Understanding Severance Allowance Rules in Vietnam
Terminating an employee is more than just an administrative decision; it carries legal and financial consequences for businesses in Vietnam. Employers must not only ensure compliance with strict labor laws but also navigate the complexities of severance allowance to avoid disputes and potential penalties. Misunderstanding severance pay, including who qualifies, how it is calculated, and when it applies, can lead to unexpected costs for employers and frustration for employees who believe they are entitled to compensation. Non-compliance with severance regulations can result in legal claims, administrative fines, and reputational damage that may impact future hiring and business operations.
This article provides an in-depth guide to Vietnam’s severance allowance rules, covering eligibility, calculation methods, employer obligations, and key differences between severance and unemployment benefits.
What is Severance Allowance?
Severance allowance is a mandatory financial compensation that employers in Vietnam must pay to eligible employees upon termination. It is designed to provide temporary financial relief for employees who have been let go under lawful circumstances, ensuring they have some stability while seeking new employment.
This compensation applies to employees who meet specific legal conditions, such as working under a valid labor contract for a defined period. It also serves as a safeguard to prevent sudden financial hardship for workers who lose their jobs due to company restructuring, operational changes, or other reasons beyond their control.
Employers must adhere to Vietnamese labor regulations when determining severance eligibility and calculating the correct amount, as failure to comply can result in labor disputes and legal consequences.
The legal framework governing severance allowance in Vietnam includes:
- The Labor Code of Vietnam (Law No. 45/2019/QH14)
- Decree 145/2020/ND-CP, which provides detailed guidelines on labor contract termination
- The Social Insurance Law, which affects severance and unemployment benefit eligibility
Who is Eligible for Severance Allowance?
Employees are entitled to severance pay if they meet the following conditions:
- Have worked for at least 12 consecutive months under a definite-term or indefinite-term labor contract.
- Their employment is terminated due to:
- Mutual agreement between employer and employee
- Company restructuring, merger, or closure
- Expiration of a fixed-term labor contract without renewal
Exclusions: Employees are NOT entitled to severance allowance if:
- They are terminated for disciplinary reasons (e.g., misconduct, theft, or policy violations)
- They voluntarily resign without fulfilling the required notice period
- Their employment period is covered by unemployment insurance (see below for details)
How is Severance Allowance Calculated?
The formula for severance pay in Vietnam is:
Severance Allowance = 0.5 × Average Monthly Salary × Years of Service
Key Points for Calculation:
- Average Monthly Salary: Based on the last 6 months of salary before termination.
- Years of Service: Total working time minus any periods covered by unemployment insurance.
- Rounding Rules: If the total working period includes a fraction of a year, 6 months or more is rounded up to 1 year; less than 6 months is rounded down.
Example Calculation:
- Employee’s last 6-month average salary: VND 12,000,000
- Total working time: 5 years, but 3 years covered by unemployment insurance
- Severance allowance owed:0.5 × 12,000,000 × (5 – 3) = VND 12,000,000
Employers must ensure accurate severance calculations to avoid disputes with former employees.
Employer Responsibilities When Paying Severance Allowance
When terminating an employee, employers in Vietnam must adhere to strict labor laws to ensure compliance and prevent disputes. This includes accurately determining severance eligibility, calculating the correct amount based on tenure and salary history, and ensuring that payments are made on time. Failure to meet these legal obligations can lead to financial penalties, labor disputes, and reputational damage.
- Severance payments must be made within 14 days of the official termination date. Employers who fail to meet this deadline may face administrative fines ranging from VND 1,000,000 to VND 50,000,000, depending on the severity of the violation.
- Severance calculations must be accurate, taking into account the employee’s total length of service and their average salary over the last six months. Miscalculations, such as failing to exclude periods covered by unemployment insurance, can result in legal claims and employer liability.
- Proper termination records must be maintained to justify severance calculations in case of future disputes. Employers should keep records of employment contracts, payroll history, severance calculations, and termination notices to ensure compliance with labor regulations.
By following these obligations, employers can minimize legal risks, maintain good labor relations, and ensure a fair and transparent termination process for all parties involved.
Common Employer Mistakes & Legal Risks
Employers frequently make errors when handling severance payments, often leading to compliance violations and potential legal action.
One of the most common mistakes is incorrect severance calculations. Employers may miscalculate severance by failing to exclude insured periods covered by unemployment insurance or by using an incorrect salary basis. These errors can result in underpayment or overpayment, both of which may lead to disputes with former employees.
Another major risk is delayed severance payments. Under Vietnamese law, severance payments must be made within 14 days of the employee’s termination. Employers who fail to meet this deadline may face legal claims and financial penalties. Delays can also cause unnecessary conflict, leading to labor department investigations or lawsuits.
Unlawful termination is another critical issue. If an employee is terminated without a legally valid reason, the employer may not only be required to pay severance but could also be held liable for additional compensation, reinstatement orders, or damages for wrongful termination. Businesses must ensure that termination decisions comply with Vietnamese labor laws to avoid costly legal consequences.
To mitigate risks, companies should work with experienced labor lawyers to ensure compliance with Vietnam’s severance laws.
How Employers Can Mitigate Legal Risks
To avoid legal disputes and ensure compliance with Vietnamese labor laws, employers must take proactive steps in managing severance payments.
One of the most effective strategies is to ensure that labor contracts clearly define severance policies. Ambiguities in contracts can lead to misinterpretations and potential disputes with employees. Contracts should specify conditions for severance entitlement, payment timelines, and calculation methods to align with labor law requirements.
Maintaining accurate payroll and employment records is another crucial measure. Employers should track employee tenure meticulously, ensuring that severance calculations properly account for years of service and unemployment insurance coverage. Failing to maintain precise records can result in miscalculations, which may expose businesses to fines or lawsuits if employees challenge the severance amount they receive.
Seeking legal guidance from labor law experts can further protect businesses from unintended violations. Employment laws in Vietnam are frequently updated, and consulting experienced legal professionals ensures that severance policies remain compliant. This is particularly important for multinational companies and organizations with complex workforce structures, where adherence to both local and international labor standards is essential.
Conclusion
Severance allowance is a critical legal obligation for employers in Vietnam. Understanding the eligibility criteria, calculation methods, and payment timelines ensures compliance and prevents disputes. Companies must also differentiate severance pay from unemployment benefits to apply the correct policies.
Le & Tran is a top-ranked labor law firm, recommended by AmCham Vietnam, the US Consulate, and Chambers & Partners. Our team specializes in employment law compliance, wrongful termination disputes, and severance policy guidance.
For expert legal support on severance rules and employment termination, contact us at info@letranlaw.com.
