UAE Employment Essentials for Employers, Entrepreneurs and Investors by Gloria Estolano

Introduction

UAE Federal Law No. 8/1980 as amended (the “Labor Law”) governs all employment matters apart from government employees, agricultural and domestic employees, and employees working in the Dubai International Financial Centre (“DIFC”) and the Abu Dhabi Global Market (“ADGM”). Both the DIFC and ADGM are economic free zones that are separate jurisdictions and have their own employment laws to which the Labor Law does not apply. All other free zones located within the UAE have their respective employment rules and regulations that are in accordance with the Labor Law.

The general rule regarding work and residing in the UAE requires a non-citizen to be sponsored with an applicable visa. Sponsorship for work or residency purposes can be provided by:

  • one’s employer
  • one’s spouse who is legally employed or
  • self-sponsorship via setting up in a free zone company

The sponsorship process requires several approvals from various government entities to ensure the prospective employee is not a security risk, is free from certain communicable diseases, and has the requisite skills for the proposed employment position. The various entities involved in the process includes approvals from:

  • Department of Naturalization and Residency (“DNR”)
  • Health Authority
  • Ministry of Human Resources and Emiratization (“MOHRE”)
  • Emirates Identity Authority (“EIDA”)
  • Police – Criminal Investigation Department (“CID”)

Upon completion of the process, the person will obtain a work permit, residency visa, health card and Emirates identification card. The entire process takes between two and four weeks to complete from the date the prospective employee enters the UAE. Once sponsored, an employee may sponsor his family if he/she earns a minimum monthly salary.

Employment contracts are of two types, either limited term (a set start and end date) or an unlimited contract which continues until either party provides the other with the required notice period. The main difference between the two kinds of contracts concern consequences of terminating the employment relationship by either party.

Compensation is made of two parts, 50% basic salary and 50% allowances. Allowances include amounts for housing, schooling and transportation etc. The basic salary is the amount upon which the end of service gratuity (“ESG”) is calculated. Note: There is no provision in the Labor Law to provide pensions for non-citizens of the UAE.  However: An employer is required by law to register its Emirati employees with the National Pension Plan and contribute to the fund at set rates. Although an employer may have a pension program in place for its seconded employees, the Labor Law will still apply, as they are employees of the local UAE entity. It is important to have an agreement in place which addresses any benefits or conflicts with the employment terms in the home jurisdiction to ensure that, at the end of the employment period in the UAE, the Labor Law requirements are met.

The Labor Law does not require a probationary period term in the contracts. It is discretionary, however, and can only occur one time during employment, and can be no longer than 6 months.

Addressing Areas of Concern

Common areas of concern involve issues regarding:

  1. Continuity of employment of employment – relocating employee from overseas to local entity;
  2. share sale transfers;
  3. asset business purchases;
  4. discipline;
  5. termination of the employment relationship;
  6. calculation of the end of service entitlements and
  7. restrictive covenants
  8. dispute resolution

1. Continuity of employment

This situation involves an overseas employer who is sending employees from its overseas company to live and work in the UAE in a locally established entity. The latter may be a branch of the overseas company, or a wholly new entity which is incorporated within the UAE and retains a relationship or affiliation with the overseas company. An employer has two options.  The first option is that the overseas company can continue the employment relationship between the employee and itself during the relocation period.  Thus, the employee is employed by the home overseas entity and the local entity.  The second option is that the employer may terminate the employment relationship with the overseas company, settle all existing labor entitlements, and start a new employer/employee relationship with the local entity in the UAE. The local entity in all instances must comply with the Labor Law and ensure employee has valid residency visa and work permit.

It is usually at the end of employment that cross-border employment issues arise. Employees may try to bring a claim against both the overseas company and local company for arbitrary dismissal (i.e., dismissal without a valid reason) and for end of service entitlements. Employees may attempt to bring a claim in another jurisdiction if the employment rights and entitlements in that country are more favorable than those in the UAE. It is prudent to review the legal relationship between the overseas company and the local entity, as it may impact the continuity of employment between the overseas company and employee following the employee’s transfer to the local UAE entity. In all cases, the employer must ensure the employment terms comply with the Labor Law.

2. Share sale transfers

In both share sale transfers and asset or business purchases, due diligence of the target business is essential regarding the employees and employment issues within the target. All employees must have valid work permits and residency visa sponsorship through a locally established entity.  Note: GCC nationals do not require UAE residency visas, but still require a valid work permit. Review for any pension plans and end of service entitlement issues for UAE nationals and ensure proper registration, and employer past payments, into the UAE Federal Pension plan.

There is no consultation process required in the UAE to impact either share sale transfers or asset purchase transactions, but potential creditors must be notified. Also, there are no trade unions or employee representative bodies in the UAE that must weigh in on these transactions. In a share sale transfer the individual employment contracts remain in place and no consent is required from the employee. It is a straight forward transaction.

3. Asset purchases

In an asset purchase, there is a change of ownership of an asset.  The employees will be working for a new employer and will need new employment contracts in the name of the new employer. There is no transfer or undertaking regulation, but, in an asset purchase, it is necessary to terminate all existing employment contracts and enter into new ones. Given that this is a termination of employment, a notice of 30 days and payment of the employees end of service entitlements, inclusive of the ESG, is required from the transferor (existing employer). However, in these situations, the employee may be given the option of payment of the end of service entitlements or continuation of service rollover to the new owner (employer) in a new employment contract.

 It is common practice to include in the business transfer agreement an indemnity from the transferee to the transferor on employment claims and request each employee to sign a letter of continuity, confirming their employment will transfer to the transferee as if it were continuous and they do not have any claim against the transferor.  In addition to new employment contracts and end of service entitlements continuity (or payout) the transferee employees will need new work permits, new residency visas with the new sponsor. The new sponsor pays all fees when submitting all documents for each transferring employee through MHROE, arranging medicals, stamping of work residency visa in the passport and issuance of a medical insurance card.

4. Discipline

Employers may impose disciplinary measures on non-performing employees, including warnings, fines, suspensions or dismissals. A fair and reasonable process must be followed. The Labor Law requires that a minimum due process procedure must be followed prior to imposing disciplinary measures. The process mandates that an employer must: a) timely notify the employee in writing of the allegation against him/her; b) provide the employee an opportunity to make a statement and defend him or herself; c) investigate the allegation and defense; and d) record this process in the employee’s file, with the findings and actions listed at the bottom of the report. Any disciplinary policy must be easily accessible and communicated to all employees and may be part of the employee handbook or a separate policy.

5. Termination of employment

Ending the employment relationship in either a limited or unlimited contact is immediate if the employee has committed a “for cause” action set out in Article 120 of the Labor Law.  Cause for instant termination under Article 120: a) causing a substantial loss to the employer (provided this is reported to the MOHRE within 48 hours); b) disobeying clearly delineated safety instructions; c) appearing at work intoxicated or under the influence of illegal drugs; d) assaulting an employee at work premises; e) assuming a false identity or nationality or submitting forged documents; f) defaulting on basic duties under the employment contract despite being notified  in writing that he will be dismissed; g) conviction of a crime involving honor or public morals; h) absence from work without a valid excuse for more than 20 nonconsecutive days in a single year; and i) revealing any confidential information of the firm for which he works.

For those employees on an unlimited contract and those on a renewed limited contract, the employee may end the employment by providing 30 days written notice to employer.

An employer may also terminate the unlimited and renewed limited term contract by providing 30 days written notice period and a valid reason to the employee. Where a valid reason for termination is not provided, the employee may seek compensation up to three months salary by filing a labor complaint in the Labor Court.

Where a person is working under an initial limited contract, he/she will pay compensation to the employer if he/she ends the employment prior to the end date. Similarly, if an employer ends an initial limited term contract before its end date the employer will owe employee compensation for the early termination.

6. End of service entitlements

The end of service entitlements owed to the employee when the employment is terminated (unless terminated for cause under Article 120, as discussed above) includes payment in cash representing:

  • salary to date of termination
  • notice period
  • accrued but unused annual leave
  • bonus or commission (where applicable)
  • return air ticket or its value (where applicable)
  • end of service gratuity (based upon a fixed formula depending on years of service)
  • minus any amounts owed employer.

7. Restrictive Covenants

Restrictive covenants are permissible in an employment contract that seek to prevent employees from engaging in unfair business activities following termination of their employment. Such covenants include:

  • Non-competition: Prevents employees from joining a competitor;
  • Non-solicitation: Prevents employee from soliciting existing clients; and
  • Non-poaching: Prevents employee from recruiting or poaching ex colleagues.

These covenant terms must be reasonable in length of time, area of restriction and activity or activities that are being limited. An employer must prove actual damages caused by the former employee’s breach of the restrictive covenant to prevail in court.

There is an ongoing duty for employees not to disclose confidential information to a third-party and is a crime under the UAE Penal Code. Where the disclosure is released via an electronic portal it is treated as a cyber-crime, which is also covered under applicable UAE law.

8. Dispute Resolution

All employment contracts must be registered with the MOHRE and the Labor Court has jurisdiction over all labor claims. The statute of limitations to file a case is one year from the date of which any entitlement under the Labor Law became due. Initially, all complaints must be filed with the Labor Office for a single conciliatory meeting with the parties and MOHRE representative. If unsuccessful, the parties have the right to file a complaint in the Labor Court.

MHLF (Mahmood Hussain Law Firm) and Mora & Associati are proud of this alliance since it will allow both law firms to offer our clients a seamless assistance for their international operations in the Emirates and Italy. We intend to offer an added value in the commercial relationship between Italian and Emirati Companies.