Vietnam Hr Update

1/16/2009

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Vietnam HR Update Vietnam HR Update By Ames Gross August 2008 Published in Benefits & Compensation International Vietnam’s economy is taking off dramatically. After a long period of steady growth, foreign direct investment (FDI) leapt to $10 billion in 2006 and $21 billion in 2007. The country’s economy, growing at an annual average of 8% for the last few years, is moving beyond basic industries, like garmentmaking, to more sophisticated products. In 2007, Intel and Foxconn (a large Taiwanese electronics manufacturer) each began new projects in Vietnam valued in the billions of dollars. This phase of rapid growth is creating new challenges for HR managers there. Blue-collar employment In this high-growth environment, Vietnam’s workforce is expanding very quickly. The country has a population of over 86 million, making it the thirteenth most populous country in the world. The 45 million working Vietnamese are increasingly moving to the cities to take industrial and service jobs. According to the General Statistics Office of Vietnam, in mid-2006 there were 8.2 million people employed in industry or construction. This number has been increasing by over 500,000 annually since 2000. The basic foreign-invested enterprise (FIE) minimum wage, ranging from US$50 to US$63 monthly, is lower than basic wages in much of China. Vietnam’s plentiful labor makes it a draw to international firms that might have invested in China before. However, over the past few years, significant labor tensions have hit Vietnam. In the first four months of 2008 alone, there were about 300 strikes recorded. These strikes usually affect domestic Vietnamese companies, but they have also involved large foreign manufacturers like Panasonic and Yamaha. Workers’ grievances include inadequate wages, excessive overtime, and illegitimately deducted wages. Strikes in Vietnam are almost always illegal strikes, unauthorized by a union. Procedures for legal strikes exist, but they are difficult and are rarely used. High inflation has compounded labor tensions recently. As of May 2008, the annual consumer goods inflation rate in Vietnam had skyrocketed to 25%, one of the highest in Asia. As consumers are hit by rising prices, wage increases have become the primary demand of striking workers. In general, paying more than the minimum wage may be necessary to retain reliable basic laborers, especially in the more modern, urbanized areas around Ho Chi Minh City. Some enterprises report having to pay low-level workers over US$80 per month (25-60% above the minimum wage). White-collar employment As more companies enter Vietnam, recruiting skilled employees for technical and management positions is becoming more difficult. Due to cultural differences and the legacy of Communism, the majority of local workers in Vietnam are not well suited to the demands of Western companies. Growing multinational companies are desperate for personnel who have experience in Western companies and can speak English. However, the pool of people meeting these requirements is small, and due to competition they tend to have inflated salaries. There is also the risk of poaching, which is rising as competition heats up. Vietnamese salary levels are increasing rapidly. White-collar salaries rose by about 12% yearly in 2006 and 2007. Annual salary increases for key staff tend to be even higher. In 2007, salary levels for senior positions were at least US$2,500 per month for HR managers, US$4,000 for CFOs, and US$6,000 for CEOs. Other job functions in high demand include finance, accounting, sales, and marketing. More expensive expatriates can help when no one else is available, but they often encounter cultural and language barriers. One solution to this dilemma is to hire overseas Vietnamese. These “Viet Kieu” number over 3 million worldwide, about half of them in the US. Since they usually speak

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Vietnam - Vietnam HR Update Vietnamese, they can integrate well with local workforces. The Vietnamese legal system can sometimes make overseas Vietnamese ambivalent about returning to Vietnam to take high-level positions. In Vietnam, civil law and criminal law are not well separated. In some cases, parties involved in disputes have been imprisoned for months, even over business disputes that were civil in nature. This is infrequent, but it happens enough for some candidates to be concerned. Even native Vietnamese may hesitate to take positions like CFO, which are seen as particularly at risk. In the longer run, training local employees in-house can also provide good returns. Although it requires more investment in the employee, it circumvents the supply shortage and gives the employee a more Western business understanding. It can also instill a sense of loyalty and limit job-hopping. Changes to labor laws The Vietnamese social insurance system requires contributions of 15% of salary from the employer and 5% from the employee. The system was overhauled recently, significantly affecting some FIEs. The Law on Social Insurance, which went into effect on January 1, 2007, caps taxable “salary” at 20 times the minimum wage for contribution purposes. For higher-paid employees, who might earn 60 times the minimum wage or more, this will reduce contributions significantly as compared to the past. On the other hand, contribution rates are slated to rise gradually to 18% from the employer and 8% from the employee by 2014. In 2007, the Ministry of Labor, War Invalids, and Social Insurance (MOLISA) warned that only about two-thirds of employers have been paying the required premiums. The government is starting to assess fines as well as charge interest on payments more than 30 days late. FIEs in Vietnam should make sure they are fully compliant with their obligations. Revocation of a business license is one possible punishment for nonpayment, although this has not actually been reported yet. On July 1, 2007, the new Law on Gender Equality took effect in Vietnam. Passed in November 2006, this law bans “all forms” of discrimination against women, although its details are vague. It also offers tax breaks to enterprises employing a large number of women. Unemployment insurance, which currently does not exist in Vietnam, is set to be added to the social safety net in 2009. Although the details are still being worked out, employers and employees will probably contribute 1% of monthly salaries each. Workers who pay into the system for at least 12 months will be eligible for public assistance when out of work. FIEs should incorporate this into future budgets and be prepared to start paying into the government fund when the program starts up. This may entail more administrative work, since the government unemployment insurance fund will be separate from the existing social insurance fund. Minimum wages in Vietnam are different for foreign and domestic companies, and also vary by region. The most recent rise in minimum wages took effect on January 1, 2008. From that date, FIE minimum wages rose by about 15%, becoming VND 1 million (about US$63) in Hanoi and Ho Chi Minh City; VND 0.9 million (about US$57) in other major cities; and VND 0.8 million (about US$50) everywhere else. Minimum wage increases usually come at irregular intervals. In the future, MOLISA is planning to implement increases every year in September. Officially, since 2003, Vietnamese law prohibited enterprises from employing more than 3% or 50 (whichever is less) foreigners in their total workforce. This rule received heavy criticism from FIEs operating in the country. In March 2008, the government issued a new regulation governing the use of foreigners in foreign enterprises. This abolished the 3% maximum, but at the same time, it established a new rule on employing foreigners. The new rule is that no less than 20% of an FIE’s “managers and experts” must be Vietnamese nationals. Like the previous 3% rule, this may go unenforced in many cases. In 2008, the government seems to be taking more action to moderate the effects of labor strikes. In particular, a decree in June 2008 warned that trade unions or employee representatives could be held responsible for damages to equipment, materials, etc. if they instigate illegal strikes. The maximum compensation is three months’ wages per person involved. However, most strikes in Vietnam are organized informally and identifying instigators can be difficult. Differential Tax Rates to Go Some changes are underway for income taxes in Vietnam. Previously, expatriates working in Vietnam were taxed at somewhat lower rates than Vietnamese nationals. As of January 1, 2009, tax rates will be unified for everyone. Most expatriates will not see a significant decrease in their tax bills. However, the top marginal tax rate, for those making over 960 million VND annually (about US$60,500), will be reduced from 40% to 35%. In addition, a wider range of non-salary benefits which were not taxable before, such as airfare for visiting home and tuition for children’s schools, will become taxable.

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