The article written by Lawyer Vo Dinh Duc titled “Terminating labour contract when dissolving enterprises: not a simple issue” is published in The Saigon Economic Times dated 12-1-2012.


In the current situation of economic difficulty, some enterprises are forced to consider the restriction or moderateness in their operation in order to exist, leading to the reduction of the number of employees. However, meeting the provisions of the Law on Labour and the Law on Enterprises to terminate the labour contract (LC) legally is not a simple matter at all.

When a labour contract may be terminated?

According to provisions at Article 38 of the Law on Labour, in the event of the termination of operation of the enterprise, body or organization, the employer is entitled to unilaterally terminate the labour contract with the employees.

However, the Law on Labour mentions only the legal bases for termination of the operation of the enterprise, body or organization rather than provides the official time for termination of the labour contract. Circular No. 21/2003/TT-BLDTBXH further elucidates the cases of termination of the labour activities as when the relevant authority decides the dissolution, the court announces the bankruptcy, the expiry of operation license, the enterprise violates the laws and its operation license is withdrawn or its business registration certificate is revoked, but does not specify the time for the termination.

According to the Law on Enterprises, the procedure for termination of business operation will be implemented as follows: first, the enterprise shall issue the decision of enterprise dissolution; then proceed with the liquidation of properties and liquidation of contracts (including LC), put an announcement in the newspaper, prepare tax account, return the seal, etc. Upon completion of the above jobs, the enterprise submits the dissolution dossier to the business registration authority and its name will be deleted in the business registration book.

In the above process, there are at least two time points need to be considered regarding the termination of LC. The first time point is the time at which the enterprise issues the decision of dissolution. Logically, this is the time at which the right of termination of labour contract arises, since the next job after the issuance of decision of dissolution is to liquidate the labour contract with the employee. However, there is a legal complication, as the time for termination of labour relation shall be the time at which the enterprise issues the decision of termination of labour contract, or the enterprise and the employee agree on the conditions and sign the agreement of termination of the LC.

The issuance of decision on termination of LC is a risky solution because it is likely to lead to dispute. Agreeing with the employee to terminate the LC is always the best solution. However, if the employee and the enterprise do not agree on the conditions of LC termination, the dissolution procedure cannot either be completed because the obligations to the third party have not been settled. This causes headache to enterprises.

The next problem is that the dissolution process may not be completed until the name of the enterprise is deleted in the business registration book. During that time, the enterprise has the full right to revoke the dissolution decision. Therefore, in case the enterprise does not dissolve after having signed the agreement of LC termination, does the employee have the right to work again for the enterprise? Obviously, the employee has the ground to say that the dissolution decision is only an internal one, and the employee needs some confirmation of a third party as the relevant authority that the enterprise will definitely close or at least it is going to close.

The second time point is the time at which the enterprise has completed the dissolution procedures and obtained the final confirmation from the business registration authority about the completion of the dissolution. It is clear that it is not reasonable if until this time point the enterprise conducts the LC termination because at that time the enterprise has completed the dissolution and does not exist, and how can the procedures of LC termination with the employee be carried out?

Thus, the time point for LC termination must be after the issuance of dissolution decision and before the enterprise obtains the confirmation of completion of dissolution.

What is “enterprise, body or organization”?

The next issue is as to how it is interpreted as “enterprise, body, or organization” at Article 38 of the Law on Labour? A representative office or a branch (as a subordinate unit of an enterprise) is certainly not regarded as an enterprise under Article 4 of the Law on Enterprises 2005 (i.e. an economic organization with its own name, properties, stable head office, and is entitled to business registration as provided). Therefore, according to this Article, the termination of operation of a representative office or a branch is obviously not regarded as a reasonable base for the LC termination with the employee, since in this case the enterprise is still operating.

A branch or a representative office is not regarded as an enterprise, so is it regarded as “a body or an organization” under Article 38 of the Law on Labour? There has not been a clear answer for this question.

Many people do not accept the termination of LC when a branch or representative office is closed. However, in reality, a representative office or a branch is still entitled to sign LC directly with the employee. Thus, it is not reasonable if the enterprise is forced to maintain the LC when it dissolves the branch or representative office. For example, how an enterprise with head office located in Ho Chi Minh City can arrange jobs for its staff in Hai Phong when its branch in Hai Phong is closed. And can the employees working for the branch in Hai Phong move to Ho Chi Minh City to work at the head office? The fact that the enterprise is forced to maintain the LC will cause difficulties for both parties.

Enterprise has to be careful

As above analyzed, the application of provisions of the Law on Labour and the Law on Enterprises faces some unclear points in the definition of enterprise or organization terminating its operation in order to terminate the LC, consequently, the application of these provisions may face legal risks leading to unnecessary disputes between the employee and the employer.

To reduce those risks, in most cases enterprises shall be more careful as to instead of applying Article 38 they would apply Article 17 of the Law on Labour – termination of LC when there is change of structure or technology. However, in moving to this solution, the enterprise has to conduct the retraining, noticing the labour management authority, taxation authority, licensing authority, putting announcement in the newspaper, etc. This takes much time and costs but not very effective, especially in the difficult situation that the enterprise is facing.