Answer:
1. When agreeing to terminate a LC before the term expires, how the Employer fulfilsfinancial obligations to the Employee?
According to the Labour Code, the Employer and the Employee can agree on the termination of the LCprematurely[1]. In fact, when dealing withthetermination of the LC, the Employer and the Employee will sign an agreement to terminate the LCwhich specifies the financial obligations that the Employer must perform to the Employee upon the termination of the LC, in particular, the Employer must fulfil the following financial obligations:
1.1 The paymentsthat the Employer must pay to the Employee when agreeing to terminate the LC
According to the Labour Code, within 14 working days from the date of termination of the LC, the parties are responsible for paying all amounts related to the interests of the other. Amounts that the Employer must pay to the Employee include[2]:
- The salary under the LCsigned between the Employer and the Employee;
- Salary corresponds to the number of annual leave days that the Employee has not used[3]; and
- Severance allowance for any Employee who hasbeen working for the Employer regularly for 12 months or more, each working year is entitled to a half-month salary allowance for the working period underthe Employer’s management but the Employee does not pay unemployment insurance[4].
Aside from the payments mentioned above, normally, when dealing withtermination of the LC, the Employer will pay the Employee an additional amount that is considered the enterprise’s support for the Employee to find a new job. In return, the Employee agrees to terminate the labour relations with the Employer and waives the Employer from all legal obligations and liabilities (if any) related to the labour relations between the parties under the signed LCto avoid disputes arising in the future.
1.2. PIT and compulsory social insurance, health insurance, and unemployment insurance
When dealing with termination of the LC prematurely and settle financial obligations tothe Employee in accordance with the labour law, before paying,theEmployer mustwithhold and reserve the following amounts to the Employee:
- The PIT of the Employee
The payments that the Employee receives from the Employer upon the termination of the LC, except for the prescribed severance allowance (if any), is the income from salary and wages subject to the PIT subject to the PIT Law[5]. Therefore, as an organisationpaying income subject to the PIT, the Employer is obliged to withhold and reservethe PIT of the Employee and pay to the National Treasury under the PIT Law on behalf of the Employee.
- Compulsory social insurance, health insurance, and unemployment insurance
According to the provisions of the insurance law, monthly or periodically every 03 months or 06 months, depending on the mode of payment of the enterprise, the enterprise will deduct an amount from the Employee’ salary to pay the compulsory social insurance, health insurance, and unemployment insurance as prescribed to transfer into the special purpose credit accounts of the social insurance agencies[6]. Thus, when terminating the LC, the Employer will deduct from the Employee’ salary the payment of compulsory social insurance, health insurance, and unemployment insurance premium to pay to the competent social insurance agencies.
2. If the Employer has an agreement to pay the Employee the salary for the remaining working months until the LC expires, is it compulsory for the Employer to pay the salary once or the salary can be paid monthly until the LC expires?
In principle, the termination of a LC prematurely depends on an agreement between an Employer and an Employee. So, in fact, the Employer can agree on paying the Employee the salary for the remaining working months until the LC expires. In this case, depending on the agreement between the parties, the Employer can pay the Employee’s salary for the remaining months by giving either: (i) one-off salary payment upon termination of the LC; or (ii) monthly payment until the due date of the LC.
- In respect of the one-off salary payment to cover the remaining months of the LC upon the termination of the LC, the LC is seen to be completely terminated at the time of payment and the parties are not required to pay the compulsory insurance for the remaining period. However, if this option is picked, the total income of the Employee is taxable and will be taxed under the progressive tax system, leading to the possibility that the PIT payable will be higher than that withheld monthly in normal cases. If the Employee is paid the salary deducting all taxes and fees (net salary), the PIT payable by the Employer on behalf of the Employee will be higher than the PIT monthly payable that the Employer pays in normal cases. In like manner, if the Employee is paid salary including PIT and fees (gross salary), the payment of the PIT on salary cumulating over such months being too high (higher than the normal monthly progressive tax rates) may result in the Employee does not take this option.
- In respect of giving the Employee monthly salary until the due date of the LC, the PIT will be calculated under the progressive tax system over monthly payments that the Employee receives as usual. The PIT payable will then be lower than the PIT on the total remaining months of the LC, so if receiving the gross salary before PIT and fees, the Employee refers monthly payment to a one-off payment. However, in terms of labour relations, the following legal issues will affect the Employer if the monthly payment is picked:
- The monthly payment up to the due date of the LC could be interpreted that the labour relations between the Employer and the Employee still last until the term of the LC. That means the parties fail to fully terminate the LC prematurely;
- In relation with the types of compulsory insurance, due to the existence of the labour relations, the parties may subject to pay prescribed compulsory insurance; and
- The Labour Code does not allow the Employer and the Employee to conclude the LC without assignment of the Employer in reality, leading to no work performed by the Employee as agreed in the LC. Therefore, paying the monthly salary up to the due date of the LC to the Employee who does not work for the Employer may be considered inconsistent with the requirements of the labour laws. In addition, the salary payment for the period when the Employee is not working in practice can be rejected under the CIT law.
Thus, both options (1) and (2) have their own advantages and disadvantages and in fact, the decision of the salary payment plan will largely depend on the negotiation and dealing between the Employer and the Employee. However, option (1) will ensure that the LC between the Employer and the Employee is fully and completely terminated, avoiding legal risks that may arise for the Employer in relation to the termination of the LC.
[1]Article 34.3 of the Labour Code
[2]Article 48 of the Labour Code
[3]Articles 113.2 and113.3 of the Labour Code
[4]Article 46 of the Labour Code
[5]Article 2.2. Decree No. 111/2013/TT-BTC of the Ministry of Finance dated 15 August 2013
[6]Article 31.1.2 of the Decision No.595/QD-BHXH of the Vietnam Social Securities dated 14 April 2017
