February 04, 2019 Issue: February 2019

CAMBODIA - Labor Contract formation and Termination

By: Phany Sok

I. Introduction

Cambodia Labor Law contains 19 Chapters, and it covers only private sectors, including non-governmental organizations, but it does not apply to domestic workers and personnel serving in air and maritime transportation. It applies to all private labor contracts performed in the Kingdom of Cambodia, regardless of where it was signed and regardless of the nationality and residents of the contracted parties.

It has been amended twice since it was promulgated and implemented in 1997. The first amendment was made in 2007 on Articles 139 and 144 related to night overtime and night shifts.

The second amendment was made very recently (July 2018) on several articles under Chapter 4, but one particularly important article is Article 89. Article 89 replaces the term “indemnity for seniority with the term “indemnity of dismissal”, and the new term applies only when the termination of an undetermined duration contract (UDC) is initiated by an employer. Although the amendment was promulgated and put for immediate implementation, the Prakas that is required to fully implement this amendment will not come into effect until January 2019. Thus, it is safe to say that the amendment of this article and related ones will come into effect beginning January 2019.

Chapter 4 of the Labor Law covers labor contracts, so it is important to fully understand this chapter before the amendment comes into effect. Thus, this article will discuss forming and terminating labor contracts, and the compensation required from a termination. This article, however, does not aim to make any comparison between the current provisions with the new amendment. The comparison will be discussed in a subsequent article on Cambodian Labor Law.

II.  Labor Contract Formation

Under the Labor Law, a labor contract can be either written or verbal.

A. Fixed duration Contract (FDC)

Under Article 67 of the Labor Law, an FDC has to be written, contains a specific starting and ending date, and can be for a period of two years or less. An FDC can be “renewed one or more times, as long as the renewal does not surpass the maximum duration of two years”. This article continues that “[a]ny violation of this rules leads the contract to become a labor contract of undetermined duration”. An FDC may not contain an ending date if it is for temporary substitution of an absent employee, seasonal work to end when the season is over, or for a specific work that is not a usual activity of an enterprise.

B. Undetermined duration Contract (UDC)

A UDC can be verbal or written. All verbal labor contracts are labor contracts of undetermined duration. A written labor contract that contains no ending date or in which the duration exceeds two years is a UDC. A UDC may also be formed unintentionally as described below.

C. Transformation/Conversion from FDC to UDC

When is an FDC transformed to a UDC? And when is an employer required to convert an FDC to a UDC? As of today, there have been different interpretations between the Ministry of Labor and Vocational Training (MoLVT), the Garment Manufacturers Association in Cambodia (GMAC), the Arbitration Council (AC), and Better Factories Cambodia (BFC).

Here are the provisions that have led to different interpretations:

Article 67(2):

The labor contract signed with one consent for a specific duration cannot be for a period longer than two years. It can be renewed one or more times, as long as the renewal does not surpass the maximum duration of two years.

Article 73(5):

If the contract has a duration of more than six months, the worker must be informed of the expiration of the contract or of its non-renewal 10 days in advance.… If there is no prior notice, the contract shall be extended for a length of time equal to its initial duration or deemed as a contract of undetermined duration if its total length exceeds the time specified in Article 67.

Article 67(8):

When a contract is signed for a fixed duration for less than two years, but the work tacitly and quietly continues after the end of the fixed period, the contract becomes a labor contract of undetermined duration contract.

In Jacqsintex Garment Co., Ltd. v. Democratic Union of Jacqsintex, the Department of Labor Inspectorate interpreted that each renewal under Article 67(2) shall not last more than 2 years or the labor contract of fixed duration will become an undetermined duration contract. Thus, in the case, the fixed duration contracts of the workers in dispute are not automatically converted to undetermined duration contract because each renewal was less than 2 years, regardless of whether those workers have continuously worked for Jacqsintex Garment Co., Ltd. for longer than 2 years or not. This interpretation was countered by the Arbitration Council (AC).

The AC ruled that an FDC has become or transformed to a UDC if one or more renewals of that FDC have led to the contract lasting an aggregate of more than 2 years. The ruling was based on Articles 67(2) and 73(5). The AC reasoned that the two provisions must be read together. The AC stressed the provision of the Article 73(5), which states that “if there is no prior notice, the contract [FDC] shall be extended for a length of time equal to its initial duration or deemed as a contract of undetermined duration if its total length exceeds the time specified in Article 67[which is 2 years]”. According to the AC, the spirit of the Labor Law also favors the UDC because UDC provides more security of employment, and the ILO Recommendation 166 of 1982 regarding Termination of Employment also stresses that contracts of fixed duration should not be used for long term employment. With all of these, AC concluded that FDC shall be converted to UDC if the same worker is hired at the same workplace for more than two years.

In its Guide to the Cambodian Labour Law for the Garment Industry, BFC cites the AC’s ruling in the transformation of FDC to UDC which states:

The Arbitration Council has found that an FDC may be renewed one or more times only if the total length of the employment relationship does not exceed 2 years. If an FDC is extended or renewed so the total period of the contract is more than 2 years, then the contract will automatically become a UDC.

However, GMAC, while it does not expressly disagree with AC, citing Article 67(8) in its Bi Monthly Legal Pointer for April 2014, suggests that an FDC has transformed to a UDC only when an FDC continues “quietly” and the total duration of the contract exceeds 2 years; in other words, if an employer provides a worker with a notice of renewal or non-renewal in accordance with the Labor Law, GMAC seems to suggest that an FDC may continue indefinitely.

III. Labor Contract Termination

A. Termination of an FDC and Compensation

Termination of an FDC and its compensation fall under Article 73 of the Labor Law.

In general, an FDC ends when it comes to a specific ending date on the contract. It can, however, be also terminated during term.

The ending of an FDC, whether through expiration or cancellation, requires prior notice if the duration of the contract exceeds 6 months. A 10-day notice period is required for an FDC of more than 6 months and a 15-day notice period is required for an FDC exceeding a year. The law also provides that “[i]f there is no prior notice, the contract shall be extended for a length of time equal to its initial duration”. The law, however, is unclear on what if an employer provides some, but insufficient, notice. For example, if a 10-day notice period is required, but an employer missed the date and provides notice only 7 days before the expiration of the contract for a non-renewal, can the employer pay the missing days and end the contract? Or is the FDC deemed having been renewed when the first day of the notice requirement ended without action from the employer? Anecdotally, legal practitioners have provided different interpretations.

The termination of an FDC during term, if both parties agree, must be in writing and be witnessed by a Labor Inspector. If either party does not agree with the termination during term, the termination cannot be done, except in the case of a serious misconduct or force majeure.

An initiation of termination of an FDC from an employer without meeting the aforementioned conditions will entitle a worker to compensation of remuneration that is, at least, equal to the remuneration of the remaining contract. However, if an initiation of the termination is done by a worker, the law is unclear as to how much a worker shall compensate his or her employer. The law seems to give that power to the court to decide, as it states, “the premature termination of the contract …entitles the employer to damages in an amount that corresponds to the damage sustained”.

When an FDC is ended, a worker is entitled to a severance pay of at least 5% of the total money that he or she has earned. Even if a worker has committed a serious misconduct, he or she still receives a severance pay of 5% of the total renunciation that he or she has earned up to day of termination.

B. Termination of a UDC and Compensation

There is no restriction as to when a worker can terminate his or her UDC. A worker can initiate the termination of his or her employment any time as long as he or she respects the notice requirement. However, an employer can terminate a UDC only when there is a valid reason. A valid reason is defined as any reason “relating to the worker's aptitude or behavior, based on the requirements of the operation of the enterprise, establishment or group ”.

To terminate a UDC, either party who initiates the termination must respect the notice requirement under Article 75, in which the notice period ranges from seven days to three months, depending on the length of the employment service of the worker. However, an employer can pay in lieu of prior notice and thus end the UDC summarily. Nevertheless, the Labor Law is unclear as to what happens if a worker wishes to summarily terminate her UDC.

Resignation by a worker does not entitled him or her to any compensation beside his or her previously earned salary and accrued annual leave.

Termination by an employer with a valid reason entitles a worker to an indemnity for dismissal under Article 89. Under this Article, a worker is entitled to seven days of wage and fringe benefits if he or she has worked for the employer for a period from six months to one year. If a worker’s employment service exceeds a year, he or she is entitled to 15 days of wage and fringe benefits of each year of service, and time fraction of six months or more is considered an entire year. However, the total indemnity for dismissal cannot exceed six months of wage and fringe benefits.

A worker whose UDC is terminated due to a health issue is also entitled to the same indemnity for dismissal. A resignation by a worker that has been unfairly pushed to resign by his or her employer also entitles the worker to indemnity for dismissal or even possible damages.

If the termination was made by an employer without a valid reason, the worker is entitled to damages in addition to an indemnity for dismissal. If a worker’s request for damages is the same or less than the indemnity for dismissal, he or she need not prove the damages caused by the termination. However, if her or she demands damages of more than an indemnity for dismissal, he or she must prove the damage and the decision rests with the court.

C. Termination of FDC or UDC due to a serious misconduct or force majeure

Serious misconduct can be committed by either a worker or an employer. Types of such misconduct are listed under Article 83, which includes, for example, by an employer, repeated late payment of wages or abusive language; and by workers, stealing, misappropriation, or embezzlement. To decide whether misconduct is sufficiently “serious” to trigger Article 83 is under the authority of the court.

Force majeure for an employer is defined under Article 85, which includes “the closing of the establishment by public authorities” and “catastrophe (flooding, earthquake, war) that cause material destruction and make it impossible to resume work for a long time”. The death of an employer that leads to a closure of a company does not constitute a forced majeure. Bankruptcy and judicial liquidation are not considered force majeure either.

Force majeure for a worker, under Article 86, can be chronic illness, insanity, permanent disability, or imprisonment.

Terminating a worker due to a serious misconduct or force majeure releases an employer from providing notice and paying compensation that is due to a worker if his or her contract is ended for another reason. While indemnity for dismissal and damages are not applicable for UDC workers when a contract is terminated due to a serious misconduct, the law is vague when it comes to force majeure, but it seems to suggest the same. An FDC worker still gets severance pay of 5% of total remuneration he or she has earned regardless of how a contract is terminated.

To terminate a worker for a serious misconduct, an employer must take action within seven days after the employer has learned about the commission of the serious misconduct. Otherwise, the employer is deemed to have relinquished his or her right to terminate a worker for that misconduct.

Regardless of how a labor contract is ended, an employer must provide a worker with an employment certificate, which, at a minimum, contains starting and ending date, and the position the worker held. The employer is prohibited from including any statement in the employment certificate that can be harmful for the worker’s future career.

IV. Conclusion

This article has provided readers with basic information under the current Labor Law on forming and terminating labor contracts and the compensation due from termination. The next article will compare the current provisions of the Labor Law with its amendment and will demonstrate the impact of the new amendment, in particular the retroactive enforcement of the new Article 89, which has caused panic to big companies in the Kingdom.

    Phany Sok

    Lecturer, the Royal University of Law and Economics