General Rules on Severance Payment in Laos

Under the Lao Labour Law, if an employment agreement is terminated by an employer for reasons not related to an employee’s gross misconduct (e.g. redundancy) the employee will be entitled to severance payment of 10% of the total monthly salary prior to termination multiplied by the number of months worked for the employer.

Severance payment in case of unjustified termination is 15% of the total monthly salary prior to termination multiplied by the number of months worked for an employer. Under Lao law, a total monthly salary includes not only a base salary but other benefits paid by an employer to an employee within the relevant month.

Finally, in case of termination for gross misconduct or an employee’s resignation, severance payment is not required.

Background of Case Study

A foreign-owned company providing branding services in Laos (“Employer“) employed a foreign individual (“Employee“) as a graphic designer. The permanent employment agreement between the Employer and the Employee was signed on 11 March 2019 with the Employee’s first day of work on 1 April 2019. By the beginning of February 2021, the Employer has noticed that the number of client orders was declining. Consequently, the Employer has decided to make the Employee’s position redundant and to outsource relevant work to independent contractors. The Employer intended to notify the Employee about termination on 22 March 2021. The Employee’s monthly salary was USD 2,000 before personal income tax.

Questions from the Employer

• Is the Employee eligible for severance payment? If so, how much should it be?
• What formalities with respect to termination of the Employee does the Employer need to meet?

Grounds for Termination

Before discussing how severance payment is calculated, it is important to consider other necessary formalities that need to be met by an employer in Laos when terminating an employee.

Firstly, there should be a sufficient reason as per the Lao Labour Law for an employer to be able to terminate an employee. Otherwise, the termination may fall under a definition of unjustified termination which may invoke several negative consequences for an employer including an employer’s obligation to pay an increased amount of severance payment.

In this case, the Employer decided to terminate the Employee because of redundancy and such a reason appears to be sufficient under Article 82 of the Labour Law.

Notice Period

Having established that the reason for termination of employment is sufficient and in line with the Labour Law, the Employer needs to understand how many days before the actual termination of employment, the Employer needs to notify the Employee. The general rule is that a notice period is at least 30 days for employees undertaking “physical labour” and 45 days for employees undertaking “mental labour” (Article 80 of the Labour Law). In this case, because the Employee is a graphic designer, a 45-day period would apply.

Calculation of Severance Payment

If termination notice is provided to the Employee on 22 March 2021, a 45-day notice period would need to be observed with the Employee’s last day of employment on 7 May 2021. In practice, an employee in Laos may be required by an employer not to work during a notice period, however, such a notice period would still need to be included in the total duration of employment when calculating severance payment. In addition, an employer must pay a salary to an employee during a notice period because, again, a notice period is included in an employment period of an employee.

Applying a general rule on severance payment presented at the beginning of the case study, severance payment for the Employee should be calculated as below:

10% of monthly salary prior to termination x number of months worked

or

10% of USD 2,000 x 25.2 months (including a notice period) = USD 5,040.

Please note that the duration of employment should be calculated not from the signing of the employment agreement on 11 March 2019, but from the first day of actual work, i.e. 1 April 2019.  Hence, the Employer should have paid USD 5,040 as severance payment to the Employee. When calculating severance payment, the salary amount before personal income tax needs to be taken into account. In addition, severance payment itself is not subject to personal income tax. Therefore, in this case, the Employer must have actually paid a severance payment of USD 5,040 to the Employee. Although the Employer has instructed the Employee not to work during a notice period, i.e. from 23 March 2021 to 7 May 2021, the Employer was still obliged to pay a salary for the same period. Such payment in lieu of notice is subject to personal income tax in Laos.