Employee Annual Leave Management in Vietnam: Compliance and Cost Risks

Key Takeaways

• Businesses may apply annual leave policies at the statutory minimum or offer more generous leave entitlements as part of their benefits and talent attraction strategy.
• Annual leave management is not only about employee entitlements; it also directly affects labor compliance, workforce costs, and operational efficiency.
• Mistakes in annual leave management may lead to labor disputes, unexpected financial obligations, or administrative penalties.
• Businesses should closely monitor seniority-based leave, carried-forward leave, leave records, and the consistency of HR, timekeeping, and payroll data.

Why should businesses manage annual leave effectively?

Annual leave is one of the fundamental rights of employees under the Labor Code. From a business management perspective, however, annual leave is not merely a number of days off granted to employees. It is also closely linked to workforce planning, cost management, and compliance control.

In practice, many disputes arise from seemingly simple mistakes, such as incorrectly calculating leave entitlement, overlooking seniority-based leave, improperly managing carried-forward leave, or failing to maintain sufficient evidence of leave usage. These issues not only affect employee rights but may also cause businesses to make incorrect payments or incur unexpected financial obligations. This is especially relevant when unused annual leave accumulates into a significant cost upon an employee’s departure or during corporate restructuring if not managed early.

Key legal requirements businesses should understand

Annual leave entitlement

Under Article 113 of the 2019 Labor Code, employees who have worked for a full 12 months are entitled to paid annual leave as follows:

• 12 working days for employees working under normal conditions;
• 14 working days for minor employees, employees with disabilities, or employees performing heavy, hazardous, or dangerous work;
• 16 working days for employees performing particularly heavy, hazardous, or dangerous work.

Additional annual leave based on seniority

Under Article 114 of the 2019 Labor Code, employees are entitled to one additional day of annual leave for every full five years of service with the same employer.

If a business offers annual leave entitlements that are more generous than the statutory minimum, it should still review its policy to ensure that employee benefits remain no less favorable than the legal requirements in effect at each point in time.

Employees who have not completed 12 months of service

Under Article 66 of Decree 145/2020/ND-CP, employees who have worked for less than 12 months are entitled to annual leave on a pro-rata basis, corresponding to their actual period of service.

The calculation of actual working time should be based on Articles 65 and 66 of Decree 145/2020/ND-CP, including the periods that are deemed working time for annual leave calculation purposes.

Points to note when roles or working conditions change

During employment, businesses may transfer employees to different roles or change their working conditions.

If such changes place an employee in a category with a different annual leave entitlement, whether 12, 14, or 16 days, the business should reassess the employee’s corresponding leave entitlement to ensure it is calculated accurately and fully.

Payment for unused annual leave

Under Article 113 of the 2019 Labor Code, when an employee resigns or loses their job without having taken all or part of their annual leave, the business is required to pay wages for the unused leave days.

This is a mandatory obligation under labor law.

Personal income tax considerations

Under Clause 8, Article 4 of the Personal Income Tax Law No. 109/2025/QH15, wages paid for unused annual leave when an employee resigns or loses their job may be exempt from personal income tax, subject to the conditions prescribed by law.

Businesses should review the relevant records, supporting documents, and accounting treatment to ensure the exemption is applied correctly.

Common practical issues businesses face

Carried-forward leave accumulated over multiple years

Many businesses allow employees to carry unused annual leave forward to subsequent years to provide greater flexibility in workforce management.

However, without an appropriate control mechanism, carried-forward leave can accumulate significantly over time. When an employee leaves or the business undergoes restructuring, the payment obligation related to unused leave may become a material financial liability.

Annual leave management in M&A transactions and employee transfers

In corporate acquisitions, mergers, divisions, separations, or employee transfers, annual leave entitlements are often among the matters that require review.

Businesses should clearly determine who is responsible for managing remaining leave balances, how pre-transfer service periods are recorded, and what financial obligations may arise in relation to unused annual leave.

Annual leave data not synchronized between HR and Payroll

When leave data, timekeeping data, and payroll data are managed across multiple systems, businesses may face risks such as:

• Incorrect calculation of remaining leave balances;
• Incorrect benefit payments when employees leave;
• Difficulty providing explanations in labor disputes;
• Time-consuming reconciliation among relevant departments.

Practical perspective: Leave records should reflect actual working arrangements

Many businesses manage leave through HRIS platforms or electronic approval workflows. In practice, however, there are still cases where an employee is recorded as being on leave while continuing to attend meetings, handle work, or perform additional tasks at the business’s request.

From a compliance perspective, businesses should ensure that leave records accurately reflect how labor is actually used. If an employee is required to work during an approved leave period, the business should have an appropriate mechanism to record this and retain sufficient supporting documents to maintain consistency across HR, timekeeping, and payroll data.

This is often overlooked in day-to-day operations, but it may become a point of contention in labor disputes or during inspections by competent authorities.

Compliance risks businesses should keep in mind

Businesses should proactively manage and monitor annual leave usage

Clause 4, Article 113 of the 2019 Labor Code requires employers to prepare annual leave schedules after consulting employees and to notify employees in advance.

In practice, many businesses focus on tracking accrued leave days but do not actively manage leave usage. This may result in large accumulated leave balances or disputes when employees leave.

Businesses should periodically inform employees of their remaining leave balances, monitor carried-forward leave, and proactively prepare annual leave plans so that employees can fully exercise their right to rest.

Payment in lieu of leave should not be treated as a routine management solution

The purpose of annual leave is to ensure that employees have time to rest. Businesses should therefore prioritize arranging leave in accordance with the law instead of regularly paying cash in lieu of leave or delaying leave due to work requirements.

If employees cannot take leave due to production, business, or operational needs, businesses should assess the related obligations on working hours, rest periods, and potential dispute risks.

Controlling carried-forward leave and year-end transfer mechanisms

Clause 4, Article 113 of the 2019 Labor Code allows employees and employers to agree on taking accumulated annual leave for up to three years at a time.

Some businesses apply a time limit for using carried-forward leave to encourage employees to use their leave within a defined period. When adopting such a mechanism, businesses should establish clear rules, communicate them properly, and ensure that employees’ minimum statutory rights are not affected.

Risk of administrative penalties

Under Article 18 of Decree 12/2022/ND-CP, violations of regulations on employee rest periods may be subject to administrative penalties, depending on the nature and severity of the violation and the number of affected employees.

In addition to fines, businesses may also be required to implement remedial measures as requested by the competent state authority.

Quick review checklist for HR

• □ Correctly identify the applicable annual leave category: 12, 14, or 16 days.
• □ Fully update seniority-based leave at each five-year milestone.
• □ Review the periods counted as working time under Decree 145/2020/ND-CP.
• □ Maintain a clear leave registration and approval process.
• □ Keep complete leave records that can be retrieved when needed.
• □ Reconcile leave, timekeeping, and payroll data periodically.
• □ Establish a policy for managing carried-forward leave and year-end transfers.
• □ Periodically assess financial obligations related to carried-forward leave.
• □ Provide guidance on handling work that arises during approved leave periods.
• □ Review the application of personal income tax rules to annual leave payments when employees leave.

Conclusion

Annual leave management is not simply about tracking employees’ days off. It is an important part of labor compliance, cost management, and workforce risk management.

A clear leave policy, consistently managed data, and well-controlled operating procedures help businesses comply with legal requirements and protect employee rights. They also help prevent errors in recording, reconciling, and paying employee entitlements. This provides an important foundation for reducing incorrect payments, overpayments, or misstatements that may lead to financial loss. For businesses reviewing their HR management systems, annual leave should be assessed periodically to strengthen control, reduce risk, and improve operational efficiency.