Employment Contracts vs. Service Contracts in Vietnam: Legal Risks of Misclassification and Practical Safeguards

NEXORA LAWFIRM frequently handles questions concerning the distinction between employment contracts and service contracts in the course of labor law reviews and tax audit support. This distinction requires careful attention, particularly for foreign companies hiring or engaging personnel in Vietnam, because misclassifying the contract type can lead to administrative penalties and back-tax assessments. This article is written for readers interested in topics such as "the difference between employment contracts in Vietnam," "risks of service contracts in Vietnam," "how to distinguish an employment contract from a service contract," and "who is subject to mandatory social insurance," and provides a detailed explanation — from a Vietnamese attorney's perspective — of the legal criteria for classifying contracts, the associated risks, and practical countermeasures. This is essential reading for executives and HR managers seeking to minimize risk in hiring, contract management, and tax exposure.

At present, many companies in Vietnam choose to engage individuals under a "service contract" rather than an "employment contract," in order to avoid the obligation to pay social insurance, health insurance, and unemployment insurance contributions, as well as other employer responsibilities under labor law.

However, the line between the two types of contracts under Vietnamese law is highly ambiguous. Because a relationship may be classified as an "employment relationship" based on the actual substance of the arrangement rather than the contract's title or outward form, this practice can expose companies to significant legal risk.

This article organizes the key practical issues from the following perspectives:

✅ The differences in the legal framework between employment contracts and service contracts

✅ The potential risks and legal liability arising from misjudging the true nature of a contract

✅ The classification criteria applied by Vietnamese courts and labor authorities

✅ Practical measures to avoid legal risk (e.g., registering the individual as a business household)

This topic is extremely important in practice for foreign companies — particularly Japanese companies — that enter into contractual relationships with individuals in Vietnam. We hope this serves as a useful reference for engaging individuals flexibly and lawfully while minimizing risk.

01 - The Difference Between Employment Contracts and Service Contracts

When engaging an individual in Vietnam, the legal obligations and risks differ significantly depending on whether the arrangement takes the form of an "employment contract" (Hợp đồng lao động) or a "service contract" (Hợp đồng dịch vụ).
The table below summarizes the differences in definition, nature, and legal requirements between the two.

Item

Employment Contract

(Hợp đồng lao động)

Service Contract

(Hợp đồng dịch vụ)

Legal definition

Under Article 13 of the 2019 Labor Code, "a contract under which the employee and the employer agree on paid employment, together with working conditions, wages, and mutual rights and obligations"

A contract under the Civil Code and Commercial Code, "under which a service provider agrees to perform a specified task and the engaging party agrees to pay compensation in return"

Essential characteristics / requirements for formation

- Involves compensated labor (wages, allowances, service fees, etc.)
- The employer directs, supervises, and manages the work
- Gives rise to an employment relationship, working hours, and social insurance obligations

- A contract for the delivery of a work product or result
- The contractor performs the work at its own discretion
- The engaging party does not directly instruct the work (i.e., a non-subordinate relationship)
- If the service provider is a merchant, business registration or professional qualifications may be required

02 - Legal Risks When a Service Contract Is Reclassified as an Employment Contract

Even where an arrangement takes the form of a service contract, if its substance amounts to an employment relationship, the contract may be reclassified as an employment contract — exposing the company to a wide range of legal risks and administrative sanctions.

2.1. Risks and Sanctions for the Company

Where a company formally engages an individual as a "service provider" but that individual, in reality, works continuously under the company's direction and supervision, the following risks arise:

Administrative penalties for failing to enter into an employment contract (violation of the Labor Code)
Back-payment of unpaid social insurance, health insurance, and unemployment insurance contributions
Claims for unpaid wages, overtime pay, and paid leave compensation
Partial invalidity of the contract (due to violation of labor law)
Liability for back taxes or under-declaration of tax

It should also be noted that even if such arrangements are not currently subject to strict enforcement by the authorities, a company may still be retroactively sanctioned if the issue surfaces in a future audit or dispute.

2.2. Risks of Disputes and Claims by the Individual

Where a labor-related dispute arises, the following scenarios can be anticipated, for example:

The counterparty to the original "service contract" asserts employee status and files suit
A social insurance authority audit results in forced reclassification of the relationship
The individual seeks legal compensation for a disparity in treatment during the contract period

In such cases, the company may be required to retroactively pay, in a lump sum, the salary, compensation, and insurance contributions it should have paid as if the individual were a regular employee.
Furthermore, if the contract itself is found to be invalid, the legal protection afforded to any compensation or expenses the company has already paid may be insufficient, potentially resulting in loss to the company.

※ Substance, Not Form, Is the Standard ※

Because the actual working reality — not the name of the contract or its formal appearance — is the legal standard applied, the notion that "using a service contract avoids employment risk" is extremely dangerous.

For a company, the potential future legal liability and reputational damage can far outweigh any short-term savings on insurance costs, making careful consideration and prior legal advice essential.

03 - Classification Criteria Used in Vietnamese Practice for Employment vs. Service Contracts

In Vietnam, courts and administrative authorities tend to determine whether a relationship is an employment relationship or a service arrangement based on substance rather than the contract's "title." Below are the representative criteria used in practice by courts and administrative authorities (labor and insurance authorities, etc.).

04 - Practical Points for Avoiding Legal Risk in Service Contracts with Individuals

When a company enters into a service contract with an individual — particularly a foreign company operating in Vietnam — it is essential to take measures to avoid the risk of the arrangement being mistaken for an employment contract. Below are practical preventive measures.

✅ ① Verify the qualifications of the contracting party

Depending on the nature of the work, if the individual does not meet requirements such as business registration, professional qualifications, or licenses, the contract itself may be found invalid.
Before signing the contract, it is important to confirm the nature of the services to be provided and the individual's legal qualifications (e.g., whether they hold a business household registration).

✅ ② Clarify the contract content and emphasize "independence"

The contract should focus on deliverables and work products, and should avoid provisions on working hours, place of work, or the application of internal company rules.
Avoid language suggestive of an employment relationship, such as "position title," "job title," or "performance evaluation system."
Clearly specify terms consistent with a transaction between independent businesses, such as deliverables, deadlines, quality standards, and confidentiality obligations.

✅ ③ Exercise caution in how the contract is managed during performance

Managing the service provider's working hours, requiring attendance, imposing reporting obligations, or issuing a company email address carries the risk that the individual will effectively be recognized as an "employee."
The relationship should be maintained strictly as one between a "principal" and a "contractor," leaving the method of work to the contractor's discretion.

✅ ④ Structure the payment method carefully

Rather than a regular, fixed monthly salary, a compensation structure based on progress or results is preferable.
If the individual has not registered as a business household, 10% personal income tax must be properly withheld.

✅ ⑤ Tax obligations and invoicing

To enhance tax transparency, issue and retain proper invoices (with VAT, or with personal income tax withheld).
Where the counterparty is a registered business household, the company is, in principle, not obligated to bear insurance contributions, which also reduces tax risk.

✅ ⑥ Consult a specialist in advance where legal risk exists

Where the nature of the work is routine, continuous, or closely resembles work performed under direction and supervision, companies should consult a local legal specialist before signing the contract and carefully consider the form of the contractual arrangement and its wording.

✅ Practical use of business household registration

In recent years, an increasing number of companies require the individual counterparty to register as a "business household" before signing a contract.
This approach makes clear that the relationship is a commercial contract between two businesses, reducing the risk that labor law will apply.

✔ Advantages:

The company is exempted from social insurance and labor law obligations, avoiding legal risk
The individual's tax treatment becomes clearer, enabling proper invoicing, which also makes expense processing easier for the company

✔ Challenges:

Some individuals are reluctant to register as a business household due to concerns about tax filing and bookkeeping obligations
Where the actual working arrangement involves being "stationed" at the company or working "every day," the relationship may still be found to be an employment contract regardless of the formal arrangement, so the actual working reality must be carefully organized.

This article has explained the differences between service contracts and employment contracts, the associated legal risks, and measures for mitigating that risk — including contract wording, tax treatment, and the use of business household registration.

Where a company essentially engages an individual who works "like an employee," it cannot avoid employment-related liability through form alone. It is therefore critical to design the contract in a manner that respects the law and to ensure that actual practice after signing is consistently followed. For Japanese companies in particular, understanding Vietnamese labor law and making use of specialist advice is key to building a robust compliance framework.
As the legal framework continues to develop, the standards companies are expected to meet are likely to become even more sophisticated.
If in doubt, we strongly recommend consulting a legal specialist.