25 July, 2019
In 2019, Cambodia’s Ministry of Labor and Vocational Training (MLVT) has been active in amending the Labor Law and revising long-standing practices. These amendments and revisions have brought much-welcome clarity to employers on requirements of the MLVT and interpretations of the Labor Law, and have further provided meaningful benefits to employees.
Foreign Workers and Employment Contracts
On March 29, 2019, the MLVT enacted its Notification on the Registration of Foreign Employment Contracts, which significantly improved the requirements for employment contracts submitted as part of the work permit application process for foreign employees.
Previously an employer was required to submit an employment contract in Khmer according to an MLVT template. Further, the contract would only be accepted if it was structured as a fixed duration contract (FDC). These requirements were problematic for many employers and employees because the template provided by the MLVT failed to cover many of the points actually agreed upon by the employer and employee. Further, many foreign employees were employed under undetermined duration contracts (UDC). Therefore, under the old system, there was often a significant discrepancy between the Khmer-template employment contracts submitted to the MLVT and the actual employment contracts (often in English) between the employer and the employee, which created significant legal uncertainty as to the actual terms of the employment relationship.
However, these concerns have been addressed under the new notification, which specifically allows employers to use their own employment contract template so long as it does not violate Cambodian law. Further, the employment contract may be structured as either an FDC or a UDC. An employer will now only have to translate the contract into Khmer.
The notification also clarifies that if the contract expires or if there are any amendments to the contract, then the employer will be obliged to submit an updated agreement.
Clarifications on Fixed Duration Contracts and Renewals
On March 17, 2019, the MLVT enacted its Instruction on Determination of Type of Employment Contracts, which clarifies the duration of an FDC. Under the instruction, an employer can enter into an initial FDC with any local or foreign employee for a duration not to exceed two years. After the initial contract, the employer can renew the FDC one or more times so long as the total duration of the renewals does not exceed two years. If the renewals exceed two years, then the FDC will be deemed a UDC.
For instance, if the initial FDC had a fixed term of six months, then the maximum duration of the FDCs could be two years and six months. If the initial FDC had a fixed term of one year, then the maximum duration of the FDCs would be three years. Likewise, if the initial FDC had a term of two years, then the maximum duration of FDCs could be four years.
If an employee reaches the maximum duration for an FDC and the employer wants to continue the employment on an FDC basis, a one-month break must be inserted between the expiration of the FDC and the start of a new one. If there is no one-month break in employment, the employee will be deemed to be working under a UDC.
Undetermined Duration Contracts and Seniority Payments
Seniority payments, which Cambodia adopted in 2018, are periodic payments made to employees working on UDCs. The MLVT has released a number of instructions over the last several months that clarify points related to seniority payments, with the calculation of ongoing seniority payments in both the garment and non-garment sectors recently detailed in an instruction enacted on June 10, 2019.
Seniority is counted once every six months (a “semester”) – from January to June and from July to December. Employees who have worked for at least one month and who work up until the end of a semester are entitled to seniority payments equaling seven and a half days of average wages and other benefits each semester, for a total of fifteen days’ ongoing seniority payments per year. The payments for each semester are to be made during the second wages payment period for June and December, respectively; this occurs between the 1st and 7th of the following month.
Seniority payments are to be calculated using the wages and benefits per semester divided by the number of months worked to get the average wages per month. The monthly average must then be divided by the number of working days, which is based on the number of working days of each individual establishment. This average is then multiplied by seven and a half days to get the ongoing seniority payment per semester.
Seniority Back Payments
The MLVT issued two other instructions to lay out the process for paying seniority back payments – one for workers in the non-garment sector and the other for those in the garment, textile, and footwear sector. These back payments are to cover the seniority payments that would have accrued (15 days per year) before the start of the seniority payments system in Cambodia.
In the non-garment sector, employers are obligated to make back payments starting in December 2021 at a rate of six days per year, or three days per semester. The calculation of the back payments only includes actual wages, not bonuses. For example, for a single semester employers would owe an applicable employee an amount of three days of wages for seniority back payments, plus seven and a half days of wages and bonuses for ongoing seniority payments.
The calculation of back payments for workers in the garment sector also only includes actual wages. The back payments for garment workers are due at a rate of 15 days per semester. Furthermore, the maximum seniority back payment amount cannot exceed 6 months of average net wages. The MLVT’s instruction further clarifies that to calculate the daily average basic net wage, employers must use 26 days per month.
Tax Obligations Related to Seniority Payments
A circular released by the Ministry of Economy and Finance on March 22, 2019, addressed tax obligations related to seniority back payments and ongoing seniority payments for Cambodian employees. Seniority payments are not to be included in an employee’s taxable salary, which means that employees do not need to pay any salary tax on the contributions. Further, from an employer’s perspective, seniority payments are allowed to be included in a company’s deductible expenses for the purposes of income tax calculations.
This article was originally published in the Bangkok Post on July 7, 2019, and is reproduced here with permission and thanks. The original can be viewed on the Bangkok Post website.
For further information, please contact:
Jay Cohen, Director, Tilleke & Gibbins
jay.c@tilleke.com
