Employers in Vietnam often face challenges when deciding the type of labor contract to use, as the wrong choice can lead to compliance issues, disputes, or unintended commitments. Misunderstanding the legal distinctions between fixed-term and indefinite-term contracts can result in penalties or automatic contract conversions that affect business operations and employee rights.

Two primary types of labor contracts dominate the employment landscape: fixed-term and indefinite-term contracts. Choosing the appropriate type of contract is crucial, as it defines the nature of the employment relationship and impacts both parties’ rights and obligations. This article explores the key differences between fixed-term and indefinite-term labor contracts under Vietnam’s Labor Code, providing practical insights for employers and employees alike.

What Are Fixed-Term Labor Contracts?

Fixed-term labor contracts are agreements with a specified duration, typically not exceeding 36 months, as outlined in Vietnam’s Labor Code. These contracts are often used for roles tied to temporary projects, seasonal employment, or defined-term assignments. Employers can renew a fixed-term contract once. However, upon the second renewal, the contract automatically transitions into an indefinite-term agreement unless specific exceptions apply.

Fixed-term contracts are advantageous for employers needing flexibility in workforce management, particularly for short-term projects or fluctuating business demands. However, employees on fixed-term contracts may face less job security compared to those with indefinite-term agreements.

What Are Indefinite-Term Labor Contracts?

Indefinite-term labor contracts have no specified end date, making them the default agreement for long-term employment relationships. These contracts are ideal for roles that require stability and ongoing commitments, such as core business functions or highly skilled positions.

Under Vietnamese labor law, if a fixed-term contract is renewed more than once, it automatically converts into an indefinite-term contract. This provision ensures that employers do not abuse fixed-term agreements to circumvent employee protections. For employees, indefinite-term contracts offer greater job security, enhanced benefits, and stricter termination protections.

Key Differences Between Fixed-Term and Indefinite-Term Contracts

Duration

Fixed-term contracts have a clear start and end date, typically lasting no more than 36 months. Indefinite-term contracts, on the other hand, have no set expiration date and continue until terminated by either party in compliance with legal procedures.

Termination Procedures

Termination of fixed-term contracts is relatively straightforward, as the agreement concludes naturally at the specified end date. However, early termination requires justification, such as mutual agreement or employee misconduct. For indefinite-term contracts, termination is more complex and requires valid legal grounds, such as redundancy, significant rule violations, or mutual agreement.

Employee Benefits

Employees on indefinite-term contracts generally enjoy better protections and benefits, including enhanced severance pay and job security. Fixed-term employees may have fewer protections, depending on the contract’s terms and the nature of their role.

Employer Obligations

Fixed-term contracts provide employers with flexibility, particularly for roles with temporary or project-based requirements. Indefinite-term contracts, while offering stability, require a higher level of commitment from employers in terms of job security and benefits.

When to Use Fixed-Term vs. Indefinite-Term Contracts

The choice between fixed-term and indefinite-term contracts hinges on the specific needs of the business and the nature of the role being filled. Fixed-term contracts are particularly advantageous for short-term projects, seasonal employment, or roles with a clear end date. These contracts allow employers to manage workforce fluctuations without committing to long-term obligations. For instance, a company ramping up operations for a six-month product launch or fulfilling a temporary increase in customer demand can benefit from the flexibility of fixed-term agreements.

On the other hand, indefinite-term contracts are more suitable for positions that demand stability and continuous contribution to the organization’s long-term goals. These contracts are ideal for hiring employees in core operational roles or leadership positions where a long-term commitment fosters trust and stability. For example, a senior manager tasked with strategic planning and overseeing company growth would typically require an indefinite-term agreement. Employers should carefully evaluate the role’s significance and future requirements to determine the most appropriate contract type.

Legal Considerations and Compliance

Vietnam’s Labor Code (Law No. 45/2019/QH14), which came into effect on January 1, 2021, governs employment contracts, including fixed-term and indefinite-term agreements. This legislation outlines key rules for contract duration, renewals, and compliance to ensure fair working conditions.

According to Article 20 of the Labor Code 2019, a fixed-term contract can only be renewed once. If an employee continues working after the expiration of a second fixed-term contract without signing a new agreement within 30 days, the contract automatically becomes indefinite-term. Employers must draft contracts with clear language to avoid ambiguity and ensure alignment with these provisions.

Practical Advice for Employers

Regularly reviewing labor contracts is essential to ensure compliance with the latest updates to Vietnam’s Labor Code. Employers should take a proactive approach by creating clear and precise terms in all employment agreements, avoiding ambiguity that can lead to misunderstandings or disputes. Clearly defining roles, responsibilities, and compensation helps establish a strong foundation for employer-employee relationships.

Monitoring the renewal timelines of fixed-term contracts is particularly important. Employers must ensure timely renewals or transitions to indefinite-term agreements to prevent unintended violations of labor laws. HR teams should be well-versed in tracking contract durations and understanding legal requirements for renewals and terminations.

Investing in regular training for HR staff on labor law compliance is another critical step. This ensures that the team remains informed about updates to regulations and best practices for managing employment contracts. Engaging legal professionals to review contracts and provide tailored advice can mitigate risks, especially in complex cases such as contract disputes or handling transitions between fixed-term and indefinite-term agreements.

Finally, fostering open communication with employees about contract terms and their rights under Vietnamese labor law can enhance trust and transparency, ultimately contributing to a more harmonious workplace. By combining legal diligence with clear communication, employers can build compliant and sustainable employment practices.

Conclusion

Choosing the right type of labor contract is more than a legal formality, it’s a strategic decision that shapes your workforce and impacts your business’s long-term success. By understanding Vietnam’s labor laws and carefully tailoring contracts to meet both legal requirements and operational needs, employers can create a compliant and productive workplace.

Le & Tran’s expertise in employment law ensures that your business receives precise, actionable guidance for drafting or managing labor contracts. Whether you’re navigating transitions between contract types or resolving disputes, our team is here to help you make confident, informed decisions. For professional support tailored to your business, contact us at info@letranlaw.com.