Are My Team Members Subject to the Cambodian Labour Law?
Whether the members of a startup team are subject to the Cambodian Labour Law is often far from obvious, yet critical for figuring out how they may be paid, whether they are entitled to vacation, what registration needs to take place, who owns the source code, and many other practical questions. Avoiding these decisions can lead to business-killing liabilities and disputes should the startup ever gain traction.
A startup will often begin informally, with a few friends brainstorming a business and bootstrapping operations. Perhaps one is “in charge”, while the others are doing specific tasks in exchange for pay, or promises of pay or equity in the future. The team members may be wearing different hats and playing different roles at different points in the startup’s development.
To complicate matters, a startup might splinter – with a handful of team members taking the project in one direction, while the remaining members keep on with the original business.
Who was employed, and by whom, at what point in time?
In terms of the Cambodian Labour Law, any relation between an employer and worker, resulting from an employment contract to be performed within Cambodia, is within the scope of the law. An employer need not to have been registered as a business – one individual can hire another, potentially making them a worker subject to the labour law.
The question at the outset is thus whether the team member is a worker/employee in terms of the labour law. The key criteria are whether they have agreed to
- perform work,
- under the direction and management of someone else,
- in exchange for remuneration.
Whether these three points are satisfied will depend on the facts of the relationship.
The startup founders – those actively working on the project from the initial phase – are hopefully performing work on the business. However, if a founder stops actively participating, they would no longer be working and thus not a worker.
The trickier question is whether the founder is under the direction and management of someone else. In the case of a small team of founders cooperating as equals, no one could be said to be directing or managing the others. However, if one is more clearly in charge, and is setting the rules and conditions of how the others do their work, then this would tend towards an employer-employee relationship.
Finally, if the founders all have an equity stake in the startup, and are only taking their share of the profits, the remuneration test would not likely be satisfied.
If, however, a founder is being paid an hourly or monthly fixed amount, similar to a wage or salary, or even being promised equity in the future – they would more likely be found to be a worker.
Leaving aside whether a founder must be treated as an employee under the Cambodian Labour Law, the founders might freely decide to make themselves employees of the company in order to draw a salary and for tax reasons. This is also possible, but should be considered carefully, as they would then have the full rights and benefits as any other employee.
Another category of “team” member are independent contractors. This would be someone who is paid some form of remuneration – cash, debt, equity, or even in-kind-services – in exchange for doing some specific work, and at their own direction.
For instance, a developer is taken on to build a specific function of the website, using their own computer and tools, setting their own schedule, and being paid a lump sum upon completion. They would most likely be an independent contractor and not an employee.
However, once that person begins working from the startup’s office, using software the startup purchased, taking care of the maintenance and upkeep of the product, and being paid a stable, periodic amount, they could be found to be an employee.
It is recommended to sign an independent contractor agreement, setting forth what work is to be done, under what conditions and in exchange for what remuneration. The startup should also allow the independent contractor significant freedom, for instance by not mandating they work regular times from their office, lest the startup be found to be “directing and managing” them.
A third set of team members are those variously labelled intern, trainee, apprentice, volunteer, entrepreneur-in-residence, or even just “my friend”. What they have in common is that they do not own any part of the company (like the founders), are not (currently) being paid (like employees), but are doing work at the direction and under the management of the startup.
This is a tricky, and potentially explosive mix of factors.
Without remuneration, they would not be employees under the Cambodian Labour Law, yet could be falling afoul of minimum wage regulations. This could lead to claims for unpaid wages, and that they should indeed be categorized as an employee with all the rights and benefits arising therefrom. At the early stages of a startup, when the business would be considered an un-registered general partnership, it can be far from clear who amongst the team is considered a partner, and who just “a friend helping out.”
It is wise to formally document the terms of the relationship from the beginning, and for those team members not receiving remuneration, to be careful in assigning and directing them to perform tasks.
How to Hire an Employee under the Cambodian Labour Law
A written employment contract is an absolute must.
Bringing someone onboard with a verbal promise of payment is a recipe for misunderstanding, dispute, and legal exposure. The contract need not be long or overcomplicated, but should cover the basic points specified below and be in compliance with the Cambodian Labour Law.
The employment contract can be written in English or Khmer, assuming both parties understand the language. It should state the full names of both employer and employee, the starting date, work location, compensation and other benefits, job title and ideally a description of the main tasks. Holiday, annual leave, termination provisions and other topics can be further specified so long as they do not conflict with legal requirements, or be left out of the agreement and the default provisions of the labour law will apply.
The two basic types of employment contracts are fixed and unspecified duration. A fixed duration contract must be written, with precise start and end dates not exceeding two years. If not, it is considered an unspecified duration contract. If an employee begins with a fixed-duration contract, but keeps working after the expiration date without a renewal, then it is considered an unspecified duration contract. The major difference in the two types of contracts is in terms of termination, as discussed below.
As employers are often unsure whether a potential hire will be a good fit, the law allows them to hire employees on a probationary basis. The probationary period is limited to a maximum of one month for non-specialized workers, two months for specialized, and three months for regular employees . Probationary employees can be terminated without notice.
To hire a foreigner, the employer should require them to show a valid passport, Cambodian visa, residence permit, health certificate and work permit issued by the Ministry of Labour. Further, the law gives preference to Cambodians in hiring, sets caps on the share of foreign workforce, and requires prior-permission from the Ministry of Labour prior to hiring foreigners. Application of these requirements is uneven and incomplete, but can change at any time.
Employment discrimination is a hot button issue today, and startups should have an awareness not only of the business and moral dimensions, but also the legal provisions in Cambodia. According to the Cambodian Labour Law , in hiring, firing, work assignments, promotion, pay and termination, a business may not discriminate on the basis of race, color, sex, creed, religion, political association, union membership, social origin or birth. Decisions based on skills and qualifications are allowed.
Show Me the Money: Paying Employees
Salaries should be paid directly to the employee, in cash, check or by wire transfer: Payment to a third party is only allowed if specifically agreed. Employees must be paid twice a month. The first payday must take place in the second week of the month, for 50% of the net monthly wages. The remaining compensation is to be paid in the fourth week. Those working on a commission should be paid out every three months at the latest.
Employers must inform employees of their compensation before their start day, and before any changes (i.e. a raise) before it takes effect.
On payday, each employee should receive a pay stub indicating the pay rate, overtime, tax withheld, taken and remaining annual leave, and any bonuses or deductions. Salary deductions are allowed only in very limited circumstances, and not as a punishment for misconduct or other behaviour.
Tax on salary must be deducted by the employer from each paycheck and paid directly to the General Department of Taxation. For resident employees, the tax rate progressively rises to a top marginal rate of 20%; for non-residents the tax rate is a flat 20%. Further information and advice can be found in a separate post on taxation.
Seniority indemnity payments must be made to employees under unspecified duration contracts every six months. The payment is equal to fifteen days of wages and benefits per year. Half is due in June, the other half in December. Employees on fixed duration contracts are not entitled to seniority indemnity payments, however they would be entitled to severance payment of at least 5% of their wages, as detailed below.
Let’s Take a Break: Leave, Holidays and Benefits
Full-time employees are entitled to paid annual leave of 18 days per year, plus one additional day for every three full years of continuous employment . Part-time workers are given leave in proportion to their working hours.
While annual leave accrues during the first year, the employee does not have the right to use it until their one-year-anniversary. Of course, the employer can allow them to take leave during the first year if they so wish.
Any untaken leave must be paid-out at the end of the contract. An employee cannot be forced to take all their leave in a particular year, but rather can defer leave, in excess of twelve days per year. The deferral cannot exceed three years, or else the days are lost.
The list of paid public holidays is published each year in a Prakas (regulation) from the Ministry of Labour. The exact number varies by year, but is usually between 25 and 30 days. When a holiday falls on Sunday, the following Monday is taken. If a startup has to stay open during an official holiday, affected employees are entitled to double pay for that day.
Special leave is distinct from annual leave and holidays, and is meant for personal and family matters. Employees may request up to seven days of special leave, for such significant events as a birth, death, marriage, or serious sickness of a relative. Subject to the company’s internal rules, the employer may deduct these days from the annual leave, but if the employee has none remaining, they cannot deny the special leave. The employee may, however, be required to work overtime to make up for the special leave taken.
Sick leave, provided the employee has a doctor’s certification confirming their illness, is to be paid at 100% of wages for the first month, 60% for the second and third months. After the third month, the employee is not entitled to further payment, though the employer is required to suspend the contract for up to six months, allowing the employee to return to their position.
Maternity leave allows expectant mothers to 90 days off, assuming they have been employed for over a year. During the time off, they are paid at least 50% of their average wage for the prior year, and should be paid-out prior to them going on leave. Further, they may not be terminated because they became pregnant, nor while on maternity leave.
Please Just Go: Ending the Employment
All employment relations end at some point, whether through the employee resigning or being fired, retiring, or in the worst case – dying.
As startup teams tend to be young, retirement and death will be left aside, to focus on how to handle an employee who decides to leave on their own, or must be forced to depart.
In the case where the employee decides to leave of their own free will, the procedures and payouts will depend on whether they are on a fixed-duration or unspecified duration contract.
For fixed-duration employees, who want to leave at the end of their contract period, the startup should either serve them with proper notice of the termination of their contract sufficiently ahead of time (10 days for contracts of six to twelve months, 15 days for over a year), or sign a mutual agreement in the presence of a Labour Inspector. Without proper notice or a mutual agreement, by law the contract will automatically renew for another term, requiring the employer to make additional payments to the employee. If the employer does not give sufficient notice, according to the timeframes above, then the employee is entitled to payment of the wages for the remaining time.
In both cases and unless otherwise agreed in a collective agreement, a severance payment of 5% of the employee’s total wages over the course of the employment must be made. This is often an unpleasant surprise to startups unaware of this requirement, and should be budgeted for when making employment offers.
For employees on contracts of unspecified duration, they must give sufficient notice as follows:
- Less than 6 months of service: 7 days notice
- 6 – 24 months: 15 days notice
- 2 – 5 years: 1 month notice
- 5 – 10 years: 2 months notice
- 10+ years: 3 months notice
During the notice period, the employee is entitled to full pay and allowed two days off per week to seek a new job. Because of this reduction in time, as well as potentially negative effects on remaining colleagues, many businesses decide to grant the employee “garden leave” to stay home at full pay.
Firing an employee can be one of the most unpleasant tasks an entrepreneur needs to undertake. In Cambodia, the ability to terminate an employment contract, against the will of the employee, will depend on the type of contract, the notice period, and the reasons for termination.
Firing an employee is easiest in cases of serious offenses, of which the Labour Law gives the following, non-exclusive list of examples:
- Stealing, misappropriation, embezzlement
- Fraudulent acts committed at the time of signing (ex. presentation of false documentation) or during employment (sabotage, refusal to comply with terms of employment, divulging professional confidentiality
- Serious infractions of disciplinary, safety and health regulations
- Threat, abusive language or assault against the employer or other workers
- Inciting other workers to commit serious offenses
- Political propaganda, activities or demonstrations in the establishment.
- Termination based on a serious offense can be done with immediate effect, but must be done within seven days of learning of the matter, otherwise it is waived.
An employee on a fixed-duration contract, even fired for a serious offense, would still be due their 5% severance payment and remaining annual leave. If they are dismissed more than seven days after the employer learned of the offense, they would be due full wages for the remaining term of the contract.
Employees under unspecified duration contracts can also be fired for serious misconduct, immediately and with no further payment (except for remaining annual leave)– subject to the 7-day rule. If that period has passed, the employer could rely on classifying the offense as non-serious misconduct, but must serve notice of termination within 15 days of learning of the offense . Alternatively, they would need to show an economic or other valid reason.
For the Record: Documentation and Record-Keeping
Employing workers involves a certain amount of paperwork.
First, when starting up, a declaration of opening needs to be made to the Ministry of Labour. For small companies with less than eight employees, this can be done within 30 days of opening, otherwise beforehand. Further information can be found in a separate post on setting up a company.
Second, a payroll ledger must be setup in coordination with the Labour Inspector. This records the employee’s compensation, time worked, leave and seniority, and serves as important evidence in case of disputes.
Third, an establishment register, with the employer’s name, type, activity and contact information is required.
Fourth, businesses with over seven employees must have internal regulations – essentially a set of rules governing a number of human resource issues in accordance with the labour law. They must be approved by the Labour Inspector and posted on the business premises. The regulations should cover hiring process, compensation, working hours and breaks, holidays, termination notice, health and safety measures, and worker obligations.
Finally, employers are required to note the hiring and dismissal dates for all employees in their workbooks, and approved by the Labour Inspector in a timely fashion.
