Company dissolution is a legitimate legal basis to terminate employment. However, the process is not as simple as closing the doors and walking away. There is a strict legal process to ensure a lawful and fair termination. Care must be taken to avoid disputes that may delay dissolution.
This article provides a practical path to employee termination as a result of company dissolution, options to terminate, and financial obligations to employees.
Addressing these objectives is essential to ensure a smooth and dispute-free termination.
OPTIONS TO TERMINATE LABOR CONTRACTS
Under the Labor Code 2019, an employer is permitted to terminate an employment contract on the grounds of company dissolution. There are two main approaches:
Option 1: Automatic termination upon company dissolution
This is a statutory termination, meaning that once the company is dissolved, employment contracts are automatically terminated. Unlike unilateral termination, the employer is not required to provide prior notice of termination of the employment contract.
However, pursuant to the Enterprise Law, employers are required to notify their employees of the company dissolution within seven (7) days from issuance of the dissolution resolution. Employers must provide all employees with the dissolution resolution and meeting minutes. For employees to whom the company still has financial obligations, the employer is also required to provide the debt settlement plan.
When passing a resolution to dissolve the company, the employer must outline the reason for dissolution, the timeline, and the process to settle outstanding debts. Plans to address labor-related obligations (salaries, severance allowances, and other entitlements) must be included. The employer should allow time to address employee complaints or disputes.
Risk of automatic termination without advance notice:
While the law does not require advance notice, failure to inform employees adequately ahead of time can lead to emotional distress, poor morale, and potential disputes. Employees may perceive a lack of notice as unfair treatment, even when it complies with the law. Complaints to the authorities are taken seriously and may delay the liquidation process. In practice, many labor disputes arise not from legal violations, but from perceived unfair treatment or lack of transparency.
As a further alert, an enterprise may only carry out dissolution if it is not engaged in a legal dispute before a court or tribunal.
Best practice:
To minimize risks and foster goodwill, employers are strongly advised to notify employees in advance of termination–ideally at least 45 days prior to termination. Advance notice provides employees with adequate time to prepare for the transition, facilitating a smoother dissolution process and reducing the likelihood of disputes.
Option 2: Mutual agreement on termination
Ideally, the employer and employees can agree on termination by mutual consent before a dissolution decision is issued.
This approach offers several advantages:
- Greater flexibility in choosing the termination date;
- Reduced risk of disputes;
- Opportunity to negotiate terms, including allowance, bonuses, or other benefits.
Keys:
A mutual termination agreement signed by each employee is important. So is acknowledgement of receipt of the agreed payment and inclusion of a waiver and release, discharging the company from future liability. An agreement can significantly mitigate litigation risks during and after the dissolution process.
FINANCIAL OBLIGATIONS TO EMPLOYEES UPON TERMINATION
Upon termination of employment due to dissolution, the employer must meet the following obligations:
- Outstanding salary;
- Unused annual leave (monetary equivalent);
- Severance allowance (if eligible);
- Contractual bonuses or payments as stipulated in the labor contract.
Note, an employer may proceed with dissolution only after all debts have been settled.
SEVERANCE ALLOWANCE: WHO GETS IT AND HOW MUCH?
Employees with at least 12 full months of service are entitled to severance pay. There is no statutory cap on severance allowance.
Formula: Severance Allowance = 0.5 × Average Monthly Salary × Years of Eligible Service
Where:
- Average Monthly Salary: Based on the six consecutive months of contractual salary just prior to termination
- Years of Eligible Service: Includes actual working time, probation, company-sponsored training, sick leave, maternity leave, and other paid leave periods, etc.
- Excluded Periods: Time during which the employee was covered by unemployment insurance or had previously received severance allowance/redundancy allowance.
PRIORITY OF PAYMENT
Employee-related payments have priority over other obligations the company may have. This includes both secured and unsecured obligations. All payments to employees must be completed within 14 working days from the termination date. This period may be extended for up to 30 days by law.
Failure to meet this deadline to settle all employee-related financial obligations during company dissolution may result in an administrative fine, the severity of which is graduated based on the number of employees affected. Specifically:
- Up to VND 4 million for companies employing 10 or fewer employees;
- Up to VND 10 million for companies with 11 to 50 employees;
- Up to VND 20 million for companies with 51 to 100 employees;
- Up to VND 30 million for companies with 101 to 300 employees; and
- Up to VND 40 million for companies with more than 300
CONCLUSION
Dissolving a company in Vietnam is not just about closing operations—it is often mainly about handling labor issues the right way. To avoid legal issues and to ensure a smooth process, employers should:
- Decide which course to take: That is, between automatic contract termination and a mutual termination agreement with all employees.
- Plan early: Notify employees in advance, even when not legally required.
- Pay promptly: Prioritize all employee payments to avoid delays in the dissolution process.
- Document clearly: Ensure that decisions and agreements are timely, well-documented, and legally compliant.
For further information, please contact:
Nguyen Yen Trang, Russin & Vecchi
NYTrang@russinvecchi.com.vn
