In times of uncertainty and especially in dealing with changes in the supply chains, employment terminations take place a lot.

Vietnamese employment law is deemed very employee-protecting, for which terminating an employment is not easy. When terminating with a lot of employees is needed, retrenchment can be the most suitable choice for ending an employment.

As it can be used to terminate employment at a large scale, retrenchment is a means for workforce restructurings. For retrenchment, companies terminate employment to reorganize operations, adopt new technologies, or reduce costs in response to economic pressure.

This article provides a brief overview of retrenchment under Vietnamese law, highlights key legal considerations, and discusses what courts typically examine when assessing the legality of retrenchment-based termination.

1. What Is Retrenchment under Vietnamese Law?

Under Article 42 of the Labor Code 2019, an employer may restructure their workforce due to organizational restructuring, technological changes, or economic reasons.

Common situations that may trigger retrenchment include:

a) Restructuring departments or business units

b) Changes in production processes or technology

c) Reduction in production scale due to market downturn

d) Financial or operational difficulties requiring cost reduction

In this regard, it is worth noting that retrenchment on the basis of economic reasons generally contemplates broader economic circumstances, such as an economic downturn affecting the market more generally, rather than financial difficulty faced by the employer alone. As a result, in practice, retrenchment is more commonly implemented on the basis of organizational restructuring or technological changes than on economic reasons alone.

Vietnamese law requires retrenchment to not only comply with procedural safeguards but also to demonstrate legitimate organizational or economic reasons for the restructuring. If either the procedures or the substantive justification cannot be established, the termination may be considered unlawful, potentially exposing the employer to compensation liabilities or reinstatement claims.

2. Key Legal Requirements for Retrenchment

Although the administrative formalities associated with retrenchment are relatively limited, the legal considerations surrounding its implementation are more nuanced. Employers therefore need to approach workforce restructuring with careful planning and documentation.

Employers must comply with several mandatory steps:

a) Prepare a Labor Utilization Plan

Where retrenchment affects the jobs of multiple employees or places multiple employees at risk of losing their jobs, the employer must prepare a Labor Utilization Plan. This plan typically sets out, among others:

• Current workforce structure

• Positions to be retained

• Positions to be reassigned or retrained

• Employees whose employment contracts must be terminated

The Labor Utilization Plan is the backbone of the retrenchment process, as courts would revisit this document when assessing whether the retrenchment is properly justified. Therefore, the Labor Utilization Plan should be carefully prepared with potential future scrutiny in mind. The plan should contain analysis and justification that go beyond the minimum information required by the law.

b) Consult the Employee Representative Organization at the grassroots level and Organize Labor Dialogue

The employer must consult with the employee representative organization at the grassroots level (“Grassroots Employee Representative Organization”), such as the trade union, regarding the Labor Utilization Plan. Additionally, the employer must also organize a labor dialogue to discuss matters relating to the Labor Utilization Plan.

Where, following the preparation of the Labor Utilization Plan, the employer is unable to arrange alternative jobs for all employees and must retrench certain redundant employees, the employer must proceed with the next statutory steps. In this regard, the employer must consult with the Grassroots Employee Representative Organization regarding the proposed termination of labor contracts with the redundant employees and organize a labor dialogue to discuss the proposed termination.

While the law does not clearly specify whether conducting a labor dialogue alone would satisfy the consultation requirement, or whether both steps must be carried out separately, the prevailing practice among Vietnamese labor authorities is that both consultation with the Grassroots Employee Representative Organization and a labor dialogue should be conducted.

c) Notify Labor Authorities

The employer must notify the provincial labor authority at least 30 days before the termination of the labor contracts with the redundant employees.

This requirement allows the authorities to monitor compliance with labor regulations and ensure that employees' rights are protected.

This notification is generally the only step in the retrenchment process that requires formal engagement with a governmental authority.

d) Pay Job Loss Allowance and Other Statutory Entitlements

Employer must settle all statutory payments to the employee within 14 working days (or, in the case of an extension, no later than 30 days) from the termination date, including outstanding wages, payment for unused annual leave (if any), job-loss allowance (where applicable) and other contractual entitlements.

Job-loss allowance applies to employees who have worked regularly for 12 months or more, and as follows:

• At least one month’s salary for each year of service, and

• Not less than two months’ salary in total.

When calculating this allowance, the employer may exclude the period during which the employee participated in unemployment insurance.

3. Practical Issues Employers Often Face

Although the procedural steps appear clear, retrenchment in Vietnam often presents practical legal challenges.

In practice, the following three issues often arise:

a) Demonstrating Genuine Business Reasons

Employers must demonstrate that the retrenchment is genuinely required due to organizational restructuring or economic reasons.

Courts often expect supporting evidence such as:

• restructuring plans

• internal decisions of management bodies

• financial reports

• documents showing operational changes

If the employer cannot clearly demonstrate the business rationale, the retrenchment may be viewed as a pretext for dismissal.

It is also observed from practical case law that, even where an employer can initially demonstrate a genuine business need for retrenchment, this justification may later be questioned if the employer subsequently hires a new employee with similar qualifications to perform substantially the same role or a comparable job scope. In such circumstances, the retrenchment decision may face significant scrutiny in a dispute.

b) Selecting Employees for Retrenchment

If a retrenchment decision is challenged before the court, the employer must demonstrate that the selection of employees for retrenchment was conducted in an objective, transparent, and reasonable manner. Where the available documents indicate that the employer intentionally targeted specific employees without objective justification, the court may question the legality of the retrenchment.

Accordingly, retrenchment must be premised on the redundancy of a department, function, or position, rather than targeting a particular employee from the outset. Once a department or position is identified as redundant, the employer may then determine which specific employees within that group will be affected.

Where the restructuring results in redundancy within certain departments of the company, Vietnamese law does not specify detailed criteria for selecting which employees must be retrenched within each department. However, employers must still ensure that the selection process is objective and justifiable.

Typical criteria may include:

• job redundancy due to restructuring

• performance records

• skill compatibility after technological changes

If employees in similar positions are treated differently without reasonable justification, the employer may face allegations of unfair treatment.

c) Considering Alternative Positions

Before terminating employment contracts, employers are expected to consider whether affected employees can be retrained or reassigned to other positions within the company.

Courts may examine whether the employer genuinely explored these alternatives. If suitable positions existed but were not offered to the employee, the termination may be challenged.

Strategically, What Should an Employer Consider for a contemplated Retrenchment?

While retrenchment is permitted under Vietnamese law, it is subject to strict procedural and substantive requirements. Courts tend to scrutinize these cases closely, particularly where procedural steps have not been fully complied with or the underlying business rationale is not clearly substantiated.

In planning a workforce restructuring, an employer should consider whether retrenchment or mutual termination would be the more suitable approach in light of the expected cost, timing, and implementation considerations. Although retrenchment can be an efficient restructuring legal mechanism, mutual termination with individual employees may provide a cleaner and more straightforward approach from a legal implementation perspective. A comparative assessment of both approaches will help employers adopt a reorganization plan that is sensible and workable in the circumstances.

And when retrenchment is selected as the preferred means for employment termination, proper implementation is the most important for risk-controlling, and for ensuring the employment restructuring is achieved.