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Cambodia Legal Update: Seniority Payments – New Regulations Bring Some Things into Clearer Focus

19
Jul
2019

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CAMBODIA LEGAL UPDATE: SENIORITY PAYMENTS – NEW REGULATIONS BRING SOME THINGS INTO CLEARER FOCUS

As you may be aware, the Ministry of Labor and Vocational Training (“MLVT”) has issued several regulations since its introduction of an employee seniority payment for those with unlimited duration contracts (“UDCs”) (which replaced the indemnity for dismissal previously stipulated in the 1997 Labor Law) through an amendment to the Labor Law (for more details about these and other pertinent regulations, please visit our Cambodia Business Brief page here).

However, the legal and tax implications of certain points remain unsettled, and both employers and employees have raised issues and concerns, and requested further clarification.

In response, the MLVT recently issued three new regulations on seniority payments, in addition to the previously issued Prakas No. 443 dated 21 September 2018 and Ministerial Notification No. 042/19 dated 22 March 2019. We provide below the key points of each of the regulations.

MLVT Notification No. 023/19 dated 8 July 2019 on the entitlement to retroactive seniority payments (prior to 2019) and ongoing seniority payments (from 2019 onwards) for the textile, garment, and footwear industries

  • Once again, all employers are reminded that the seniority payment described in the amendment to the Labor Law is applicable to employees that are employed under a UDC.
  • Employees employed under a fixed duration contract (“FDC”) are instead entitled to severance pay, proportional to their wages and the duration of the contract. The exact severance amount may be determined in a collective bargaining agreement, but if it is not, the severance pay will be set at 5% of the wages employees have been entitled to during the duration of their contract.
  • Per prior MLVT regulations, the duration of an FDC cannot be longer than two years. The FDC may be renewed or extended one or more times as long as the total duration of all renewals or extensions does not exceed two years. If an FDC exceeds such limits, it automatically becomes a UDC. Employers who have been using FDCs that exceed the maximum duration will have those FDCs become UDCs by the end of 2019 at the latest, and must then pay seniority payments from the date that the FDC became a UDC, in accordance with Prakas No. 443 and other applicable regulations.
  • If employees under such converted UDCs have already received severance pay of 5%, they are not entitled to claim a seniority payment.
  • Both retroactive and ongoing seniority payments are exempt from taxes.
  • Employees are not entitled to a seniority payment in the case of an employee’s unilateral resignation or serious misconduct.

Ministerial Instruction No. 057/19 dated 10 June 2019 on the payment of retroactive seniority payments by employers in the textile, garment, and footwear industries

This is applicable to employers and employees in the textile, garment, and footwear industries, and covers retroactive seniority payments only.

Method to count an employee’s work seniority

Years of service prior to 2008 are not subject to the retroactive seniority payment. The maximum ceiling of the retroactive seniority payment to be paid is capped at six months (equal to 156 days) of the actual average wages (excluding fringe benefits) of each particular year for service years from 2008 to 2018.

In the first year of employment, a confirmed employee who has continuously worked for an employer for from one to six months (excluding the probation period) is entitled to a seniority payment calculated at 7.5 days. If s/he has worked longer than six months, the retroactive seniority payment would be for the full year, calculated at 15 days.

Method to calculate the retroactive seniority payment

Ministerial Instruction No. 057/19 provides a formula with examples (not discussed here) to calculate the retroactive seniority payment for each applicable year from 2008 to 2018.

Step 1: Calculate the average actual wage per month

Average actual wage per month = Total monthly actual wages during the period for which the retroactive seniority payment applies ÷ Number of total months during the period for which the retroactive seniority payment applies

Step 2: Calculate the average actual wage per day

Average actual wage per day = Average actual wage per month ÷ 261

Step 3: Multiply the average actual wage per day with the number of days of the retroactive seniority payment

Retroactive seniority payment per year = Average actual wage per day × 152

Method of payment for the retroactive seniority payment

  • Payments equal to 15 days of average actual wages must be made twice a year. The first payment is payable at the same time as the second installment payment of wages due in June, and the second must be paid at the same time as the second installment payment of wages due in December. Retroactive seniority payments must be paid based on the actual years of service of each employee for the period from 2008 to 2018.
  • Employers must separate employees’ monthly wages from the retroactive seniority payment to avoid any confusion regarding tax obligations.

Retroactive seniority payments based on employment contract category

If an FDC was used for a period exceeding the limits of the law (as explained above), counted as of 2018, the retroactive seniority payment must be determined as below.

  • If an employee has already received severance pay (5%) at each FDC’s expiration date, s/he is not entitled to a retroactive seniority payment.
  • If an employee has not received severance pay (5%) at each FDC’s expiration date, a retroactive seniority payment must be made and calculated as explained above by counting the employee’s seniority from the date of signing the first employment contract.

If an FDC becomes a UDC in any year up to the end of 2018, the retroactive seniority payment must be paid as follows:

  • If an employee has already received severance pay (5%) at each FDC’s expiration date during the period when the FDC was used, the employer must pay retroactive seniority payments that have not been paid from the time when the UDC was put in place up through 2018 only.
  • If an employee has NOT received severance pay (5%) at each FDC’s expiration date, the employer must pay retroactive seniority payments in compliance with the basis, formula, and methods described above. In such a case, work seniority must be counted from the date the employee signed the first employment contract.

Employee termination

  • If employees are terminated without a valid reason, they are entitled to the following items:
    1. Unpaid wages up to the termination date
    2. Compensation in cash in lieu of prior notice (applicable in a case where an employer has not given prior notice as required by the applicable laws and regulations)
    3. Compensation in cash for untaken annual leave up to the termination date
    4. Seniority payment entitlement for the half year in which the employees are terminated, equal to 7 days of wages and fringe benefits if employees have remaining work seniority of from one month to less than six months
    5. Total retroactive seniority payments that have not been paid
  • Besides items 1 to 4 above, employees may claim damages equal to the seniority payment owed to them, but not exceeding six months of wages and fringe benefits. In this case, employees are released from obligations to provide proof of their damages claim. However, if the employer does not agree with the damages claim, the employee may submit the case to the competent ordinary court for a decision.
  • Employees terminated for serious misconduct are entitled to the following items:
    1. Unpaid wages up to the termination date
    2. Compensation in cash for untaken annual leave up to the termination date

Common principles

  • The work seniority used to calculate the retroactive seniority payment must be counted from the date the confirmed employee signed the employment contract excluding the probation period.
  • Confirmed employees who have worked for employers at least 21 days are considered as having worked for one full month and are entitled to receive the retroactive seniority payment.
  • The actual wages used for the basis of calculating the retroactive seniority payment due are the actual wages excluding other benefits such as healthcare benefits, occupational risk benefits, and overtime payments.
  • For employees who have retired or died any time from 2019 onwards, employers must pay all of the remaining seniority payments to those employees or their living heirs.
  • Periods of maternity leave, sick leave, and work-related accident leave are counted as employees’ work seniority for the purpose of calculating the retroactive seniority payment.
  • Retroactive seniority payments must be paid together with the second installment payment of wages for June and December. Thus, when employers pay the second installment payment of wages for June and December each year, employees in the textile, garment, and footwear industries who have work seniority before 2019 will receive: (i) the second installment payment of wages for June and December; (ii) the current seniority payment of each half year calculated at 7.5 days; and (iii) the retroactive seniority payment (if any).
  • Employees and employers must keep evidentiary documents, such as payment slips or receipts or the equivalent and have them signed or thumb-printed by both parties for each retroactive seniority payment.

Ministerial Instruction No. 058/19 dated 10 June 2019 on the payment of ongoing seniority payments

The instruction applies in general to all employers within the scope of the Labor Law, regardless of whether they are or not they are in the textile, garment, and footwear industries.

Method to count work seniority

  • From 2019 onward, employees’ work seniority for ongoing seniority payments are counted each half-year: the first half-year is counted from January to June, and the second from July to December.
  • Confirmed employees who have worked for from one to six months within each half-year and have worked until the end of each half-year (June and December) are entitled to an ongoing seniority payment equal to 7.5 days of wages and fringe benefits for each particular half-year.
  • Employees that have resigned before the end of June or December are NOT entitled to the ongoing seniority payment for that particular half-year.

Method to calculate ongoing seniority payments

Step 1: Calculate wages and fringe benefits per month

Wages and fringe benefits per month = Total wages and fringe benefits for the half-year ÷ 6 months or the number of actual months worked3

Step 2: Calculate wages and fringe benefits per day

Wages and fringe benefits per day = Wages and fringe benefits per month ÷ 22 days or 24 days or 26 days (based on the actual number of working days per month)

Step 3: Calculate the ongoing seniority payment for each half-year

Ongoing seniority payment for each half-year = Wages and fringe benefits per day × 7.5

Method to pay the ongoing seniority payment

  • Ongoing seniority payments must be paid together with the second installment payment of wages to employees (paid twice a month) for June and December.
  • Employers must divide the monthly wages and ongoing seniority payment into two separate payment packages for ease of tax payment.

Employee termination

  • If employees are terminated without a valid reason, they are entitled to the following items:
    1. Wages that have not been paid up to the termination date
    2. Compensation in cash in lieu of prior termination notice (if employees have not been given the notice as required by the applicable laws and regulations)
    3. Compensation in cash for annual leave that has not been taken up to the termination date
    4. Ongoing seniority payment for the particular half-year in which the employees are terminated, equal to 7 days of wages and fringe benefits if employees still have work seniority of from one to six months
    5. Total retroactive seniority payment that has not been paid to the employees
  • Besides the first four points above, employees have the right to claim damages equal to the ongoing seniority payment employees are entitled to, but not exceeding six months of wages and fringe benefits. in such a case, employees are released from obligations to provide evidence of their damages claim. However, if the employer does not agree with the damages claim, the employee may submit the case to the competent ordinary court for a decision.
  • Employees terminated for serious misconduct are entitled to the following items:
    1. Wages that have not been paid up to the termination date
    2. Compensation in cash in lieu of the remainder of all untaken annual leave.

Common principles

  • The work seniority used to calculate employees’ ongoing seniority payments must be counted from the date the confirmed employee signed the employment contract excluding the probation period.
  • Confirmed employees who have worked for employers for at least 21 days are considered as having worked for one full month and consequently, will be entitled to ongoing seniority payment.
  • Wages and fringe benefits used for the basis of calculating the ongoing seniority payment due from 2019 onward are the gross amount before tax.
  • For employees who have retired or died any time from 2019 onward, those employees or their heirs will receive the following:
    1. The remaining retroactive seniority payment they are entitled to
    2. The ongoing seniority payment of any particular half-year during which employees have retired or died, equal to 7 days of wages and fringe benefits if they have work seniority with the employer of from one to less than six months
  • Periods of maternity leave, work-related accident leave, and sick leave are counted as work seniority for the basis of calculating the ongoing seniority payment. In contrast, other benefits, such as occupational risk benefits and healthcare benefits received during the above-listed leaves are not included in the calculation of the ongoing seniority payment.
  • From 2019 onward, each time employers make the second installment payment of wages for June and December, they must make the following payments:
    1. The second installment of wages for June and December
    2. The ongoing seniority payment of 7.5 days for each particular half-year
    3. The retroactive seniority payment, if any
  • Employees and employers must keep evidentiary documents, such as payment slips or receipts or the equivalent and have them signed or thumb-printed by both parties for each half-year seniority payment.

Despite the MLVT’s efforts, ambiguities remain and some points have still not been addressed:

  • The regulations have not defined the scope of application clearly. The phrase “textile, garment, and footwear industries” is used to apply Ministerial Instruction No. 057/19, but it is not defined anywhere in the regulations. This creates uncertainty among both employers and employees as to whether they fall under the scope of Ministerial Instruction No. 057/19 and are entitled to the retroactive seniority payment or whether they will have to wait until 2021 (the implementation date of the retroactive seniority payment for those outside the textile, garment, and footwear industries).
  • The regulations mention “fringe benefits”, but no clear definition is provided besides those items listed in the discussion. Do they include insurance, pension fund, housing allowance, car allowance, phone allowance, service charge, savings fund, compensation for paid public holidays, commissions?

Employers and employees outside the textile, garment, and footwear industries are already reviewing the application of the retroactive seniority payment, even though the implementation date is not until 2021, and there are still some unanswered questions:

  1. How is an employee’s work seniority counted?
  2. What is the basis to calculate the retroactive seniority payment (6 days as per the MLVT’s Ministerial Instruction No. 042/19 or 15 days as per the Labor Law amendment, Prakas No. 443)?
  3. What is the implication for retroactive seniority payments if an FDC signed before 2019 is converted to a UDC?

We will continue to monitor the issue of seniority payments for further developments. If you have any questions about this alert, please contact me (leung.seng@vdb-loi.com) or Mr. Alex Larkin (alex.larkin@vdb-loi.com).

1. 26 days is a number determined by the MLVT and stipulated in its ministerial instruction.
2. 15 days is an employee’s seniority payment entitlement for one year.
3. This is based on the actual number of months an employee works in a particular half-year (from one to six months).

VDB Loi is a network of leading law and tax advisory firms with offices in Cambodia, Indonesia, Laos, Myanmar and Vietnam. We provide the highest quality solutions for transactions and taxation. Our general areas of practice are corporate, finance, licensing and disputes. Our principal specialized areas of practice are energy, infrastructure, real estate and construction, telecom, and taxation.

You can find more information on our Cambodia office here.

Kind regards,

Leung Seng | Senior Associate
PYT & Associates, member of VDB Loi
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