A decree on 8 February by Cardinal Giuseppe Bertello, the governor of Vatican City, said getting a vaccine was "the responsible choice" because of the risk of harming other people.
Vatican City, at 108 acres the world's smallest state, has several thousand employees, most of whom live in Italy.
Its vaccination programme began last month and Pope Francis, 84, was among the first to get the vaccine.
The decree said that those who cannot get vaccinated for health reasons may be given another position, presumably where they would have contact with fewer people, but will receive the same pay even if the new post is a demotion.
But the decree said those who refuse to get a vaccination without sufficient reason would be subject to a specific provision in a 2011 law on employee rights and duties.
The article in the 2011 law says employees who refuse "preventive measures" could be subjected to "varying degrees of consequences that could lead to dismissal".
After news stories about the decree, many Italians took to Twitter to criticise it, with some saying it was contrary to Pope Francis' general call for mercy. Read more at RTE HERE.