Question
What procedures must an enterprise follow when terminating employment contracts with employees due to changes in organizational structure, technology, or economic reasons?
Answer
Pursuant to Article 42 of the Labor Code 2019, an enterprise may terminate employment contracts with employees in cases of changes in organizational structure, technology, or for economic reasons. However, termination of employment contracts in these circumstances must fully satisfy the conditions and procedures prescribed by law. Failure to comply with the applicable regulations may result in the termination being determined as unlawful.
First, the enterprise must determine whether the workforce reduction actually falls within the cases of changes in organizational structure, technology, or economic reasons as prescribed by the Labor Code. Where changes in organizational structure, technology, or economic reasons affect the employment of multiple employees, the enterprise must formulate a Labor Utilization Plan in accordance with Article 44 of the Labor Code 2019.
The Labor Utilization Plan must contain the contents prescribed by law, including the number and list of employees who will continue to be employed, employees who will be retrained for continued employment, employees who will be transferred to part-time work, and employees whose employment contracts must be terminated; and must also identify the measures and financial resources necessary to implement the plan.
During the formulation and implementation of the plan, the enterprise must consult with the employee representative organization at the grassroots level, if any. After the plan is approved, the enterprise must publicly notify the employees of the plan within 15 days from the date of its approval.
Where, after implementing the measures under the Labor Utilization Plan, the enterprise is still unable to arrange employment and is therefore required to terminate employees, the enterprise must provide written notice to the provincial-level People’s Committee and the employees at least 30 days prior to the date of termination.
In addition, the enterprise must fully perform its financial obligations toward employees whose employment contracts are terminated. Pursuant to Article 48 of the Labor Code 2019, the enterprise is responsible for paying salaries and other amounts related to the employees’ entitlements, completing procedures for certification of the employees’ periods of participation in social insurance and unemployment insurance, and returning documents retained from the employees. Where employees satisfy the applicable conditions, the enterprise must also pay job-loss allowance in accordance with the law.
Regarding the payment deadline, amounts relating to the employees’ entitlements must be paid within 14 working days from the date of termination of the employment contracts. In cases where the enterprise changes its organizational structure or technology or for economic reasons, this period may be extended but must not exceed 30 days.
In practice, an enterprise may face risks if it merely relies on a restructuring decision or an internal decision of the enterprise to unilaterally terminate employment contracts without formulating a Labor Utilization Plan, consulting with the employee representative organization, or fulfilling the statutory notification obligations. Such failures may result in disputes and give rise to legal liabilities of the enterprise toward the employees.
Conclusion
An enterprise cannot simply rely on restructuring as a reason to immediately terminate employees’ employment contracts. When reducing its workforce due to changes in organizational structure, technology, or economic reasons, the enterprise must properly determine the legal grounds, formulate and implement a Labor Utilization Plan, consult with the employee representative organization, fulfill the applicable notification obligations, and ensure all employee entitlements are fully protected in accordance with the Labor Code 2019.
Full compliance with the prescribed procedures not only ensures the protection of employees’ rights and interests but also helps the enterprise mitigate the risks of disputes and legal liabilities when implementing restructuring and workforce reductions.
If your company requires legal advice on workforce reduction due to restructuring, formulation of a Labor Utilization Plan, or procedures for lawful termination of employment contracts, please contact SB Law for timely and appropriate support from our team of lawyers and legal experts based on your company’s actual circumstances.
