Vietnamlawmagazine

Vietnamese lawmakers are garnering comments on the “last of the last” version of the draft amendment to the Labor Code (the Draft) from stakeholder parties. Business communities are frowning over the “labor reform” that, in their view, has yet been evolving for the better.

Giang Nguyen¹ and Ha Dang²

A bit of history

The interminable chain of consultations on labor reform seems to have reached an end. On March 24, the Vietnam Chamber of Commerce and Industry (VCCI) brought parties together in another round of discussion on the 6th version of the Draft in a hope to effectuate wishful changes to its rigid provisions toward ventilating industrial relations and labor markets in Vietnam. The meeting went well, but an air of disappointment was looming large among business communities as they knew it possibly hard to change things at last resort.

By way of background, the year 2008 seemed to launch a “New Deal” for industrial relations of Vietnam when the Prime Minister issued Decision No. 1129/QD-TTg dated August 18, 2008, issuing an Action Plan for Implementation of Directive No. 22-CT/TW dated June 5, 2008, of the Secretariat of the Party Central Committee. The Decision established a framework:

“… For enhancing leadership, and providing direction for the development of harmonious, stable and progressive labor relations within enterprises; with a view to perfecting the legislative environment so that strikes at enterprises could take place in a legal manner; to maintain the harmonious and stable management-labor relations for protection of legitimate rights and interests of both sides while contemporaneously ensuring a stable investment environment and social order, the Prime Minister hereby requests that ministries, line agencies and competent local authorities to execute the Directive by implementing an action plan that started with reviewing, revising and supplementing the Labor Code and its implementing legal documents.”

Four years have lapsed since the first draft was touted out for public debate and numerous changes have been effected. However, if the ultimate goal is to achieve stable and harmonious labor relations, then tremendous efforts exerted over the past four years may have gone down the drain.

Easy to opt in but hard to opt out

A salient feature of current labor laws of Vietnam is securing income-employment. Employers are welcomed when they initiate a hire contract with an employee. The law gives them a maximum 60 probationary days to think over the candidate. During this period, parties may terminate at-will if the other party fails to perform agreed requirements. And then the deal must be sealed. Thirty days after the expiry of the first time-bound employment contract, parties may renew another one which legally lasts for another statutory period, then the law ties them into an indefinite relationship under which only the employee may break out. Even though the current law provides the right to exit for employers, strictures have been found every time they seek to exercise it.

Under current laws, there are a number of exit strategies. Companies may choose not to renew the definite hire contract upon its expiry. This is the most comfortable safe harbor as no legal consequences may result. But conventional wisdom shows most employment relationships will never break during the initial phase of employment where parties are anew and feel fond of one another. Problems do really arise as the contract has already entered into infinity. At this point, unilateral termination on the part of employers may no longer be “child play”. Only when substantial evidence suffices as to the “fault” of the employee evidenced by their “failure to perform”, their commitment of embezzlement, misappropriation of corporate funds, disclosure of business secrets, theft or any misconduct expressly named in the internal labor rules (ILR), the employers would be able and legally sound to terminate the contract. However, in practice the burden proof that the employer must shoulder seems so burdensome that proof may be nearly impossible.

Lawyers play a critical role in the termination process. Sensing that explicit routes for opting out of the bond are narrow, some advise companies to restructure part of their corporate structure to fit in the “retrenchment” leeway permissible by the law. This is, however, easier said than done. Vanishing one department is not difficult for the company to carry out, but complying with all subsequent procedures required by the law and substantiating it to convince the labor authorities is an extremely tough nut to crack. Other than that, as consultations with the trade union are compulsory, it may play a blocking role if that needs be, particularly when the higher-level union comes into play in the vacuum of a grassroots trade union. After all, without mutual consent to exit, the employer may be bogged down in lawsuits subsequent to any premature and reckless termination.

During the course of debating the Draft, opinions vary as to the propitious advent of an employment-at-will regime as prevailing in many developed economies. While Vietnamese lawmakers raise grave concerns over the discretionary right to terminate on both sides, they have gradually recognized the preeminence of the rule. An immediate upside is that it creates pressure on the employee to continuously improve in order not to receive a “you are fired” email the next morning he or she comes to the office. Another is the flexibility of labor markets where no strings are attached and demand-supply of labor is fully unleashed. Tough rules make Vietnamese workers aware of their liability to adapt and respect modern corporate culture and work themselves to the full productivity level. Though the government may be wary of who will carry the burden of frictional unemployment during the job-hopping gap considering the nascent and tenuous social safety net, envisioning the longer-term development of Vietnamese human resources, this rule may offer greater good than harm.

Restricting overtime and expanding maternity leave: Is it supportive of workers in “low wage” sectors?

The strident call for reform that rings loud is the Draft has not enabled labor-intensive manufacturers to fully tap their workforce capacity in meeting unexpected orders commissioned by buyers in high seasons. Critique is lashed at the overtime ceiling and expanded maternity leave which is considered to do more harm than good to workers, particularly those in the low wage sectors.

The Draft permits a total overtime of 200 hours per year with a monthly cap of 30 hours except for some special cases where the government grants 300 or 360 hours. Questions arise as to whether overtime is “under”? Many companies need the employee to work more due to operational requirements mostly driven by buyer demands such as rush orders in a high season. In any case, this overtime cap fails factories to meet unexpected orders. And in fact, factories in Vietnam are trying by one way or another to dodge around this overtime ceiling without being penalized. Some factories even report that buyers know the restrictive overtime cap and have been looking the other way. This just shows how obsolete this overtime cap has become.

Overtime is by law not compulsory. However, with the current minimum wage being too low to cater for the basic living standards, the employee expects further income from working overtime. If they are unable to do the volume of overtime with one company, they may choose to take up a second job with another company. This is not good for the employees themselves and for the companies in the same competing line of business. Furthermore, in comparison with other countries in the ASEAN and other regions, Vietnam is losing competitiveness in terms of its lowest overtime limit. There is an imminent risk that is associated with the restrictive overtime regime. Buyers, in the face of this overtime cap, may look for sourcing labor-intensive manufactured products (textile and apparel, footwear etc,) from other countries with relaxing overtime. Millions of job would fly from Vietnam to neighboring countries like Cambodia, Indonesia and even Myanmar. Worryingly, there have been factories who said they could relocate their factories away from Vietnam in 14 days if labor laws are inhibiting to their normal business functioning.

A counter-argument may help justify lawmakers’ views and perennial concerns. Critically, working overtime is physically exhaustive to labor force who already squeezed themselves out of a 12-hour-work shift. Labor accidents and work-related diseases are reportedly rising. This could over the long run impact the holistic well-being of Vietnamese labor force. Economically, overtime kills new job creation. In fact, with an abundance of labor market entrants, particularly those detaching themselves from the copious rural workforce, labor-intensive factories are still bottomless in terms of absorbing an exodus of workers from other sectors. By imposing extra hours of daily work, companies allege to have saved huge recruitment and training costs in engaging new staff.

Sensible recommendations have been made as to enhance flexibility in working hours in order for companies in Vietnam to maintain their competitiveness in the context that neighboring countries are racing to the bottom by relaxing labor laws. As such, companies should be allowed to exceed 300 hours per year on the principle of mutual agreement. Employees should be allowed to work longer than contractually agreed if they consent to do so. The law should give the employer the right to reach agreement on working overtime with the employee and such should be defined in the Labor Contract, Internal Labor Rules and Collective Agreement as well as any other labor arrangements. While acknowledging the institutional concerns over the health and well of the general working population, is it reasonable for the nation to work harder during its early years of industrial start-up?

While capping overtime is just one side of the story, expanding maternity leave has added spicy sauces to labor law debates. Vietnamese women would be entitled to a six-month maternity leave, a 150% hike from the current duration. Some prominent representatives of foreign business communities such as EuroCham and AmCham are raising their eye brows over this change and asking if Vietnam wants to be a welfare state from which many super high income countries even wish to break free. On one hand, expanding maternity leave will surely apply pressure on the social insurance funds which must, in turn, raise the contribution rates. The payroll taxes will increase and workers’ take-home income would therefore decrease. In the context that the funds risk being on the abyss of deficit and insolvency, adding more liabilities on them may not be a wise thing to do. In addition, separating women from work for a longer duration would blunt their working sense and in extreme cases could amount to depriving their working right. Though the Draft allows women to negotiate back to work after four months, many employers may not constructively reject it. A longer time-off means potentially being replaced and thus women could lose chances to advance higher in their career. All these would risk contravening the spirit of the United Nations Convention on Advancement of Women (CEDAW).

Centralized bargaining: is it frivolous?

Labor reform should ultimately aim to remove strictures on management-labor relations and ventilate preexisting predicaments by creating new channels of dialogue. During the past two decades since the Labor Code was enacted, there have been uncountable labor unrests disguised under “wildcat” strikes. Analyses of causes have shown that workers and employers fail to communicate with one another in the absence of a periodic and stable dialogue forum. Collective bargaining hence serves the purpose of such a forum where labor and management freely discuss, compromise and agree on new terms and conditions of employment then crystallize them in a collective labor agreement (CLA). Statistical facts show that over years, the Labor Code has brought about symbolic bargaining that results in “copy of the law” CLA that in fact does not work in stabilizing workplaces but do exist to just form a complete HR management toolkit. Reasons are ample but one notable cause is that there is not clear-cut separation of labor and management at workplace level. In fact, key executive members are on the payroll of management. Cases are known on trade union chairmen cum human resources managers. Thus, the “morale to enter a real fight” on the part of enterprise trade unions is zero when it is the time for parties to negotiate a new CLA.

The Draft pushes both enterprise and industry bargaining levels. Procedures on steps, representational mechanisms and enforcement of CLA have been shaped. While it is feasible for a bargaining to take place in the workplace level, it may be too far from being practical for the country to exercise an industry-level bargaining for a couple of reasons. First of all, there has yet to be a well-established representational mechanism where industry management and labor could meet and talk. VCCI and VCA (Vietnam Cooperative Alliance) may stand in the vanguard of representing Vietnamese employers who, in theory, must include foreign investors. But then the status of foreign business associations as part of the employers’ most representative organization should be revisited. Vietnamese laws only allow them to be associate members of VCCI and have no voting right. A question is if the law would allow foreign business associations to act as a party to bargaining in balance to Vietnamese industry trade unions. This is a critical question that needs be solved if Vietnam wants industry collective bargaining to unfold.

Other issues of concern over the conflict between enterprise and industry CLA and what extent centralized bargaining would contribute to stabilizing workplace relations have come to the fold. Experts say as long as companies can do well in enterprise bargaining, there would be no need for lifting the bargaining to another level. When it comes to which CLA assumes supremacy, Vietnamese lawmakers point to industry CLA. As such, if industry CLA offers better terms and conditions of employment, then enterprise CLA must be amended accordingly. This sounds philanthropic but not logical from the balance of power and the game of negotiation. In modern economies where a relative balance of power is redressed between management and labor, if labor wins the negotiation over better CLA terms, workers would enjoy their hard-won results. Workers should also be ready to see their benefits reduced if the management fights back and seal a deal on lower terms and conditions. When industry CLA is revised down, enterprise CLA must follow suit. But this seems not the logic of action in the Draft. The link between the two is thus not yet causal, but one way and imposing.

Could Vietnam maintain its competitiveness as an abundant pool of labor?

The World Economic Forum (WEF) announced in its 2011-2012 Global Competitiveness Report that Vietnam dropped six spots from 2010 in terms of competitiveness. The Report shows pessimistic view of Vietnam’s two-digit surging inflation, high state budget deficit ratio and substandard infrastructure in addition to cumbersome administrative procedures and corruption.

While Vietnam is touting its lucrative FDI destination in terms of other factors, its copious labor pool remains a dominant strength that attracts investors. However, the Draft shows uncompetitive provisions such as those on overtime, maternity leave and strict turnover procedures etc. Business community representatives repeatedly maintained that these provisions could restrict and reduce productivity. In fact, statistics released by MOLISA 2010 Employment Trend Report, Vietnam’s industrial sectors, which generated the highest share of the gross domestic product (GDP) in 2009 (around 42 per cent), experienced a zero average annual increase in labor productivity between 2007 and 2009. Further, the lack of productivity growth may limit the scope for improvement of working conditions. Also under the report, it is without the adequate education and skills of the labor force that may plunge Vietnam into the low productivity trap and thus would hamper its competitiveness in a crowded global market. The report went on suggesting that it is imperative for Vietnam to upgrade and enhance its workforce’s skills as well as improved access to training etc., to boost productivity, improve decency of job and income, and above all attain stronger economic development in the short and long run.

Amidst this context comes a palpable sense of urgency that the Draft and the subsequent Industrial Relations environment created when it becomes the new Labor Code would have an unwanted impact on current and future FDI which is on the down trend. Already, statistics released by the Ministry of Planning and Investment shows FDI in 2011 fell 26% from 2010 peak. Another discernible fact is that Vietnam is losing opportunities to attract modern manufacturing FDI, which is going to neighboring countries. This is the reason why the air of disappointment is dooming over FDI communities when their recommendations have not been seriously considered after serial consultations, though their industrial share represents around 42% of Vietnam’s gross industrial production and 59% of Vietnam’s exports in 2011. FDI in manufacturing has long been deemed the “goose that lays the golden egg” for Vietnam’s economy. If such is true, the Tripartite Partnership, the Government, and the National Assembly should have paid greater attention to and taken positive action on their comments and recommendations to make labor reform truly in line with business demands and regional competition.-