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    Decisive Role of Work Permit in Resolving Labor Disputes

    One of the requirements for foreigners to work in Vietnam is to be granted a work permit by the competent Vietnamese authorities (Article 151.1.(d) of the 2019 Labor Code). However, in practice, many companies do not comply with this regulation and sign labor contracts with foreign employees without valid work permits. In the event of a dispute, the issues become: “Is the labor contract with a foreign employee without a work permit valid?” and “What role does a work permit play in a labor dispute with foreign employees?”

    From both legal and practical perspectives, a work permit is the basis for determining not only the validity of a labor contract and its duration but also the related compensation which a company might incur when a dispute arises.

    A labor contract becomes invalid when the foreign employee does not have a valid work permit, and results in significant legal consequences

    Grounds to determine a labor contract is invalid

    Article 49 of the 2019 Labor Code (formerly Article 50 of the 2012 Labor Code) specifies cases where labor contracts become invalid (e.g. the entire contents of the labor contract are illegal; the signer is unauthorized; the job as agreed in the labor contract is prohibited by law; etc.). There is no regulation which specifically states that the labor contract becomes invalid if it is signed with a foreign employee having no work permit, and if this is the case, how it would be categorized under Article 49 of the 2019 Labor Code.

    The Court System of Vietnam has previously issued rulings regarding this subject. For instance, Cassation Decision 12/2006/LD-GDT dated July 04th, 2006 of the Council of Judges of the Supreme People’s Court is a typical precedent. In this case, the Court determined that a labor contract was invalid because the foreign employee did not have a work permit. Specifically, Mr. Tae Man Song (a Korean) was recruited for a shipping captain position at Hyundai Vinashin Company from March 11th, 1999 to March 10th, 2005, signing several one-year labor contracts. However, Mr. Tae Man Song only had a work permit which was valid between March 11th, 2001 and March 10th, 2002. When a dispute arose, Mr. Tae Man Song was performing his 6th labor contract for the working period of March 11th, 2004 to March 10th, 2005. All three courts (the first instance, appellate and cassation courts) unanimously agreed that this 6th labor contract was entirely invalid due to the violation of the work permit regulations. The Court referred to Article 166.4 of the 1994 Labor Code (amended in 2002): “In the adjudicating process, if the People’s Courts detect that labor contracts contravene collective agreements and/or labor legislation; collective agreements contravene the labor legislation, they shall declare such labor contracts or collective agreements partially or wholly invalid.” It can deduce that a labor contract signed with a foreign employee having no work permit becomes invalid because of “contravention of the labor legislation”.

    Judgment 20/2019/LD-ST dated October 22, 2019 of the People’s Court of Go Vap District, Ho Chi Minh City also ruled a labor contract signed with a foreigner having no work permit was invalid. In its judgment, the Court specifically based on Article 50.1.(a) of the 2012 Labor Code: “The whole contents of the labor contract are illegal” (currently Article 49.1.(a) of the 2019 Labor Code has the same contents). Besides, the Court referred to Articles 117.1.(c) and 123 of the 2015 Civil Code regarding civil transactions which are invalid due to violation of prohibitory provisions of law or contravention of social morality.

    In conclusion, the Courts’ rulings generally determine that the labor contracts signed with foreigners having no work permits are invalid in whole because of its contravention of law.

    Legal consequences resulted from a wholly invalid labor contract

    In theory, when a contract is wholly invalid, such contract does not create, change or terminate the rights and obligations of the parties from the time of signing. Further, the parties shall revert to the status quo before signing and return to each other what they have received. However, as the nature of a labor relationship is the “trading of labor power (labor capacity)”, it is difficult or even impossible to apply such theories to the case of a wholly invalid labor contract (i.e. it is difficult or impossible to “restore the status quo before signing”).

    Returning to Mr. Tae Man Song’s case mentioned above, the Council of Judges of the Supreme People’s Court stated that: “[…] Because the labor contract was invalid, […] Mr. Tae Man Song was entitled to benefits as agreed in the labor contract only until the day he quit his job, not until the expiry date of the labor contract.

    Also, in the case settled by the People’s Court of Go Vap District, the foreign employee neither came to work nor performed any commitments nor participated in any required activities as agreed in his signed labor contract. The Court consequently forced him to refund all the received salaries to his employer.

    Thus, when a labor contract was declared invalid due to the lack of a work permit, the employer is still obligated to pay for the work the employee performed. If there is any claim concerning the illegal unilateral termination of the labor contract, such claim will not be accepted and the said dispute will not be settled under the principles as illegal unilateral termination of the labor contract.

    Article 11 of Decree 145/2020/ND-CP stipulates the legal consequences of invalid labor contracts. Accordingly, it prioritizes allowing both parties to enter into a new labor contract in accordance with the labor law (after the foreign employee is granted a valid work permit). In case of failure to enter into a new labor contract, at least the benefits of the employee are protected until the labor contract is determined invalid. Additionally, the employer shall pay the employee an amount of money as agreed upon by both parties, but for each actual working year under the invalid labor contract the employee shall be entitled to an amount equal to at least 01 month’s region-based minimum wage. The severance allowance regime for labor contracts (if any) signed before the invalid labor contract shall be handled under the law.

    Determining the term of the labor contract and setting a limit on employer’s liability in case of illegal unilateral termination of the labor contract

    Term of labor contract with a foreign employee having a work permit

    Before January 01, 2021 many companies usually misunderstand regulations of transformation of the term of the labor contract. Specifically, Article 22.2 of the 2012 Labor Code stipulates: Upon the expiration of the definite-term labor contract, if the employee continues working, within 30 days from the expiry date of the labor contract, the parties must sign a new labor contract. Otherwise, according to this law, the said definite-term labor contract will become an indefinite-term one. Alternatively, if a new labor contract is signed, this new labor contract can be a definite-term one, which is applied for a set time period. If the employee continues working after the second definite-term labor contract expires, both parties must sign an indefinite-term labor contract. As a result, there are many cases in which companies and the foreign employees may sign a labor contract believing it contains an indefinite-term.

    However, the regulations for transforming the term of a labor contract aforesaid cannot be applied to foreign employees as signing an indefinite-term labor contract with foreign employees is illegal. This is because the term of the labor contract with the foreign employee is always limited by the term of the work permit. Articles 20.2.(c) and 151.2 of the 2019 Labor Code (taking effect from January 01, 2021) resolves this issue, specifically: “The term of a labor contract for foreign citizens working in Vietnam must not exceed the term of the work permit. When employing foreign citizens working in Vietnam, the two parties may agree to enter into several definite-term labor contracts.

    Limit on employer’s liability in case of illegal unilateral termination of the labor contract

    Under any circumstance, the labor contract with the foreign employees is always a definite-term one. Determining the correct term of the labor contract will affect the compensation incurred by the employer in case of any illegal unilateral termination. For example, the compensation for violation of the advance-notice obligation is calculated up to 30 days instead of 45 days (except for employees working in special sectors, occupations and jobs provided at Article 7 1 of Decree 145/2020/ND-CP), and compensation for the period during which the foreign employee is not allowed to work is calculated as not to exceed the term of the labor contract.

    A precedent for this result can be found in Judgment 640/2018/LD-PT dated June 28th, 2018 of the People’s Court of Ho Chi Minh City. Mr. H (a foreign employee) signed a 02-year labor contract (from May 15th, 2013 to July 31st, 2015) with School Q. After the definite-term labor contract expired, both parties did not sign any new labor contract but Mr. H continued working until the end of March 30th, 2016 (the work permit was renewed with a term up until October 21st, 2017). On March 31st, 2016, School Q sent a 30-day advance notice of terminating the labor contract with Mr. H. Mr. H claimed that School Q illegally unilaterally terminated the labor contract with him. Additionally, by arguing that his labor contract became an indefinite-term one, he requested School Q to provide compensation for the following amounts: an amount equivalent to 15 days’ salary because School Q violated the 45-day advance notice obligation, his payment for untaken annual leave and his salary for the period during which he was not allowed to work up until the date of the appellate hearing, which was on June 28th, 2018.

    However, the People’s Court of Ho Chi Minh City determined that the term of Mr. H’s labor contract can only be valid in accordance with the term of his work permit: “[…]the term of the labor contract signed with foreign employees working in Vietnam is 02 years and the parties must sign a new labor contract if they still have employment needs when the work permit expires”. The Court did not accept the argument that Mr. H’s labor contract was an indefinite-term one. Therefore, the Court only required School Q to compensate Mr. H amounts, including his salary and payment for untaken annual leaves, up until the expiry date of his work permit i.e. October 21st, 2017 instead of June 28th, 2018 which was the date of the appellate hearing. The Court further rejected the claim by Mr. H for compensation equal to 15 days’ salary for a violation of the period of sending advance notice, because Mr. H’s labor contract was defined as definite-term which only required a 30-day advance notice.

    Conclusion

    The work permit plays a key role in resolving labor disputes with foreign employees since it not only is the basis for determining the validity of labor relations but also sets limits to the liability incurred by employers in case of disputes.

    Additionally, if an employer employs a foreign employee without a valid work permit, both the employer and foreign employee shall be subjected to following administrative sanctions:

    • The employer can be fined from VND 60 mil to VND 150 mil.
    • The foreign employee can be fined from VND 15 mil to VND 25 mil. He/she can also be expelled from Vietnam, which makes him/her unable to re-enter Vietnam for the next 03 years.

    1. At least 120 days for labor contracts with a term of 12 months or more; at least a quarter of the term of the labor contract for labor contracts with a term of less than 12 months.