On January 29, 2019, the People’s Court of Ho Chi Minh City issued Appellate Judgment No.102/2019/LD-PT regarding a labor dispute between Mr. Anthony James F (employee – plaintiff) and Company R (employer – defendant) relating to a probationary contract.
The relevant facts of the case are as follows: Mr. F and Company R entered into a 03-month probationary contract (from August 23, 2015 to November 20, 2015). During the probationary period, Mr. F alleged that he had fully and satisfactorily completed his assignments as reported in his self-appraisal report which was sent to Company R on November 20, 2015. Following this, Company R terminated the probationary contract with him stating that there was an unsatisfactory probationary result. Mr. F disagreed with the reason given by Company R. Instead, Mr. F claimed that his probationary contract was transformed into an official labor contract at the end of the term and, as such, Company R illegally unilaterally terminated his official labor contract. Mr. F filed a lawsuit against Company R. Company R defended itself from Mr. F’s claim by arguing that there was no official labor contract created, only a probationary contract between Company R and Mr. F.
The People’s Court of Ho Chi Minh City ruled that the probationary contract was invalid in this case based on the following two reasons:
–First, it violated the regulations concerning probationary contract time limitations according to Article 27.1 of the 2012 Labor Code:
“[…] a probationary period “does not exceed 60 days for positions which require professional and technical qualifications of collegial or higher level”. That Mr. F and Company R agreed on a 03-month probationary period is not compliant with the law.”
–Second, it violated the regulations for work permits according to Article 169 of the 2012 Labor Code:
“[…] Because Mr. F is an expat working in Vietnam, pursuant to Article 23.1.(b) and Article 169 of the 2012 Labor Code, he “[…] must possess a work permit granted by a competent authority.” This is a compulsory condition that the plaintiff was required to satisfy at the time of starting work for Company R.
[…] Therefore, based on the above reasons, Probationary Contract No. WMC/HR-23.04.2015, dated April 23, 2015 between Mr. F and Company R is invalid according to Article 50 of the 2012 Labor Code.
That the probationary contract is invalid is at fault of both parties, so both parties must accept the consequences. Such probationary contract does not impose any right or obligation on either party, thus such probationary contract is not transformed into an official labor contract.”
Based on this reasoning, the People’s Court of Ho Chi Minh City rejected the statement of claim made by Mr. F:
“[…] Based upon assessments above, there is not sufficient legal grounds to accept the claim of the plaintiff – Mr. Anthony James F and, as the result, the first-instance court rejects the entire claim of the plaintiff in compliance with the law.”
The aforesaid judgment of the People’s Court of Ho Chi Minh City mentions the invalidity of a probationary contract signed with an expat. However, from a legal perspective, there is no regulation directly stating recognition or prohibition of probationary contracts with expats. From a practical standpoint, almost all enterprises regard expats and Vietnamese employees under the same probationary requirements by either signing a separate probationary contract or including a probation clause in the labor contract. The question is how this issue should be handled at the contract signing stage. Are regulations concerning probation applied to expats? Below are our viewpoints and analysis:
1. Is it allowable to sign a “probationary contract” with an expat?
Although there is no regulation directly governing probation contracts for expats, as mentioned above, upon reviewing regulations relating to expats working in Vietnam as well as consulting with labor management agencies, a probationary contract signed with an expat will not be legally recognized. This is due to the following factors:
a. It is a requirement that after obtaining a work permit both parties must enter into a “labor contract”
Under the provisions of the labor law, before starting to work in Vietnam, the expat must obtain a work permit2 . Following this, both parties enter into a labor contract and send a copy of the signed labor contract to the labor management agency that issues the work permit . This regulation implies that after obtaining the work permit3, in terms of form, only a standard labor contract is acceptable. Upon consulting with the Departments of Labor – Invalids and Social Affairs of Ha Noi, Da Nang and Ho Chi Minh Cities, these agencies consistently utilize the aforesaid regulation to conclude that probationary contracts are not applied to expats.
It should be noted that the working period (i.e. starting date of work, expiry date) of the signed labor contract must be aligned with the term of the work permit4, excepting certain special cases where the employer must provide an explanation to the local labor management agency (e.g. the expat has not entered Vietnam to work as scheduled due to special reasons, resulting in the start date for work in Vietnam being altered not corresponding to the start date stated in the work permit). If instead the parties sign a probationary contract, both parties violate these regulations concerning the working period under the labor contract.
b.Regulations regarding work permits imply that the employer must have a long-term plan of employing expats. As a result, signing a probationary contract with a maximum term of 60 days is not appropriate.
Employers are allowed to employ expats as managers, executive directors, experts and technical workers in order to meet production and business needs, only in the case where these positions are currently unable to be filled by Vietnamese employees5. As such, this regulation reinforces the position of the labor management agencies that signing probationary contracts with expats is not allowable as the underlying reason for employing expats is the inability of finding Vietnamese employees suitable for the position. Accordingly, the labor management agencies assume that before employing expats and obtaining work permits, the employer has carefully considered and selected candidates and confirmed that the expat has sufficient expertise and experience to be eligible for the employed position. Thus, probation is no longer necessary if the employer plans to employ the expat for long-term employment (it is noted that the employer has to declare the expected employment period (max. 02 years) of the expat in the application file for the work permit).
In practice, the labor management agencies carefully consider the employer’s explanation for its need to employ expats to ensure that the employment is aligned with the business scope of the employer. As an example, the Department of Labor – Invalids and Social Affairs of Ho Chi Minh City rejected the application file of an enterprise and requested that it make an additional explanation as follows: “The Department of Labor – Invalids and Social Affairs requests the company to prepare a detailed description of the above-mentioned job title being aligned with the business scope of the company […] to have grounds for the Department to grant the work permit […].” In another application which was also rejected, the Department of Labor – Invalids and Social Affairs of Ho Chi Minh City stated that: “The Representative Office would like to employ an expat for a position – job title as “Expert on […]” but it is not aligned with the operational scope of representative offices which are: being a liaison office, studying the market and promoting business opportunities, not conducting business activities or providing services or other profit-generating activities in Vietnam; it is not aligned with the explanation for the reasons for employing the expat; […].” Moreover, Appellate Judgment No.01/2018/LD-PT6 , dated January 15, 2018 of the High-level People’s Court in Da Nang, states that the Department of Labor – Invalids and Social Affairs of Khanh Hoa Province rejected granting a work permit to an expat for an accounting position because “many current colleges and universities in Vietnam provide perfectly adequate training for accounting majors, and Vietnamese employees can meet the employment requirements for the said position, thus, employing a foreigner for such a position was unnecessary”.
Returning to the regulations concerning probationary contract time limits, the maximum probationary period is 60 days. Either contractual party can unilaterally terminate the probationary contract at any time during the probation without providing any advance notice nor incurring any compensation obligations if the probationary results do not meet the requirements agreed to by both parties . Therefore, signing a probationary contract is not compliant with the regulations of employment and issuance of a work permit for expats as mentioned above.
c. Other issues concerning signing probationary contracts with expats.
When expats work in Vietnam, besides work permits, the employer is required to obtain visas and/or temporary residence cards for them and their families (if any). If the expat terminates his/her employment after only 60 days of probation, their work permits, visas and temporary residence cards will be revoked. As a result, this will significantly increase the workload for the local management agencies in resolving administrative application files and managing issues related to the work and residence of the expat in Vietnam. This is because the agencies will need to grant permits/licenses several times within a very short period.
In addition, in terms of cost efficiency, employers will incur unnecessary expenses when expats terminate their employment after only 60 days of probation. For instance, the employer will normally need to pay governmental fees for work permits, visas, and temporary residence cards (for expats and their families (if any)); consular-legalization fees and notarized translation fees for documents issued by foreign authorities; fees for medical check-ups; and fees for Vietnamese criminal records upon a case-by-case basis as well as other incidental costs.
2. Should employers take risks arising from not signing a probationary contract with an expat who is an expert or senior manager with a significantly high salary, in light of the fact that unilaterally terminating employment with an employee is very limited by law?
a. Is it allowable to include a probation clause in a labor contract with an expat?
The 2012 Labor Code provides that an employer and employee may enter into a probationary contract . This regulation can be interpreted as allowing the signing of a probationary contract separately from the labor contract at the parties’ discretion. Alternatively, both parties can opt to include a probation clause in the labor contract. Comparing the two options, signing a labor contract which includes a probation clause is preferable as it prevents employers from committing violations of the labor regulations as well as avoiding rejection by the labor management agencies as discussed in Item 1 above.
In practice, the Departments of Labor – Invalids and Social Affairs of Ha Noi, Da Nang, Ho Chi Minh Cities do not oppose a probation clause being included in the labor contract. This is because the employer and the expat have met the formality requirements prescribed by law i.e. signing the labor contract after obtaining the work permit.
If this option is chosen, the employer can unilaterally terminate the labor contract with the expat during the probationary period stated in the labor contract. However, because the parties formally enter into a labor contract, the employer has to fulfil its obligations which accompany the labor contract, specifically
- Obtaining a work permit for the expat. The employer should take into account issues relating to the timeline, complex paperwork and cost burdens as discussed in Item 1 above when obtaining a work permit.
- Fully contributing the premiums of compulsory insurance (social insurance, health insurance) for expats during the probationary period.
- Withholding and fully remitting the personal income taxes of the expat to the tax authorities in compliance with the progressive tax rates. The tax authorities consider neither the type of signed contract nor whether the employer is in violation of the labor law or not. The tax authorities are only concerned with the term of work stated in the contract in order to compel the employer to obey the regulations of personal income tax which is to be applied to an expat.
b. There are particular regulations for employing expats for a short period.
An employer can employ expats to work in Vietnam for a period of less than 30 days (and not exceeding accumulative 90 days per year) . These expats are exempted from a work permit because the preparation of the application file is very time-consuming while the working period is very short.
This provides some flexibility as the employer can rely on this regulation to employ an expat for a short working period for the purpose of testing an expat’s eligibility (which, in effect, would be the same as having a period of probation).