In 2023 it’s safe to say that Vietnam is very popular for global businesses seeking expansion and new talent abroad. As a rapidly growing economy with a diverse talent pool, Vietnam is the home of many opportunities and highly skilled independent contractors. Because of this, knowing how to hire and pay contractors in Vietnam safely can significantly benefit your business prospects.
From navigating legal requirements to optimizing payment structures, this article provides way to properly pay contractors in Vietnam. Let’s explore the key considerations and best practices for safe and effective contractor management in Vietnam so you can pursue the best possible market entry.
How are Worker Types Different for Employees and Independent Contractors in Vietnam? 3 Defining Characteristics
An independent contractor in Vietnam is a person or a legal entity, also known as a freelancer or consultant in some cases, that signs a contract with a company to carry out particular services or duties for another party.
According to Vietnamese labor legislation, the type of working arrangement is the primary distinction between an independent contractor and an employee. In this instance, a contractor and a company known as the client or principal establish a business-to-business partnership.
Independent contractors in Vietnam have more discretion on how, when, and where they work because they are self-employed. They must take care of their own taxes and social insurance obligations but have more control over their work patterns.
It would be best to keep this in mind as it will affect how you pay contractors in Vietnam.
Vietnam updated the Labor Code in 2021 to better define the idea of an employee using 3 critical points of definition.
Now, to work out if a worker is an employee, you must ask:
- Do they work under a consistent agreement with a company (aka, with a labor contract)?
- Do they receive management or oversight from within the company?
- Will they receive a regular salary?
For a worker to be an employee, all 3 requirements must be satisfied.
The ideal way to be sure whether you are working with an employee or contractor in Vietnam is to create an independent contractor work agreement at the outset of the working relationship. This document designates the other party as a contractor, explicitly utilizing those 3 criteria above.
This contractor agreement should lay out the following:
- The duties and outcomes expected from the contractor
- The payment amount and manner expected from the company when its time to pay contractors in Vietnam
- A defined contract period
- The explicit limitations and restrictions which apply to the working relationship
Contractor Misclassification Risks in Vietnam
Contractor misclassification in Vietnam is when a company hires a worker as a contractor yet treats them as an employee. Companies often do this consciously to avoid employer responsibilities related to higher liability and necessary social security contributions. It may also happen unconsciously due to not understanding local employment regulations.
However, while companies may benefit financially in the short term, it brings up a range of potentially catastrophic penalties. These financial or criminal penalties can easily derail your market entry and include:
- A 20% penalty on underpaid personal income tax (“PIT”), plus interest at a rate of 0.03% per day.
- If the contractor is classified as an employee, but their employer fails to pay their social security premiums or unlawfully fires them, then the company could face criminal penalties. This includes financial penalties, imprisonment, and bans on holding specific positions or jobs in the future. This could seriously affect the chances of successful expansion to Vietnam in the future.
Which Benefits and Employment Laws Relate to Contractors in Vietnam?
Vietnam has a well-developed employment rights and benefits administration system, but the law doesn’t class independent contractors as employees. Therefore, they don’t receive any of the same mandatory benefits. Your company doesn’t have to provide anything beyond the payments in the independent contractor agreement when you pay contractors in Vietnam.
From an employer’s perspective, it’s crucial to maintain a separation between contractors and employees. Because of this, you shouldn’t offer additional perks as benefits.
Employee benefits may be a good incentive for companies who want to convert contractors into employees in Vietnam, as discussed below.
How Do Vietnamese Taxes and Other Labor Rates Relate to Paying Contractors in Vietnam?
When you pay contractors in Vietnam, you are not responsible for contractor tax or social security management.
Contractors must pay their own set Personal Income Taxes and social security contributions.
However, companies doing business in Vietnam directly may have to pay a specific Foreign Contractor Withholding Tax if either party is foreign, alongside VAT. These payments depend on the type of services provided, and the amount paid differs significantly.
It’s important to note that the specific employment tax and labor rate requirements can change over time. We recommend consulting with a local tax advisor, legal expert, or the relevant Vietnamese authorities. Having the most up-to-date and accurate information is essential when you hire or pay contractors in Vietnam.
4 Safe Ways to Pay Contractors in Vietnam: How to Hire and Pay Contractors in Vietnam with INS Global
Direct deposits or Overseas Wire Transfers
Depending on your work agreement and payment schedule, you can pay contractors in Vietnam using direct deposit or wire transfer. This is possible even if you use these methods to pay workers. However, when you pay contractors in Vietnam, pay all amounts in lump sums rather than through your standard payroll system.
Keep contractor payments apart from other payments made to regular employees while doing this. Also, remember that you cannot deduct taxes or social security payments from clients like you can from employees.
Sending Checks or Cash
The majority of contractors throughout the world were paid primarily through cash or checks, but this is no longer the case. Checks are problematic since there is a chance that they will bounce. Many contractors will also distrust them as there are fewer checks in general today.
If you pay contractors in Vietnam, think twice about using checks unless you have other options. Electronic payments are faster and less likely to be misplaced than checks, which causes confidence problems.
Other Online Payment Methods Like PayPal
PayPal’s popularity has significantly decreased over time due to its fees and the rise of competing online businesses accepting electronic payments. However, similar online payment alternatives are still quick and simple ways to pay contractors in Vietnam.
There are several alternative ways to pay digitally in Vietnam, with MOMO (Mobile Money) being the most widely used form of digital wallet.
A Guaranteed Global Payroll Service Provider
There are numerous third-party systems and payroll partners available with the sole purpose of helping you pay contractors in Vietnam in full legal compliance.
As we detail below, PEOs, umbrella companies, and EOR services all provide HR outsourcing services to help you throughout the process.
What You Can Do If You Want to Convert an Independent Contractor into an Employee in Vietnam
When you have a good relationship with a contractor in Vietnam who has specific skills or could be a long-term asset, turning them into a full employee might be a good idea.
This new relationship can save you money in the long term but requires a more specific set-up which might be difficult if you don’t already have a local structure.
Converting independent contractors into employees in Vietnam involves ensuring compliance with labor laws and regulations. Both parties should clarify and understand all factors before changing anything about the relationship to avoid misclassification issues.
Here is a general step-by-step process:
- Familiarize yourself with the relevant labor laws and regulations in Vietnam around employment responsibilities to understand the requirements for hiring employees and the rights and obligations of both parties. Working with an expert in Vietnamese labor law during this time may be sensible to ensure you are compliant.
- Draft an employment contract that outlines the terms and conditions of employment in contrast to the preexisting contractor work agreement. This full contract should include job responsibilities, working hours, compensation, benefits, and other relevant provisions.
- Hiring an employee in Vietnam includes new payroll responsibilities and benefits, which might encourage the contractor to become an employee. Establish a payroll system to process the employee’s salary, including any bonuses, allowances, or benefits agreed upon in the employment contract. It’s essential here to make sure your payroll system in Vietnam can pay accurately and on time to boost your new employee’s confidence in you as an employer.
- If the employee is a foreign national, you may need to apply for a work permit and an appropriate visa. Unless you have the right structures in place in Vietnam, you may have to hire this employee through an EOR in Vietnam.
- Integrate the new employee into your company’s payroll process and register them with social insurance and health insurance contributions. You will need to obtain the employee’s personal information, including their identification documents, and start withholding the right amount from their salary.
- While the contractor is probably already known to our team, you should still conduct an onboarding program to reintroduce the newly hired employee to your company culture, policies, and procedures.
- You’ll now have to keep proper records of all employment-related documents, including contracts, payroll records, tax records, confidential information, social insurance contributions, and other relevant documentation.
This complex process is made much harder if you don’t have a local entity to hire contractors in Vietnam. That’s why an Employer of Record (EOR) in Vietnam might be the best way to hire and pay contractors in Vietnam. Because an Employer of Record in Vietnam hires employees on your behalf, you can hire as many or as few employees without a local structure or additional employer liability in Vietnam.
Otherwise, you can use an EOR in Vietnam to hire and pay contractors in Vietnam in the same way that you would when using an Umbrella Company. That way, the EOR provides benefits to the contractor while allowing them freedom and flexibility.