Hiring Vietnamese Staff from Abroad
Latest Update: November 4, 2021
This is relevant for: Foreign companies selling, sourcing and servicing in Vietnam
To hire staff abroad, employers have two options:
The number of companies trading with and operating in Vietnam grows steadily. This market becomes an increasingly relevant destination for sales, sourcing and servicing. Hence, many enterprises are looking to strengthen their footprint in Vietnam by employing local personnel from abroad. This can basically be done through the following options:
Hire with a labor contract
Close a service contract (aka employee service contract)
Within a service contract, the relationship is closed between a "client" and an "individual". A labor contract is agreed by an "employer" and an "employee". For understandability and because many foreign companies view it this way, we will only talk about employer/employee within this article.
For foreign companies, labor contracts (LC) and service contracts (SC) stand in competition to each other. The question often is: "Which one is suitable for us?".
Within this article, we will compare both solutions regarding different aspects.
Technical Issues in Closing Cross-Border Contracts
Labor Contract: First of all, it is not possible to directly close a labor contract between a foreign employer and a Vietnamese employee. This means that if a company abroad wants to sign such an agreement it has to utilize a local legal entity. A few options below:
Hire through subsidiary in Vietnam: A foreign company could establish a local Vietnamese company or representative office. However, this often is unprofitable if just one or two staff would be employed to it.
Hire through partner: A neat option can be to ask a local business partner to hire staff which will be paid by the foreigner through a service charge. Especially in sales, there seem to be many companies supporting dedicated sales managers through this kind of arrangement. However, there are cases where foreigners do not want an employment through partners to keep "their" staff independent or partners simply refuse.
Office-in-Office: We, AHK Vietnam, can support foreign companies without a foothold in Vietnam through the employment of dedicated project managers for sales and sourcing activities. More info here.
Service contract: Can be closed cross-border.
Overview: Setup service contract and labor contract if foreign company does not have an entity in Vietnam
Possible Types of Employment
Labor Contract: Service contracts basically not allow for the kind of supervision of staff that a labor contract would grant. Indochine Counsel states that "full-time devotion" may also not be requested by the client. Hence, "nine-to-five" employments in a traditional office setup could be viewed as critical in legal terms. This would resemble freelancer regulations in Germany. Foreign employers should therefore take care that their local Vietnamese employees do not slip into some kind of "false self-employment" (German: "Scheinselbständigkeit"). The law firm "Le & Tran" provides an overview of the legal distinctions which can be found here.
Service contract: In contrast, within a labor contract any type of employment regulation may be agreed as long as it is in line with the employer's business license and the Vietnamese Labor Code.
Application of Labor Code
Labor Contract: Will be subject to the Labor Code. Hence, employers have to observe regulations on overtime, annual leave etc. Notably, within Labor Code regulations it can be hard to implement employer-side dismissals in Vietnam. For the employer, being subjected to the Labor Code can thus be a substantial disadvantage if labor conflicts arise.
Service contract: The Labor Code does not apply to service contracts.
Labor Contract: Subject to regular, income-dependent personal income tax (PIT), social insurance (SHUI) and possibly labor union fees (LU). This makes labor contracts a relatively costly affair as laid out here.
Service contract: The freelancer basically "only" has to pay 10% PIT flat. There is no administrative burden that has to be taken care of by the employer abroad.
Up until now, we mainly looked at legal and financial aspects of labor and service contracts. Here, service contracts are surely beneficial from an employer's point of view because they are cheaper to implement and show more flexibility than labor contracts. However, company policies as well as personal views and attitudes also play an important role in the comparison as can be seen below.
Service contract: The employee has to pay PIT in Vietnam. This responsibility is solely laid upon the employee; there is no liability for the employer abroad. It has to be emphasized though that tax evasion seems to be widespread in Vietnam. While non-compliance with local tax regulations is not an immediate issue for the foreign employer it may hamper business activities if the employee's business should be subject to penalties due to violations. Therefore, the foreign employer should demand proof of the employee regarding fulfilment of relevant regulatory obligations. Furthermore, graft is a major challenge in Vietnam. It will be very hard for the employer abroad to control any such activities, e.g. giving out "informal entry fees", by the employee.
Labor Contract: In contrast, within a labor contract relationship, the employer has more leverage enforcing compliance standards. Because PIT, SHUI and LU will be paid by the employer there should be no challenges with non-compliance in statutory aspects.
Service contract: Again, from a purely technical-legal standpoint, service contracts appear to be a rational choice for foreign companies looking to "employ" personnel in Vietnam. However, in practice they are often viewed as to "loose". Many European/German companies want to establish long-term and close relationships with their representatives abroad. In this respect, service contracts with independent freelancers may be considered "short-term" and "distant". The idea of working with freelancers is thus often not part of company policies.
Labor Contract: On the other hand, labor contracts are often seen as too much "exposure" and a potential risk; especially in light of the relatively hard rules on employer-side dismissal.
Service contract: Overall, service contracts must be seen as an employer-friendly solution. Within them, the freelancer does not enjoy the same degree of protection an employee would receive such as protection against dismissal and social security contributions. Therefore, high-skilled and sought-after staff might refuse working within service contracts. Instead, this target group would prefer closing a labor contract. In these cases, a service contract might be a deal-breaker.
Labor Contract: In contrast, most employees will not object closing a labor contract.
While service contracts have a strong lead in technical and financial terms, labor contracts may be considered as more intimate and long-lasting. There are use cases for both employment modes. Every enterprise has to weigh pros and cons to make a decision on which to apply for their business in Vietnam.
In a nutshell: Pros and Cons of labor contracts and service contracts from a foreign employer's perspective
From our experience there are mainly three use cases where service contracts compete with labor contracts:
Sales and marketing
Service and maintenance
These use cases correlate with different factors. Four of them seem most important:
Work hours: If the work relationship constitutes a regular "nine-to-five" job there might it might be legally mandatory to close a labor contract. If work is irregular, for example, if a technician is only called out for a certain job, it might be more fitting to a service contract.
Success basis: Jobs requiring constant diligence, like quality management, might be prone to labor contracts because they often lead to regular work hours. On the other hand, if payment is mostly based on outcome, e.g. sales, work hours often don't count as much and thus service contracts might be applicable.
Employee disposition: If employees like to avoid risks they often look for more secure long-term engagements including payment of social security contributions. In their eyes, labor contracts contribute to risk mitigation. In contrast, risk-friendly individuals might choose service contracts due the perceived freedom they offer as well as the possibility of receiving higher bonuses. Unsurprisingly, sales types tend to choose service contracts more often.
Labor availability: As pointed out above, labor contracts are often the "better" choice from the employee's point of view. If they have the "cards in their hands" they will thus favor these. This is often the case if they are active in highly sought-after positions requiring rare know-how. So, if the labor availability for a certain function is low, offering a labor contract might be in order.