015, Circular No.47/2015/TT-BLDTBXH dated November 16, 2015 of the Ministry of Labor – Invalids and Social Affairs guiding implementation of a number of regulations on labor contracts, labor discipline and material responsibilities of Decree No.05/2015/ND-CP dated January 12, 2015 of the Government had not been issued yet. So there were no specific guidelines on the compulsory contents of a notice to the State labor management authority at the provincial level when making changes to organizational structure and technology similar to the ones enumerated by Article 7 of the aforesaid Circular.”

As such, the grounds for the People’s Court of Binh Duong Province in recognizing the letter of Company N as proper notice in compliance with Article 44.3 of the 2012 Labor Code were: (1) at the time of the incident, there were no specific regulations on the compulsory contents of a notice sent to the Department of Labor – Invalids and Social Affairs of Binh Duong, and (2) the contents of the letter by Company N did include some basic information about the reasons and the expected number of laid-off employees that were sufficient to place the Department of Labor – Invalids and Social Affairs of Binh Duong Province on notice of lay-offs due to restructuring. This precedent shows that there is still a possibility that a restructuring process will be considered illegal and an enterprise will lose a lawsuit because of the incomplete and inappropriate contents of a notice to the State labor management authority at the provincial level. Currently, the compulsory contents of such notice are stipulated in Article 1.4 of Decree No.148/2018/ND-CP, including: (i) name and address of the employer and its legal representative; (ii) the total number of employees, the number of laid-off employees; (iii) the reason for the lay-offs; (iv) the point in time of the lay-offs; and (v) the amount of job-loss allowance. In sum, every company considering restructuring should be aware of and comply with this regulation.