How should workforce reduction due to capital reduction be implemented in compliance with the law?

In the context of corporate restructuring, workforce reduction due to capital reduction has become a sensitive legal issue because it directly affects employees’ rights and the responsibilities of enterprises. Understanding the legal grounds, implementation procedures, and compensation obligations helps enterprises minimize dispute risks while ensuring that personnel reductions are conducted in compliance with applicable regulations.

I. Introduction to issues relating to workforce reduction due to capital reduction

Workforce reduction due to capital reduction is an important restructuring decision of an enterprise, typically arising when the enterprise experiences financial difficulties, downsizes its operations, or changes its business strategy.

Personnel reductions in such circumstances directly affect employees’ jobs, income, and benefits, while also imposing numerous legal obligations on the enterprise concerning the legal basis for implementation, notification procedures, compensation obligations, and dispute resolution. Failure to comply with applicable regulations may expose the enterprise to complaints, labor disputes, or related legal liabilities.

II. Understanding workforce reduction due to capital reduction

1. What does workforce reduction due to capital reduction mean?

Workforce reduction due to capital reduction refers to an enterprise reducing the number of employees when implementing a capital reduction or downsizing its production and business operations, thereby leading to a reduced demand for labor. Such a circumstance is generally considered a case of employee dismissal due to organizational restructuring, technological changes, or economic reasons and must comply with Article 42 of the Labor Code 2019.

2. What are the main reasons leading enterprises to reduce workforce due to capital reduction?

The principal reasons leading enterprises to reduce workforce due to capital reduction usually stem from financial factors and operational restructuring, including:

• Financial difficulties or prolonged losses causing enterprises to reduce capital, downsize operations, and cut personnel expenses.
• Corporate restructuring, such as changes in organizational structure, departmental mergers, or streamlining operations to align with new capital resources.
• Downsizing production and business activities due to reduced market demand, discontinuation of products, or partial business closure.
• Changes in business strategies or operating models resulting in reduced labor demand.
• Policy changes requiring enterprises to restructure resources and personnel.

III. Legal provisions relating to workforce reduction due to capital reduction

1. Are there any legal provisions requiring enterprises to notify employees of workforce reduction due to capital reduction?

• The obligation to provide notice in cases of workforce reduction due to capital reduction is expressly regulated under Article 42 of the Labor Code 2019 regarding employers’ obligations when changing organizational structures, technologies, or for economic reasons.
• Pursuant to Clauses 3 and 4 of Article 42, where changes in organizational structure or economic reasons (including circumstances in which enterprises reduce capital and downsize operations) affect the employment of multiple employees, enterprises are required to develop and implement a labor utilization plan in accordance with Article 44.
• In particular, Clause 6 of Article 42 clearly provides that employee dismissal may only be imposed after the enterprise has consulted with the employees’ representative organization at the grassroots level (if any) and provided at least 30 days’ prior notice to the provincial People’s Committee and the affected employees.

Accordingly, where capital reduction results in workforce reduction, enterprises are legally obligated to provide prior notice to employees and competent State authorities and to implement a labor utilization plan in compliance with Article 42 of the Labor Code 2019.

2. What obligations does an enterprise have regarding compensation when implementing workforce reduction due to capital reduction?

When an enterprise reduces workforce due to capital reduction (which is generally regarded as a case of organizational restructuring, technological changes, or economic reasons), the employer must fully comply with its legal obligations under the Labor Code 2019, particularly the provisions of Articles 42, 44, and 47.

First, under Article 42, if capital reduction creates a risk of job loss for multiple employees, the enterprise must formulate and implement a labor utilization plan. Such a plan is intended to prioritize employee retraining, reassignment to new positions, or other measures aimed at minimizing dismissals. Employee dismissal may only proceed after consultation with the employees’ representative organization and after the required advance notice has been provided.

Where continued employment cannot be arranged, the enterprise is obligated to pay job-loss allowances in accordance with Article 47 of the Labor Code 2019. Accordingly, employees who have worked regularly for at least 12 months and lose their jobs due to economic reasons are entitled to job-loss allowances, with the minimum amount being equivalent to one month’s salary for each year of service (excluding periods during which unemployment insurance contributions were made in accordance with the law).

In addition to job-loss allowances, the enterprise must fully settle all related benefits, including unpaid salaries, unused annual leave payments, insurance obligations, and other financial obligations under the employment contract and relevant laws. If the workforce reduction is implemented unlawfully or causes damage, employees are entitled to claim compensation in accordance with labor law regulations.

3. What common mistakes in the process of workforce reduction due to capital reduction may lead to disputes?

Mistakes in the process of workforce reduction due to capital reduction are often direct causes of labor complaints and disputes. Common mistakes include:

• Failure to formulate, or improper formulation of, a labor utilization plan as required by law, including failure to assess affected employees and provide reassignment solutions.
• Failure to consult with employees’ representative organizations prior to dismissal, thereby violating mandatory procedures.
• Failure to provide proper advance notice to employees and competent State authorities within the prescribed time limit.
• Dismissing employees without proper legal grounds (for example, failure to substantiate economic reasons or organizational restructuring), resulting in unlawful termination of employment contracts.
• Inaccurately or insufficiently paying job-loss allowances, severance allowances, and related benefits, thereby giving rise to compensation claims.
• Applying non-transparent criteria for selecting employees subject to workforce reduction, leading to potential disputes concerning discrimination.
• Failure to issue valid internal resolutions or decisions where workforce reduction is associated with capital reduction or corporate restructuring decisions.

IV. Questions relating to workforce reduction due to capital reduction

1. If an employee disagrees with a workforce reduction decision, what should they do?

If an employee disagrees with a workforce reduction decision, they should first request the enterprise to explain the legal basis for the decision and provide the labor utilization plan in order to examine the legality of the dismissal in accordance with Clause 4, Article 42 of the Labor Code 2019.

If the parties are still unable to reach agreement, the employee may take the following steps:

• Submitting an internal complaint to the enterprise or the employees’ representative organization requesting reconsideration of the decision.
• Requesting assistance from a labor mediator in resolving the labor dispute in accordance with legal procedures.
• Initiating legal proceedings before a competent Court if they believe the workforce reduction violates legal regulations or their lawful rights and interests are not adequately protected.

2. What procedures apply when a decision on workforce reduction due to capital reduction is made?

Pursuant to Articles 42, 44, and 47 of the Labor Code 2019, workforce reduction due to capital reduction (which is considered organizational restructuring or economic reasons) is generally implemented through the following basic steps:

- Step 1. Determining the legal basis for workforce reduction

The enterprise must clarify whether the reason for capital reduction falls within cases of organizational restructuring, labor restructuring, or economic reasons under Article 42 as the basis for implementation.

- Step 2. Developing a labor utilization plan

If the capital reduction affects multiple employees, the enterprise must formulate a labor utilization plan in accordance with Article 44, including lists of employees who will continue working, receive retraining, be reassigned, or have their employment contracts terminated.

- Step 3. Prioritizing reassignment and retraining of employees

Where new positions are available, the enterprise must prioritize retraining employees in order to continue employing them before proceeding with dismissals.

- Step 4. Consulting with the employees’ representative organization

Before deciding on dismissals, the enterprise must consult with the grassroots-level employees’ representative organization in accordance with Article 42.

- Step 5. Providing prior notice to State authorities and employees

Employee dismissal may only be implemented after the enterprise has provided at least 30 days’ prior notice to the provincial People’s Committee and the affected employees.

- Step 6. Fully paying obligations upon dismissal

If employment cannot continue to be arranged, the enterprise must pay job-loss allowances and fully settle all related entitlements in accordance with Article 47.

3. Which legal provisions apply if disputes arise relating to workforce reduction due to capital reduction?

Where disputes arise relating to workforce reduction due to capital reduction, such disputes shall be resolved in accordance with the labor dispute provisions under the Labor Code 2019, specifically:

• Article 179: Providing for types of labor disputes (individual labor disputes and collective labor disputes), including disputes concerning dismissal, job-loss allowances, and employees’ entitlements upon termination.
• Article 188: Regulating the order and procedures for resolution of individual labor disputes, under which most disputes must undergo mediation by a labor mediator before litigation, except for certain cases where direct lawsuits are permitted.
• Article 189: Providing for jurisdiction over collective labor disputes regarding rights, including mediation, labor arbitration councils, and Courts.

4. If the proper procedures are not followed when reducing workforce, how may the enterprise be sanctioned?

Pursuant to Article 12 of Decree No. 12/2022/ND-CP, where an enterprise reduces workforce due to capital reduction but fails to comply with proper procedures, it may be subject to the following sanctions:

The enterprise may be fined from 5,000,000 VND to 10,000,000 VND where employees are dismissed due to organizational restructuring, technological changes, or economic reasons in any of the following circumstances:

• Failure to consult with the grassroots-level employees’ representative organization in advance;
• Failure to provide 30 days’ prior notice to the provincial People’s Committee or employees;
• Failure to formulate a labor utilization plan, formulation of a plan lacking mandatory contents, or failure to consult with employees’ representative organizations during the formulation process.

In addition to monetary penalties, the enterprise must also implement remedial measures, including:

• Payment in full of severance allowances or job-loss allowances together with interest on unpaid amounts;
• Completion of procedures for certification and return of employees’ documents;
• Payment of an amount equivalent to wages for the period during which advance notice obligations were not fulfilled.

5. Do employees have the right to file complaints if they believe they have been treated unfairly in workforce reduction due to capital reduction? How should such complaints be made?

Employees have the right to file complaints if they believe that workforce reduction due to capital reduction violates legal regulations or infringes upon their lawful rights and interests.

Specifically, under Article 5 of the Labor Code 2019, employees are entitled to lodge complaints, denunciations, and lawsuits against decisions or actions of employers affecting their rights and interests. In addition, disputes arising from dismissals due to organizational restructuring or economic reasons shall be resolved under the labor dispute mechanism provided in Article 188 of the Labor Code 2019, under which most individual labor disputes must first undergo mediation by a labor mediator before being brought before a Court (except for certain cases where direct litigation is permitted).

Regarding implementation procedures, employees may submit complaints directly to the employer or the grassroots-level employees’ representative organization requesting reconsideration of the decision. If the matter is not resolved or is resolved unsatisfactorily, employees may request labor dispute mediation and subsequently initiate legal proceedings before a competent Court in accordance with labor procedural laws.

V. Are You looking for a reputable legal expert to assist with issues relating to workforce reduction due to capital reduction?

When enterprises implement workforce reduction due to capital reduction, legal risks such as labor disputes, complaints regarding allowances, and violations of dismissal procedures may easily arise if labor law regulations are not properly complied with.

Seeking legal advice from the outset helps enterprises formulate lawful labor utilization plans, fulfill notification and compensation obligations, and minimize disputes. At the same time, employees may also receive support in protecting their lawful rights and determining legal grounds for complaints or litigation when necessary.

NPLaw provides in-depth consulting services relating to workforce reduction due to organizational restructuring or economic reasons, including assistance in reviewing documentation, representing parties in dispute resolution, and proposing appropriate legal solutions, thereby helping parties resolve issues efficiently, lawfully, and with minimized long-term risks.

The above information is for reference purposes only. Should clients require detailed advice for specific cases, please contact NPLaw Firm for immediate consultation.