2020 26 March

Cambodia Legal Update: COVID-19 – Labour Force Restructuring

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This publication is part of our series focusing on workforce management in consideration of the COVID-19 outbreak in Southeast Asian countries.

During this period of the global COVID-19 pandemic, employers in Cambodia are experiencing, and are likely to continue to experience, increasing operational and financial challenges. At DFDL, we have a dedicated team of experts to advise your organization on ways to minimize such impacts in compliance with local law. Our team is ready to strategize with you on the options below to the extent that workforce restructuring is now needed to minimize adverse impacts on your business.

Voluntary leave without pay and reduced working hours

Voluntary and temporary unpaid leave and a reduction in working hours are not specifically set out in the Labour Law (other than in the context of suspension). Rather, these scenarios are based on mutual agreement between employer and employee. In such instance, the employer will provide no (or reduced) salary and benefits to the affected employees under the voluntary unpaid leave program or will reduce the salary and benefits of the affected employees under the voluntary reduction of working hours scenario.

These arrangements require a written variation to the terms of each existing employment agreement, typically in the form of an amendment to each employee contract.

Suspension of employment

If agreement cannot be reached with all affected employees with respect to leave without pay or reduction in working hours, another option is suspension of employment. 

Article 71 of the Labour Law permits an employer to proceed with suspension of employment on the basis of serious financial or material difficulty (or specific difficulty) or, subject to certain qualifications, force majeure. Suspension typically requires the involvement of the labour authorities.

For suspension based on serious financial circumstances, Article 71(11) of the Labour Law provides that an employment contract may be suspended when the business faces serious economic or material difficulty or any particularly unusual difficulty, which leads to a suspension of the entire business operations for not more than two months. The employer must be prepared to prove that the business faces serious financial hardship, such as serious economic and material difficulty. Such suspension must be notified to and be under the monitoring of the labour inspector.

For suspension based on force majeure, Article 71(10) of the Labour Law provides that the employment contract may be suspended, for a maximum of three months, when there is an event of force majeure that prevents one of the parties from fulfilling its obligations. The law does not provide a clear definition of what constitutes an event of force majeure (but is typically construed as an act of God, war, civil unrest or similar unforeseen event), or details of the procedures to effect a suspension in the event of force majeure. It is not known as yet whether the recent and ongoing COVID-19 situation and ensuing governmental actions and economic consequences may be construed by the relevant regulator as an event of force majeure.

Generally, the suspension of an employment contract under either scenario above, affects only the main obligations of the contract, including those under which an employee has to work for the employer and the employer has to pay the employee, unless there are provisions to the contrary (under the Labour Law, employment contract or internal work rules) that require the employer to provide benefits to the employee. In practice, suspension is made in a form of an agreement with the employees and requires the prior approval of or, depending upon the circumstances, notification to the labour authorities.  

Importantly, in case of violation or failure to follow the mandatory procedure in relation to employment suspension, employees are entitled to full wages and benefits during the suspension period and may resume work as normal after the suspension period ends.

Redeployment

For multinational corporations, redeployment of employees from one branch to another, often in different jurisdictions, is frequently a desired approach to minimize labour costs in one office while retaining key employees. Importantly, labour regulations are very specific to each jurisdiction, so care must be taken to ensure compliance with the applicable law of both the jurisdiction where the employee is departing and the jurisdiction where such employee may be redeployed.

There is no prescribed mechanism under the Labour Law to effect the transfer of employees between two separate and distinct legal entities. In light of this, to effect a redeployment, the employment relationship must be terminated in Cambodia and then a new employment relationship entered into in the foreign jurisdiction. In some situations, a tripartite agreement, among the Cambodian entity, the foreign jurisdiction entity and the redeployed employee is used to enshrine certain agreed terms, such as termination compensation and recognition of seniority, among others.

Mutually agreed termination

Mutually agreed termination, based on agreement between employer and employee, affords the parties with a great deal of flexibility when ending an employment relationship. Under the Labour Law, other than a requirement for the mutual termination of a fixed duration contract to be executed by both parties before a labour inspector, there are no prescribed requirements concerning mutually agreed termination and the accompanying termination compensation. While it is reasonable to form a view that the parties are free to determine termination compensation via mutual agreement, the terminated employees should arguably be entitled to the minimum compensation provided under the Labour Law and their other statutory and contractual entitlements. It is common practice in mutual termination for the employer and employee agree to a payment, which is equal to termination compensation in the case of termination without cause (being full termination compensation).

Collective termination

For employers whose situation requires the collective termination of employees (more than one employee), the employer must follow a collective termination layoff procedure.

The Labour Law allows for collective termination if it is as a result of a reduction in an employer’s activity or due to an internal reorganization. While there is no definition of a ‘reduction in an employer’s activity or an internal reorganization’ in the Labour Law, an example could be the closure of certain stores (or areas within a store), the reduction or loss of supply of certain products and/or a material reduction in revenue, which results in there being less need for certain employees (and the need for an internal restructure).

The employer must inform the employee representatives (and union delegates, if any) in writing about the planned collective termination and seek their suggestions on the appropriate measures prior to an announcement of the proposed collective termination. The employer must inform the Ministry of Labour and Vocational Training (“MLVT”) of each step of the collective termination process and the MLVT can call the concerned parties together one or more times to examine the impact of the proposed collective termination and assess the measures to be taken to minimize its effects. In special circumstances, the Minister of MLVT may issue a Prakas to suspend the termination of the employment for a certain period of not more than 30 days to assist the employers and employees find a solution. Such suspension by the MLVT can only be extended once.

Importantly, there are certain requirements that must be followed in terms of the order of employees to be terminated, based on seniority, family obligations and other factors, as well as certain re-hire obligations should positions become open during a certain period of time following termination.

Individual termination

Under any circumstances, an employer may terminate an individual employee with or without cause.  Such individual termination requires careful analysis of the specific justification for termination and compliance with the prescribed notice periods, severance compensation entitlements and provisions concerning the termination of specially protected employees under the Labour Law and related regulations (and, where applicable, adherence to contractual commitments where higher benefits are afforded than under the law). Care should also be taken to follow the applicable regulations on termination strictly relevant to the different types of employment contracts.

Risks

Each of the above alternatives give rise to risks to employers.  

In the event of termination of employment (individually or collectively), employees may assert claims for wrongful termination and/or failure to provide certain termination entitlements and, in some instances, request for reinstatement if business conditions change.

In the event of mutually agreed termination, suspension, voluntary leave or reduced working hours, as well as redeployment, employees may subsequently claim that they were pressured or coerced by the employer into entering into an agreement, or that they were unaware of their entitlements and rights under the law. There is also a risk that a labour official, Arbitration Council or court, if in a position to construe such an agreement, may take an adverse view on the basis that the Labour Law constitutes mandatory law and parties may not contract around it.

Moving forward

Plans for reorganization and reduction in employment costs should be carefully considered on a case-by-case basis to ensure compliance and minimize risks. Factors such as grounds for termination (including suspension), types of employment contracts involved, seniority and special protection against termination, among others, must be taken into account, and appropriate procedures must be followed.

Our team is ready to advise on and assist with any specific client reorganization plan. Please do not hesitate to contact us on labor.KH@dfdl.com.

The information provided here is for information purposes only and is not intended to constitute legal advice. Legal advice should be obtained from qualified legal counsel for all specific situations.


Contacts

Chris Robinson

Partner, Head of Cambodia Corporate & Commercial Practice Group

chris.robinson@dfdl.com

Samnangvathana Sor

Senior Consultant, Cambodia Corporate & Commercial Practice Group

samnangvathana.sor@dfdl.com

Alex Larkin

Senior Consultant, Cambodia Corporate & Commercial Practice Group

alex.larkin@dfdl.com


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