On July 11, 2018, Cambodia passed an amendment to the Labor Law that eliminates “indemnity for dismissal”—a local legal concept equivalent to a severance payment—for undetermined duration contracts (i.e., employment contracts without a fixed expiration date, or UDCs), and replaces it with an ongoing requirement for employers to pay employees a new “seniority payment.” These amendments affect undetermined duration contracts, and may also affect fixed-term contracts (i.e., employment contracts with a fixed expiration date).

Changes on Seniority Payment Implemented

Prior to the amendment, an employer was required to pay indemnity for dismissal, or severance, to an employee with an undetermined duration contract only when the employer unilaterally terminated that employee for any reason other than that employee’s serious misconduct. Similar to the severance provisions of most other jurisdictions, this indemnity for dismissal was only paid at the end of the employment relationship and was based on length of employment.

After the amendment, an employer is no longer required to pay an indemnity for dismissal. However, an employer must instead pay employees a seniority payment every six months. On an annual basis, the total amount of the seniority payment is equal to 15 days of an employee’s wages and other fringe benefits, such as commissions and gratuities. As this seniority payment must be paid every six months, each installment of the seniority payment is half of the above amount.

Wider Scope of the Amendment

In addition to matters related to the seniority payment, the amendment also addresses damages for early termination of an employment contract. First, the amendment addresses an earlier ambiguity in the Labor Law by clarifying that if a company closes down and terminates its employees it will not be required to pay its employees any damages or compensation in lieu of prior notice under the Labor Law. Second, the amendment states that if an employee is entitled to damages, the employee can request a lump sum payment that is equal to all previous seniority payments received, plus any future seniority payments to be received under the employee’s contract, in lieu of proving the actual amount of damages. This revision is significantly pro-employee, as the Labor Law previously capped damages at six months of wages and fringe benefits.

Prakas 443 Issued to Tackle Ambiguity

Under the amendment the Ministry of Labor and Vocational Training promised to issue further additional regulations to address ambiguities in the applicable law and to more specifically clarify the implementation of the seniority payment.

Ambiguities under the new amendment include:

1.   whether an employee under a fixed-term contract is entitled to receive a seniority payment;

2.   whether an employee hired before this amendment is entitled to a seniority bonus for time employed before the enactment of this amendment;

3.   whether an employer can pay all employees a seniority payment at the same time or whether the employer must time the seniority payment to each employee’s specific start date; and

4.  the specific conditions under which an employer may terminate employees when closing down an enterprise without having to pay damages and compensation in lieu of prior notice.

In order to clarify these issues, the Ministry of Labor and Vocational Training issued Prakas No. 443 regarding seniority payments on 21 September 2018.

According to Prakas 443, the seniority payment applies to UDCs only. Employees hired under a specific duration contract (an employment contract with a fixed start and end date) will not receive the seniority payment, but are entitled to severance pay, calculated at 5% of the wages the employee would have received during the length of the contract unless otherwise stated in the collective bargaining agreement.

The seniority payment must be implemented from 2019 onwards, and also will have retroactive effect.

Ongoing payments from 2019 onwards

As stated above, employers are no longer required to pay indemnity for dismissal; the seniority payment replaces it and must be paid every six months as follows:

• 7.5 days of the employee’s wages and other fringe benefits, to be paid in June of each year; and
• 7.5 days of an employee’s wages and other fringe benefits, to be paid in December of each year.

Therefore, on a yearly basis, the total amount of the seniority payment is equal to 15 days of an employee’s wages and other fringe benefits, such as overtime, bonus, commission, profit sharing.

For the first year of service, employees who work continuously for at least one but less than six months will be entitled to a seniority payment of 7.5 days. Employees who work for six months or more, will be considered to have worked for the entire year, and will be entitled to 15 days of seniority pay.

Back pay of seniority payments prior to 2019

In addition to the seniority payments from 1 January 2019, employees who were employed prior to 2019 are also entitled to back pay for all past seniority. The amount of the back pay is, however, capped at a maximum of 6 months of the average base wage in each relevant year of employment up to 31 December 2018.

With respect to the payment of back pay, given instances of certain manufacturers failing to meet their severance obligations, more onerous obligations have been imposed upon participants in the textile, garment and footwear manufacturing (“TGF”) sectors, as follows:

a) Employees in the TGF sectors who have worked prior to 1 January 2019 and remain working for an enterprise, will be entitled to 30 days of back pay per year (to a maximum of 6 months) paid as follows:

• 15 days of seniority payment to be paid in June each year; and
• 15 days of seniority payment to be paid in December each year; and

b) Employees in all other sectors who have worked prior to 1 January 2019 and remain working for an enterprise, will be entitled to 15 days of back pay per year (to a maximum of 6 months) paid as follows:

• 7.5 days of seniority payment to be paid in June each year; and
• 7.5 days of seniority payment to be paid in December each year.

In determining the entitlement to back pay for an employee’s initial calendar year of employment, an employer must pay:

• 7.5 days of back pay if the period of employment in the initial calendar year was between 1 month and 6 months; and
• 15 days of back pay if the period of employment in the initial calendar year was more than 6 months up to 12 months.

Upon termination for cause or without cause from 1 January 2019, outstanding back pay will be payable in full upon termination (to a maximum of 6 months of the average base wage in each relevant year of employment up to 31 December 2018), except in the event of termination for serious misconduct or resignation, in which case back pay will not be payable.

Final Takeaway

It is clear that employers will be obliged to make the mandated seniority payments for any employees hired after the implementation of this amendment, and all companies with employees in Cambodia would be prudent to take note of this significant change in future staffing decisions.