Can a company operating at a loss reduce its workforce?

Date: 2026.03.26

1. What is workforce reduction?

Under current Vietnamese law, there is no specific legal definition of “workforce reduction.” However, this term is commonly understood as a situation where an enterprise terminates employment contracts ahead of their expiry date with multiple employees (from two or more individuals) at the same time in order to reduce the number of employees within the organization. This is a complex legal action and must strictly comply with the provisions of the 2019 Labor Code.

2. Can a company that is operating at a loss reduce its workforce?

👉 Employers are not allowed to arbitrarily reduce their workforce solely due to business losses if such losses do not fall under legally defined economic reasons.

According to Article 42 of the 2019 Labor Code, employers are only permitted to terminate employment contracts in cases of “changes in organizational structure, technology, or for economic reasons.”

However, business losses are merely the result of ineffective operations and are not considered a valid economic reason under the law for workforce reduction unless they arise from the following circumstances:

✔ Cases considered as economic reasons under the law:

– Economic crisis or recession

– Implementation of State policies or laws leading to economic restructuring or fulfillment of international commitments

👉 Therefore, if a company is experiencing losses but does not fall under the above two circumstances, it is not permitted to unilaterally terminate employment contracts with employees.

3. Cases where a company is allowed to reduce its workforce

Below are situations in which the law permits enterprises to reduce employees in compliance with legal regulations:

🟡 a. Due to changes in organizational structure or production/business technology

The law allows employers to terminate employees when workforce restructuring is genuinely necessary, including:

– Changes in the company’s organizational structure

– Adoption of new technology that reduces labor demand

– Changes in products or production processes

🟡 b. Due to legitimate economic reasons

– Economic crisis or recession affecting labor demand

– Requirements from the State for economic restructuring

🟡 c. Due to natural disasters, fires, dangerous epidemics, relocation, or downsizing of operations

The law also allows employers to terminate employment contracts if:

– The enterprise faces major risks such as natural disasters or epidemics that disrupt operations

– The enterprise is required to relocate or downsize by a competent authority and has taken all necessary remedial measures but is still forced to reduce jobs

4. Procedures and obligations when reducing workforce

👉 When a company meets the conditions for lawful workforce reduction, it is required to comply with the following obligations:

📌 Develop a Labor Utilization Plan

– The company must prepare and implement a “Labor Utilization Plan” in accordance with Article 44 of the 2019 Labor Code.

– This plan must be negotiated with the employee representative organization at the grassroots level before implementation.

📌 Notification and reporting to competent authorities

The company must provide prior notice to employees and submit a report to the Provincial People’s Committee at least 30 days before the termination takes place.

5. Employees’ rights and benefits in case of workforce reduction

When a company lawfully reduces its workforce:

✅ Employees are entitled to receive full benefits in accordance with the law, including:

– Full payment of wages and insurance contributions

– Job-loss allowance in accordance with Article 47 of the 2019 Labor Code

– Settlement of other benefits as stipulated in the employment contract and applicable laws

6. Solutions for companies facing losses but wishing to reduce workforce

❗ If a company is operating at a loss but does not fall under legally recognized economic reasons, it may still reduce its workforce through the following approaches:

🔹 Mutual agreement to terminate employment contracts — Both parties voluntarily agree before termination

🔹 Reassignment or contract adjustment — Transfer employees to other departments or modify employment terms based on their capabilities and business needs

Conclusion

A company operating at a loss is not automatically entitled to reduce its workforce. The law only permits termination of employees in cases of changes in organizational structure, technology, or for legitimate economic reasons in accordance with the 2019 Labor Code. Therefore, before implementing workforce reduction, enterprises must carefully identify the correct legal grounds and choose appropriate solutions to avoid potential labor disputes.