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 the employee’s gross misconduct (e.g., redundancy), the employee is entitled to a severance payment equal to 10% of their total monthly salary prior to termination, multiplied by the number of months worked for the employer.

In cases of unjustified termination, the severance payment increases to 15% of the total monthly salary prior to termination, multiplied by the number of months worked.

For the purposes of severance calculation under Lao law, the total monthly salary includes not only the base salary, but also any additional benefits paid by the employer to the employee during the relevant month.

No severance payment is required in cases of termination due to gross misconduct or if the employee resigns voluntarily.

Background of the Case Study

A foreign-owned company providing branding services in Laos (“Employer”) employed a foreign national (“Employee”) as a graphic designer. The parties entered into a permanent employment agreement on 11 March 2019, and the Employee commenced work on 1 April 2019.

By early February 2021, the Employer observed a decline in client orders. As a result, the Employer decided to make the Employee’s position redundant and planned to outsource the relevant work to independent contractors. The Employer intended to formally notify the Employee of the termination on 22 March 2021.

At the time of termination, the Employee’s monthly salary was USD 2,000 before deduction of personal income tax.

Questions from the Employer

1. Is the Employee eligible for severance payment? If so, how much will it be?
2. What formalities with respect to the termination of the Employee must the Employer comply with?

Grounds for Termination

Before calculating any severance payment, it is important to consider the necessary legal formalities that an employer in Laos must follow when terminating an employee.

According to the Lao Labour Law, an employer must have a legally sufficient reason to terminate an employee. If no such reason exists, the termination may be considered unjustified, which could lead to several legal consequences, including the obligation to pay a higher severance rate.

In this case, the Employer decided to terminate the Employee due to redundancy, which is a recognized and valid ground under Article 82 of the Labour Law. Therefore, the termination appears to be legally justified.

Notice Period

Once the reason for termination is established as valid under the law, the next step is to comply with the required notice period.

Under Article 80 of the Labour Law, the required notice period depends on the nature of the employee’s work:

• At least 30 days for employees performing physical labour
• At least 45 days for employees performing mental labour

As the Employee in this case was employed as a graphic designer, the work qualifies as mental labour, and thus, a 45-day notice period is required.

Calculation of Severance Payment

If the Employer issued the termination notice to the Employee on 22 March 2021, a 45-day notice period would apply, making the last working day 7 May 2021.

In practice, while an employer in Laos may request an employee not to work during the notice period, the notice period must still be included in the total duration of employment for the purposes of severance calculation. Additionally, the employer is legally required to continue paying the employee’s salary throughout the notice period, regardless of whether the employee is required to work during that time.

According to the general rule on severance payment outlined earlier in this case study, severance is calculated as:

10% of the employee’s total monthly salary prior to termination × number of months worked

In this case:

• Monthly salary prior to termination: USD 2,000
• Duration of employment (from 1 April 2019 to 7 May 2021): 25.2 months
• Severance calculation: 10% of USD 2,000 × 25.2 months = USD 200 × 25.2 = USD 5,040

Important notes:‍

1. The duration of employment is calculated from the actual start date (1 April 2019), not the contract signing date (11 March 2019).
2. The salary considered for severance is the gross monthly salary before personal income tax.
3. Severance payments are not subject to personal income tax under Lao law.
4. Although the Employee was instructed not to work during the notice period (23 March – 7 May 2021), the Employer was still obligated to pay full salary for that period, as this forms part of the employment term.
5. The notice period must be included in the total duration of employment for the purpose of calculating severance payment, even if the Employee was instructed not to perform any work during that period.
6. Salary paid during the notice period, or in lieu of notice, is subject to personal income tax, unlike severance payments, which are exempt under Lao law.

Therefore, the Employer was required to:

• Pay USD 5,040 in severance to the Employee (tax-exempt under Lao law); and
• Pay the regular monthly salary for the 45-day notice period (subject to personal income tax), even though the Employee was instructed not to work during that time.