In the context where enterprises are increasingly required to adapt to market fluctuations, labor restructuring has become a common solution to optimize operations and maintain business efficiency. However, in practice, not only employers but also human resources professionals and even legal practitioners often confuse the concepts of “changes in organizational structure or technology” and “economic reasons” when using them as legal grounds for terminating employment contracts.
Such confusion not only results in the misapplication of labor law provisions and incorrect calculation of statutory allowances, but also gives rise to a significant risk of labor disputes and legal liabilities for enterprises.
This article aims to clarify the legal nature of each concept, thereby assisting employers and human resources personnel in properly identifying and correctly applying the relevant legal grounds in the process of labor restructuring.
1. Changes in Organizational Structure or Technology
Legal basis: Clause 1, Article 42 of the 2019 Viet Nam Labor Code
The following cases are deemed to constitute changes in organizational structure or technology:
a) Changes in organizational structure or reorganization of labor;
b) Changes in production or business processes, technology, machinery, or equipment associated with the employer’s production or business lines;
c) Changes in products or product structure.
Changes in organizational structure or technology may be understood as fundamental and systematic adjustments in the employer’s organizational, managerial, or production and business activities, which consequently give rise to changes in labor demand. Under this interpretation, changes in organizational structure or technology are not limited to the replacement of machinery or the adoption of advanced production technologies, but also encompass various forms of adjustment closely linked to the enterprise’s organizational strategy and business operations.
First, changes in organizational structure or labor reorganization are reflected in the rearrangement or streamlining of the organizational apparatus, adjustments to the functions and duties of departments, or changes in labor organization methods. In practice, this includes scenarios such as the merger or dissolution of departments, changes in the functions of a division, reduction of intermediate management levels, or transformation of the business model, resulting in certain job positions no longer being necessary or suitable under the new organizational structure.
In addition, changes in production or business processes, technology, machinery, or equipment associated with the enterprise’s business lines are also regarded as changes in organizational structure or technology. The automation of certain production stages, the application of management software replacing manual work, or investment in new technological production lines may significantly alter requirements regarding the quantity, qualifications, or skills of employees, thereby leading to the redundancy of certain positions.
Furthermore, changes in products or product structure constitute a typical manifestation of changes in organizational structure or technology. Where an enterprise discontinues the production or business of certain traditional products in order to focus on new products, or adjusts the proportion of product groups in its business strategy, such changes often entail corresponding adjustments in labor structure, skill requirements, and job positions. For example, scaling down an inefficient business segment or expanding a high-technology-oriented segment may render a number of employees incompatible with the enterprise’s new human resource needs.
Although all of the above circumstances are recognized by law as “changes in organizational structure or technology,” in applying this ground, the employer bears the burden of proving the substantive and objective nature of such changes, as well as demonstrating a direct causal relationship between the changes and the inability to continue arranging work for the affected employees. The formalistic or mechanical invocation of this concept, without sufficient factual basis or without arising from genuine production or business needs, is in practice a common cause of labor disputes and a source of increased legal risks for enterprises.
2. Economic Reasons
Legal basis: Clause 2, Article 42 of the 2019 Viet Nam Labor Code
The following cases are deemed to constitute economic reasons:
a) Economic crisis or economic recession;
b) Implementation of State policies or laws in the course of restructuring the economy or fulfilling international commitments.
Under current labor law regulations, “economic reasons” are not construed narrowly in relation to the financial condition of individual enterprises, but rather are approached from a macroeconomic perspective. Specifically, this term encompasses situations where the economy falls into crisis or recession, or where the State promulgates and implements policies aimed at restructuring the national economy. This approach differs significantly from the common understanding in practice, thereby giving rise to a frequent mistake whereby enterprises equate termination of employment contracts for “economic reasons” with termination due to “changes in organizational structure or technology.”
In practice, when facing financial difficulties and being compelled to reduce their workforce, many enterprises choose to rely on “economic reasons,” arguing that a decline in their financial situation equates to an economic downturn. However, such reasoning is inconsistent with the legal interpretation and application of “economic reasons” under current labor law.
In cases where termination of employment contracts arises from the implementation of State policies in the process of economic restructuring or for the purpose of fulfilling international commitments, the legal basis can often be identified through administrative decisions or official documents issued by competent State authorities. By contrast, determining the existence of an “economic crisis” or “economic recession” presents considerable challenges, as Vietnamese law has yet to establish specific legal criteria or a uniform definition for these concepts. Although various approaches exist in defining “economic crisis” and “economic recession,” both academic scholarship and legal practice converge on the core understanding that these are macro-level phenomena affecting the national economy or even the global economy. Consequently, the financial difficulties of individual enterprises alone are insufficient to be regarded as an economic recession or crisis in the legal sense.
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