New labor decree troubles recruitment of expats in Vietnam

The government has recently issued Decree No. 46/2011/ND-CP dated 17 June 2011 amending a number of provisions of Decree 34/2008/ND-CP dated 25 March 2008 on recruitment and management of foreign employees working in Vietnam (referred to as “Decree 46”), in effect from 01 August 2011. This controversial decree has in fact restricted recruitment of foreign employees in Vietnam, imposed irrational conditions for work permit extension, and is likely to constitute violations of the WTO Agreements as well as US – Vietnam BTA.

1.          Recruitment process: Offer to Vietnamese first, then expats

From the effective date of Decree 46, at least 30 days prior to any recruitment of foreigners, companies in Vietnam must publicly inform recruitment demands for Vietnamese for positions that they expect to employ foreigners in at least one national newspaper and one regional newspaper. Companies must present documents evidencing that it has advertised recruitment demands for Vietnamese to these positions to apply for work permits of foreign employees.

This regulation, in fact, is commercially and legally bizarre. First, it will prolong companies’ recruitment process because it applies to recruitment of all foreign employees, including the top managerial positions. For example, a subsidy of a German company in Vietnam wishing to employ a capable German citizen as its general director will have to inform and go through recruitment process with Vietnamese applicants first before offering the position to any German of their choice.   Secondly, companies may face the risks of being sued by Vietnamese applicants if after placing advertisements, they do not conduct the follow-up recruitment steps such as resume screening or interviews.

This new regulation can constitute a violation of assurance about the right of companies to engage top managerial personnel of their choice as provided under US- Vietnam BTA. Article 8.2, Chapter IV (Development of Investment Relations) of US-Vietnam BTA provides that companies, constituted and organized under the laws of the Untied States, have the right to engage top managerial personnel of their choice, regardless of nationality, and any application of Vietnam’s labor law must not impair the substance of this right. As enunciated under the Enterprise Law and, almost all charters of companies in Vietnam, the employment and appointment of general directors or executives of a subsidy in Vietnam are decided by the parent companies, via their representatives in the subsidy. If the above regulation is applied, it will impede the freedom of American companies to, at their discretion, select and appoint executives of their subsidiaries or even branches in Vietnam, regardless of nationality.

2.         Extension of work permits for foreign employees must be accompanied with apprenticeship contracts with Vietnamese employees

Another controversial rule is provided under Article 1.13 of Decree 46. Accordingly, in order to extend work permit for a foreign employee, a company must now enter into an apprenticeship contract with a Vietnamese employee expected to substitute the relevant foreign employee.
An apprenticeship contract, or “hop dong hoc nghe” in Vietnamese, is commonly understood and elaborated via various labor regulations, as a contract between an enterprise or an entity licensed to conduct vocational training and a trainee in order for him to obtain basic technical and professional skills to get a job after apprenticeship. A company is only required to enter into a written apprenticeship contract if it recruits a trainee and employs him after termination of apprenticeship. An apprenticeship contract is entirely different from a training contract, or “hop dong dao tao” in Vietnamese. For example, a tax consultant can sign a training contract with his employer to develop his professional knowledge and managerial skills. However, if he wants to switch his job to a cook, he may enter into an apprenticeship contract with the current company or another company if they offer apprenticeship for that type of job. In addition, an apprenticeship contract is normally used when an employment relation has not been established between the trainer and the company.

In our opinion, the drafters of Decree 46 may have some confusion regarding the use of these two terms. If the apprenticeship requirement is strictly applied, current Vietnamese employees targeted as replacements for foreign managers may have to convert their employment relation to apprenticeship relation (!). Further, even in case the drafters actually mean the training contract, it is inconsistent with Article 132 of the Labor Code. Article 132 of the Labor Code indeed only requires companies to have a training plan and program to train Vietnamese to substitute foreigners in management positions or positions that require high technical expertise. Decree 46 has deviated from Article 132 and added an extremely unreasonable requirement on companies.

We are also of the opinion that this regulation, in essence, is a prohibition of hiring experienced and capable foreign employees where a company does not sign apprenticeship contracts with Vietnamese employees. Based on the wording of GATS and Vietnam’s WTO Schedule of Specific Commitments in Services (“Vietnam’s Specific Commitments”), as well as the interpretation of the Appellate Bodies in US-Gambling and Mexico – Telecoms cases, it is arguable that this regulation has in fact violated Article XVI (1) and XVI (2) (d) of GATS .

3.         Dilemma of intra-corporate transferees in manufacturing or sectors not covered under WTO commitments: no work permit exemption or extension?

Although work permit exemption is provided for a number of intra-corporate transferees under Decree 34, the exemption is only available to intra-corporate transferees working for companies in 11 services incorporated under Vietnam’s Specific Commitments.

This means intra-corporate transferees working for a purely manufacturing company or for companies operating in sectors other than these 11 sectors (e.g. education services or services incidental to manufacturing) are not entitled to this exemption. For example, a manager of a chip manufacturing company, who has been assigned to work as an intra-corporate transferee by the parent company, may still be required to apply for a work permit. In addition, because Article 10 of Decree 34 is very ambiguous on extension of work permit to intra-corporate transferees and silent on documents necessary for such extension, these intra-corporate transferees may be rejected to extend their work permits in Vietnam.

4.         Suggestions for foreign investors and negotiators of FTAs with Vietnam

Given the commercial and legal irrationality of these regulations, we suggest that foreign companies in Vietnam should cooperate via foreign business associations to raise concerns to the government over the new Decree 46. Otherwise, this regulation would cause onerous burdens and delays for companies in terms of employing foreign employees and work permit application, as well as expose companies to legal risks for contracting apprenticeships with Vietnamese employees.

For European and American negotiators of FTAs with Vietnam, it is imperative to negotiate with Vietnam on extension of service sectors entitled to market access rules more liberal than, or at least similar to, those of GATS, freedom of companies (both foreign parent company and their subsidies) to select managerial personnel regardless of nationality, and no limitation in whatsoever manner of the number of managerial and high skilled foreign employees they are entitled to hire.

Decree 46 (amending Decree 34) on recruitment and management of foreign employees in Vietnam:

•        Extension of work permits for foreign employees must be accompanied with apprenticeship contracts with Vietnamese employees expected to substitute the relevant foreign employees;

•        No work permit exemption for intra-corporate transferees in manufacturing and sectors not covered by the Vietnam’s WTO Specific Commitments.

•        At least 30 days prior to any recruitment of foreigners, companies must publicly inform recruitment demands to Vietnamese for positions they expect to employ foreigners;

•        Evidence of conducting recruitment advertisements to Vietnamese must be included in the application for work permits of foreign employees; and

•        Can trigger violations of GATS and US – Vietnam BTA.

For more information, please contact Oliver Massmann at [email protected]