Several Methods of Workforce Reduction by Employers
2025/07/20
- Nguyen Hong Thuan
Introduction
Personnel reductions are a common method employed by employers to optimize organizational structure, reduce costs, and adapt to market fluctuations. However, employers are not free to conduct personnel reductions arbitrarily and must strictly adhere to Vietnam’s labor-related laws and regulations. Violating these provisions may result in complaints and lawsuits from workers, as well as risks of liability for damages and administrative sanctions. This article explains the main methods that employers should consider when implementing workforce reduction, along with the points to注意 to for each method.
1. The concept of “personnel reduction”
“Workforce reduction” refers to the process by which an employer terminates employment contracts based on objective reasons rather than the workers’ fault. This is one of the human resource management techniques used when facing management difficulties or the need for organizational restructuring.
For example, if a company’s management is pressured due to factors such as a decrease in orders, loss of key clients, economic recession, inflation, or a decline in consumer demand, workforce reduction is considered a measure to continue the business. Additionally, there are cases where cost reduction is required due to soaring raw material and fuel prices, as well as cases where the need for personnel decreases due to advancements in AI and automation.
2. Several methods of workforce reduction
2.1. Contract Termination Due to Expiration of Contract Period (No Renewal)
Not renewing a fixed-term employment contract upon its expiration is one of the lawful means of contract termination stipulated in Article 34, Paragraph 1 of the Labor Law. The contract relationship automatically ends upon the contract’s expiration, and no additional procedures are required. However, this does not apply in some exceptions, such as when the worker also serves as a member of the labor representative organization.
This method involves no compensation obligations and has low legal risks, making it a simple and cost-effective option for employers. However, employers need to properly carry out the following matters when terminating an employment contract.
(i) Notify the worker in writing of the termination of the contract due to the expiration of the contract.
(ii) Pay salary up to the last working day and severance pay if the conditions are met.
When applying this method, it is important to check the list of employees whose contracts are expected to expire in advance and respond in a planned manner.
2.2. Contract Termination by Mutual Agreement
According to Article 34, Paragraph 3 of the Labor Law, the contract can be terminated regardless of the contract period if both the employer and the employee agree.
This method can be applied to both fixed-term and indefinite contracts, but the employer cannot unilaterally apply this method; it requires agreement with the employee. Therefore, in practice, it is common to propose a guarantee payment equivalent to one to two months’ salary.
This method is safer in terms of having a low risk of disputes because it is based on mutual agreement. However, it is required to properly fulfill the procedures stipulated in Articles 45 and 46 of the Labor Law as mentioned in Section 2.1 above. When implementing, it is necessary to identify the subjects, make a negotiation plan, clarify compensation details, and complete all legal procedures.
2. 3. Termination of contract due to organizational restructuring, technological innovation, etc.
In accordance with Article 34, Paragraph 11 and Article 42, Paragraph 1 of the Labor Law, contracts can be terminated in the following cases.
(i) Changes in organizational structure and reorganization of work. For example, if duties disappear due to the dissolution of part or all of a department or division
(ii) When tasks become unnecessary due to changes in processes, technology, machinery, or production equipment
(iii) Changes in operations due to changes in product composition
In order to ensure the legitimacy of terminating a labor contract, it is necessary to retain documents proving that any of the above applies, along with clear grounds. Additionally, if such documents and grounds are inadequate, the termination of the contract may be considered illegal.
Compared to other methods, this method involves complicated procedures and requires a long time, with potential risks of disputes. Based on Articles 42, 44, 45, and 47 of the Labor Law, the following procedures must be carried out.
– Formulation and implementation of labor utilization plans when contract terminations due to organizational restructuring, technological innovation, etc., affect the jobs of many workers.
– Consult with the workers’ representative body (if it exists) and notify the provincial-level People’s Committee 30 days in advance about the contract termination.
– Written notification to workers regarding contract termination.
– Payment of unemployment benefits if the conditions specified in Article 47 of the Labor Law are met.
This method takes time to prepare and execute, but since making a mistake in the procedure could be considered illegal, careful handling is required.
2.4. Contract termination for economic reasons
Based on Article 34, Paragraph 11, and Article 42, Paragraph 2 of the Labor Law, it applies when a company faces economic recession, financial crisis, restructuring due to national policies or laws, and it has a serious impact on business management. However, in practice, proving economic difficulties is very difficult, and guidelines are unclear, resulting in a high risk of objections and lawsuits from workers.
Based on Articles 42, 44, 45, 47, and 63 of the Labor Law, employers are required to take the following actions.
– Proof of economic recession and financial crisis. Specifically, cases where statistics on financial statements, sales, profit declines, or the adverse effects of new economic policies or laws on business activities serve as evidence are observed.
– Formulation and implementation of labor utilization plans. Clearly specify the number of continuing employees, the number of employees whose contracts will be terminated, support measures, and funding sources.
– Consult with the workers’ representative body (if it exists) and notify the provincial-level People’s Committee 30 days in advance about the contract termination.
– Written notice to the worker regarding the termination of the contract
– Payment of unemployment benefits upon fulfilling the conditions specified in Article 47 of the Labor Law
This method carries high legal risks, so particular caution is required in its application.
3. Evaluation of the above methods
Termination due to the expiration of the contract period is the easiest means to implement, as the procedure is simple and the risk of disputes is low. However, it is limited to only fixed-term labor contracts. Termination of the contract by mutual agreement offers high flexibility and is easy to avoid legal troubles, but it requires the worker’s consent and involves certain costs such as compensation payments.
On the other hand, termination of the contract due to structural or technical changes, or economic reasons is a formal method based on legal grounds and has the advantage of not requiring the worker’s consent. However, the procedures tend to be complicated and lengthy, and there is a high risk of being deemed illegal if there are deficiencies in evidence or notification procedures. Each method has its advantages and disadvantages, so employers should choose the most suitable method based on their company’s situation and the characteristics of the target workers.
In conclusion
Workforce reduction is an important management decision for companies, and at the same time, it is a measure that significantly impacts the lives of workers. Especially since workers are considered to be in a legally protected vulnerable position, employers are required to adopt a cautious attitude. Regardless of the method employed, it is important to strictly comply with laws and regulations and to handle the process with transparency and fairness. Additionally, careful dialogue with workers to prevent misunderstandings and conflicts leads to avoiding troubles and maintaining the company’s trust. Workforce reduction should not be viewed merely as a cost-cutting measure but should be implemented cautiously and systematically as part of a strategy that supports the sustainable development of the company.
References:
– Vietnam Labor Law 2019, Law No. 45/2019/QH14 (promulgated on November 20, 2019)
This article was translated by Yarakuzen.
