Can employees and employers agree to severance pay before terminating the labor contract?

In employment relationships, employees and employers often have certain seemingly simple agreements that, in practice, may carry hidden risks. A typical example is the agreement on severance pay before the termination of the labor contract. The legal issues raised are (i) whether the parties can agree on the above-mentioned content, and (ii) if the parties can agree, what are the legal risks involved. Agreeing on severance pay in advance not only entails potential legal consequences but can also affect the interests of the parties in the employment relationship. 

See more: Is the employee’s resignation agreement or unilateral termination of the labor contract?

According to Article 46 of the Labor Code 2019, the employer shall have an obligation to pay severance allowance to the employee when (i) the labor contract is terminated and (ii) the employee has worked continuously for 12 months or more. However, with an agreement to pay severance before the termination of the labor contract, the employee’s salary (usually paid monthly) may include wages, allowances, other additional amounts, and severance pay. In this case, it is assumed that severance pay is disbursed based on the employee having already met the minimum continuous employment duration of 12 months, thereby satisfying condition (ii) above. Thus, for each year, the employee is entitled to half a month’s salary in severance allowance. 

Regarding the first legal issue, whether the parties can agree on the above-mentioned content, current labor laws do not prohibit or restrict this matter. From one perspective, the result of such an agreement can be seen as more beneficial to the employee, as they receive severance pay even if they do not yet meet the conditions for severance allowance under Article 46.1 of the Labor Code 2019 and Article 8.1 of Decree 145/2020/ND-CP. 

However, despite the lack of prohibitions or restrictions in the law, paying severance monthly alongside salary (essentially providing severance in advance of the actual contract termination) may lead to the following risks: 

• Severance pay is calculated based on the total time the employee has actually worked up to the termination date of the labor contract. Monthly severance payments are made before the actual contract termination date, meaning the employee’s total working time, which determines severance eligibility, is not yet established. As previously mentioned, severance payments in such cases are based on the assumption that the employee has met the minimum 12-month continuous employment requirement. This can be understood as an estimated amount. Consequently, when the labor contract is terminated, the employee may not meet the severance eligibility criteria or may be entitled to a severance amount lower than what the employer has already paid. 

• Since severance is paid before the severance obligation arises, there is a risk that the employee will not recognize the payments as severance, even if stipulated in the contract. This stems from the lack of clear legal provisions on whether an employer may pay severance in advance. 

• According to Article 8.6 of Decree 145/2020/ND-CP, severance pay for employees can be accounted for in the production, business costs, or operating expenses of the employer. In principle, to qualify for accounting, expenses must be legitimate. However, when the employer pays severance monthly, the severance obligation has not yet arisen, meaning this severance payment may not be considered a legitimate expense for business cost calculations. 

Based on this analysis, employers should carefully review and consider the entire content of the agreement with employees to avoid potential risks and disputes, especially in cases where no specific, clear regulations exist. 

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