For years, many businesses operating in Vietnam: from tech startups to established multinational corporations: have relied on a flexible workforce of freelancers and independent contractors. This model is often viewed as a "win-win": the company reduces administrative overhead and social insurance contributions, while the worker enjoys the freedom of project-based assignments.

However, the legal landscape in Vietnam has shifted significantly. The Vietnamese authorities are increasingly moving away from the "labels" on a contract and focusing on the actual nature of the working relationship. This is the "Substance Over Form" principle. If your "freelancer" looks like an employee, acts like an employee, and is managed like an employee, the law will treat them as an employee: regardless of what the title of the document says.

With the 2021 Labor Code already in full effect and the upcoming 2025 Employment Law (set to take effect on January 1, 2026) broadening protections for gig workers, the risks of misclassification have never been higher. At BLaw Vietnam, we have seen a surge in audits and disputes centered on this very issue.

Defining the "Substance Over Form" Principle

In the past, many companies believed that as long as they signed a "Service Contract" or a "Collaboration Agreement" instead of a "Labor Contract," they were exempt from Vietnam's strict labor regulations. That era has ended.

Under Article 13 of the 2021 Labor Code, any agreement is considered a labor contract if it meets three specific criteria:

1. The performance of a specific job: The individual is hired to perform a specific task or scope of work.
2. Payment of a salary/wage: There is a regular remuneration or payment for that work.
3. Management and supervision: One party operates under the management, direction, and supervision of the other party.

If these three elements exist, the relationship is legally classified as employment. This means the individual is entitled to all benefits under the Labor Code, including social insurance, health insurance, unemployment insurance, annual leave, and statutory severance pay.

The Three Pillars of Misclassification Risk

To understand if your business is at risk, you must look closely at how you interact with your independent contractors. The "Substance Over Form" test usually drills down into three main areas:

1. The Power of Supervision and Control

This is often the deciding factor. If your company sets specific working hours for a freelancer, requires them to work from your office, provides them with equipment (like a laptop or email address), or requires them to follow internal company handbooks and disciplinary procedures, they are likely your employee. A true independent contractor should have the autonomy to decide how the work is performed and should generally use their own tools.

2. The Nature of Remuneration

Are you paying the individual a fixed monthly amount that resembles a salary? Or are you paying based on specific deliverables and milestones? While "salary" is a broad term, the more the payment schedule looks like a regular payroll cycle (paid on the 5th of every month, for example), the more it looks like a labor relationship.

3. The Job Description and Integration

If the freelancer is performing a core function of your business that is essential to your daily operations, and their job description matches those of your full-time staff, the authorities will question why they aren't on the payroll. This is particularly relevant for businesses that have started their FDI journey in Vietnam and are looking to scale quickly without increasing headcount officially.

The 36-Month Limit and Automatic Conversion

A critical trap for businesses in Vietnam involves the duration of contracts. Under Vietnamese law, there are generally two types of labor contracts:

• Definite-term contracts: Which cannot exceed 36 months.
• Indefinite-term contracts: Which have no set expiry date.

The law allows for only two consecutive definite-term contracts. If the worker continues to work after the second definite-term contract expires, the third contract must be an indefinite-term contract.

Here is where the danger lies for "perpetual freelancers." If a freelancer has been working under "Service Agreements" for four or five years, and a court or labor inspector determines that the "substance" of that relationship was employment, they will not only reclassify the relationship but may also rule that the contract automatically converted into an indefinite-term labor contract.

Once a contract becomes indefinite, it is notoriously difficult and expensive to terminate an employee in Vietnam. You can no longer simply choose "not to renew" the contract; you must have specific legal grounds for termination, which are strictly interpreted by the courts.

The 2025 Employment Law: Expanding the Net

As we look toward 2026, the regulatory environment is becoming even more protective of workers. The 2025 Employment Law explicitly addresses the "gig economy" and digital platform workers. The government’s goal is to bring more workers into the social security net.

Key changes expected include:

• Expanded Social Insurance Coverage: New mandates to include short-term workers (even those with contracts under one month) in the social insurance system.
• Digital Labor Contracts: Formalizing the use of electronic contracts, making it easier for the government to track and audit employment relationships.
• Protections for Freelancers: Granting "independent" workers access to certain labor protections that were previously reserved for full-time staff.

For companies, this means that the "gray area" where freelancers used to operate is shrinking. If you are unsure how these new rules apply to your current roster of contractors, exploring our legal blog for updates or reviewing our professional services is a vital first step in compliance.

The Financial and Legal Consequences of Misclassification

Ignoring the "Substance Over Form" principle can lead to severe financial penalties. If a freelancer is successfully reclassified as an employee, your business could be liable for:

1. Unpaid Social Insurance Contributions: The company is responsible for its share (currently 21.5%) and potentially the employee's share (10.5%) of social, health, and unemployment insurance for the entire duration of the relationship, plus late payment interest.
2. Back Taxes: Misclassification often leads to issues with Personal Income Tax (PIT) withholding. You can read more about tax-related risks on our tax tag page.
3. Severance and Statutory Benefits: You may be forced to pay for unused annual leave, public holiday pay, and severance pay.
4. Administrative Fines: Labor inspectors can impose significant fines for failing to sign proper labor contracts.

How to Mitigate Your Risks

Through the above analysis, it is clear that simply changing the name of a contract is not enough. To protect your business, you must ensure that the "substance" matches the "form." Here are a few strategic steps:

• Conduct a Labor Audit: Review all existing service agreements and collaboration contracts. Analyze the actual daily interactions between your managers and these contractors.
• Restructure the Relationship: If you want to keep someone as a freelancer, you must give them genuine independence. Remove them from your organizational chart, stop providing them with company equipment, and pay them based on results rather than time.
• Standardize Contract Templates: Ensure your service contracts do not use employment-related terminology like "salary," "bonus," "probation," or "discipline."
• Consider Outsourcing or EOR: For certain functions, using a third-party HR service or an Employer of Record (EOR) can provide a layer of protection, though this must also be structured carefully under Vietnamese law.

Partnering with Experts for Compliance

Navigating Vietnam’s labor laws requires a deep understanding of both the written statutes and the practical enforcement trends of local labor departments. At BLaw Vietnam, our team: including experts like Long Hoang and Ha Tran: specializes in helping businesses align their operational needs with legal requirements.

Whether you are looking to audit your current workforce or need to draft robust contracts that withstand the "substance over form" test, we are here to provide clear, actionable advice. We invite you to contact us directly to discuss your specific situation and ensure your business is prepared for the 2026 regulatory shift.

In addition to labor compliance, we offer a full suite of legal services to help you navigate the complexities of doing business in Vietnam. From corporate governance to tax advisory, our goal is to streamline your operations and enhance your legal security.

Don't wait for a labor audit to find out your freelancers are actually full-time staff. Take proactive steps today to secure your business's future in Vietnam.

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About BLaw Vietnam:
We are a premier legal services provider dedicated to helping international and local businesses thrive in the Vietnamese market. Our team of highly qualified professionals is committed to delivering innovative and cost-effective legal solutions. Learn more about our mission on our About Us page.