Unilateral Termination of Labor Contracts Due to the Covid-19 Outbreak

The Corona virus (Covid-19) has caused widespread damage to the global economy. Vietnam is no exception. As enterprises are facing numerous difficulties that are directly attributable to Covid-19.

According to information from the Business Registration Management Office, the number of enterprises that temporarily suspended operations increased in 2020 & 2021. In addition, there were many other enterprises that did not formally announce a suspension of business but, in practice, stopped their production and operations and allowed their employees to cease or temporarily leave work.

Settlement of liability with the employee

The 2012 Labor Code as well as the 2019 Labor Code (which is valid from January 01, 2021) provide enterprises with some less costly options that do not involve unilateral termination of the labor contract. Some examples include granting unpaid leave (if the employee is absent with permission without salary), reaching mutual agreements with the employees on the temporary postponement of contract performance, or a mutual agreement to voluntary terminate the labor contract.

However, if employees rely on their salary to pay living costs, it may be difficult to reach a mutual agreement.

To lessen the financial impact of the epidemic, enterprises may also choose other solutions for saving costs and extending the period for payment such as: (i) paying employee salaries for ceasing work (in an amount lower than the salaries stated in the labor contracts) – the level of salaries for ceasing work depends on a mutual agreement between the company and the employees, or (ii) extending the salary payment period – a late salary payment must not be made over 1 month in the special circumstances of force majeure. This occurs where the employer, despite having taken all necessary measures to remedy the problem, is unable to pay the salary on time according to the mutual agreement relating to the labor contract.

However, what if an enterprise still has no money for salary payments and no mutual agreement with the employee, what are the solutions?

Unilaterally terminate the labor contract – shall not?

Pursuant to Article 12.2.(a) of Decree No.05/2015/ND-CP, dated January 12, 2015 issued by the Government, the Covid-19 epidemic has been deemed a “force majeure” event.

According to Article 38.1.(c) of the 2012 Labor Code, an employer has the right to unilaterally terminate a labor contract in the following circumstances: “Whereas a result of a natural disaster, fire or other force majeure event as prescribed by law, the employer, despite having taken all necessary measures to remedy the problem, still has to reduce production (or) cut jobs.

Further, in accordance with Article 36.1.(c) of the 2019 Labor Code, the employer has the right to unilaterally terminate the labor contract in the following cases: “As a result of a natural disaster, fire, dangerous epidemic, enemy sabotage, or relocation of the production or business place or downsizing of production and business activities as required by a competent state agency, the employer, although having taken every possible remedial measure, still has to cut jobs”.

As such, the 2019 Labor Code which was valid from January 01, 2020 has almost no significant difference from the 2012 Labor Code in this case.

The 2019 Labor Code requires the applicable condition to be “a dangerous epidemic”, instead of “epidemic” as in the 2012 Labor Code. Covid-19 has been determined to be a dangerous epidemic, therefore, an enterprise is entitled to unilaterally terminate the labor contract due to the Covid-19 epidemic if conditions are met as follows: “despite having taken all necessary measures to remedy the problem, reducing production or cutting jobs are still necessary”.

Practical problems 

Almost labor disputes in Court arise due to issues surrounding “unilaterally terminating a labor contract” by the employer, which directly affects the employee’s rights and legitimate interests.

If enterprises unilaterally terminate a labor contract due to the epidemic (Covid-19), the enterprise shall have the burden to prove that “despite having taken all necessary measures to remedy the problem, (it) still has to reduce production (or) cut jobs.”

How does a company prove that they “have taken all necessary measures to remedy the problem” but “still have to reduce production (or) cut jobs”? This provision is “qualitative” and ambiguous by nature and must be resolved by a ruling from the Court.

Therefore, in order to establish a solid basis to argue the necessity of unilateral termination, enterprises should carefully preserve documentation and other evidence showing the process of adjusting and finding employment solutions for employees, as well as the need for reducing production and, ultimately, cutting jobs. Evidence may include:

  • Emails or documents showing that an enterprise contacted its partners to search for replacement materials;
  • Emails or documents demonstrating that an enterprise requested from its partners an extension of time to perform its duties under the contract due to the occurrence of a force majeure event;
  • Documents issued by the Prime Minister and competent authorities requesting suspension of business to prevent and fight the epidemic;
  • Financial reports, tax reports, and summaries to prove reduced production and decreasing turnover; and
  • Documentation reflecting company decisions to suspend a part of the enterprise’s production line, a division of the factory, etc.

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