UAE Employment Essentials for Employers May 2019 by Gloria Estolano

I. Introduction

UAE Federal Law No. 8/1980 as amended (the “Labor Law”) governs all employment matters in mainland UAE, as well as most of the free zones—the main exceptions being the “economic free zones” of the Dubai International Financial Centre (“DIFC”) and the Abu Dhabi Global Market (“ADGM”). Both the DIFC and ADGM are separate jurisdictions and have their own respective employment laws and regulations: DIFC Employment Law No. 4 of 2005 as amended by Law No. 3 of 2012 (the “Employment Law”), and ADGM Employment Regulations 2015, (the “Regulations”).

The general rule regarding expatriates (i.e., non-UAE citizens) legally living and working in the UAE is that they must be sponsored for the necessary visa. This is true for all expatriates whether working on the mainland the various free zones, or DIFC and ADGM. Sponsorship for work or residency purposes can be provided by:

  • one’s employer or free zone authority;
  • 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 Authorities of the individual Emirates;
  • Ministry of Human Resources and Emiratization (“MOHRE”);
  • Emirates Identity Authority (“EIDA”) and
  • 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 for mainland companies may take from two and four weeks to complete from the date the prospective employee enters the UAE. The processing time in the DIFC and ADGM are considerably shorter, (from one to two weeks). Once sponsored, an employee may sponsor his family to live in the UAE if he/she earns a minimum monthly salary.

On the mainland, and in accordance with the Labor Law, employment contracts are of two types: 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 to terminate the employment relationship. The main difference between the two kinds of contracts concern the consequences for either party when terminating the employment relationship.

In the economic free zones, unlimited and limited term contracts are also permitted, however, unlike for mainland employers, there are no further consequences to employers when contracts are terminated.

Wages for all employees working in the UAE are comprised of two parts: 60% of the amount is the “basic salary” and the remaining 40% is made up of “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. (See end of service entitlements section below).

The Labor Law allows employer to impose a one-time only probationary period which may not exceed six months during which time and at is conclusion the employer may terminate employee without notice. The DIFC Employment Law does not have a provision regarding a probationary period. The ADGM Regulations provides for a probationary period of six months during which time the employer may terminate the employment with notice.

In both the mainland and in the economic free zones there are no legal requirements to provide pensions for non-citizens of the UAE. However, where an employer has employees who are either UAE nationals or citizens of the Gulf Cooperation Council (“GCC”), the employer is required to enroll them in the employer’s UAE pension scheme in accordance with applicable Federal law.

II. Addressing Areas of Concern

Common areas of concern involve issues regarding:

a. Continuity of expatriate employment: Relocating an employee from an overseas to a local entity;

b. The discipline of the employee;

c. Termination of the employment relationship;

d. End of service entitlements;

e. Dispute resolution; and

f. Avoiding regulatory pitfall

a. Continuity of employment

This situation arises where an employer decides to transfer their employees to the UAE locally established entity from their overseas company. The local entity 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.

Essentially an employer has two options. The first option is that the overseas company can continue the employment relationship between the employees and itself during the relocation period.   Thus, the employees are employed by the home

overseas entity and the local entity. Alternatively, 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 UAE entity. The local entity in all instances must comply with the Labor Law and ensure each employee has a valid residency visa and work permit.

If the company decides to set up an entity in one the economic free zones (DIFC or ADGM) the newly set up entity must comply with the respective economic free zone Employment Law (DIFC) or the Regulations (ADGM) and ensure the employee is properly registered and sponsored by the economic free zone authority.

b. Discipline

On the mainland, 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 end of the repor Any disciplinary policy must be easily accessible and communicated to all employees

In the economic free zones, employers may discipline their employees who fail to carry-out an essential term of their employment contract or have disregarded internal company policies and or procedures as set out in their employment contract.

c. Termination of employment

Mainland employers may end the employment relationship immediately in either a limited or unlimited contact “for cause”. Cause for instant termination under Article 120 includes: 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 seven consecutive days, or 20 nonconsecutive days in a single year; and i) revealing any confidential information of the firm for which he work

Where there is no “cause” the employer may end an unlimited contract and a renewed limited contract by providing 30 days written notice and valid reason for termination.

Where a valid reason for termination is not provided, the employer may be liable up to pay the employee up to three months’ full salary compensation where a labor case has been filed 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. In the instance where an employer ends an initial limited term contract before its end date the employer will owe employee compensation for the early termination. The employer will owe the employee the remaining period of the contract term or the aggregate wage due for three months, whichever is shorter.

In the DIFC and ADGM, an employer may terminate the employment relationship (in both limited and unlimited contracts) by providing the requisite minimum notice in writing to employee. Further, employer may terminate an employee without notice for cause. Cause means termination due to the employee’s conduct in circumstances where a reasonable employer would consider immediate termination to be warranted.

d. End of service entitlements

The end of service entitlements owed to the employee when the employment is terminated under the Labor Law (unless terminated for cause) includes payment in cash representing:

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

Under the Labor Law, an employee who has worked one or more years of continuous service is entitled to an end of service payment (gratuity) on the termination of his employment. The end of service gratuity is calculated as follows: (1) 21 days’ remuneration (the basic salary) for each year of the first 5 years; (2) 30 days remuneration for each additional year of service provided the aggregate amount does not exceed two years remuneration. Where the termination occurs prior to the end of any full year of employment the gratuity shall be calculated upon a proportionate basis.

Where an employee resigns voluntarily the calculation of the end of service gratuity is reduced. Where an employee on a limited term contract voluntarily resigns prior to the expiration of his contract period he shall not be entitled to a gratuity payment unless his continuous service exceeds 5 years. No end of service gratuity is owed to an employee who has been terminated for cause.

The DIFC and ADGM have an identical minimum one year of continuous employment and calculation requirements regarding the end of service gratuity. However, there is no distinction between employees working on an unlimited or limited contract who voluntarily resign as both are paid a gratuity based upon their term of service.

Note: The DIFC, as of January 1, 2020, is replacing the end of service gratuity system with a new Employee Workplace Savings Trust savings scheme. Whereby employees will contribute funds on a continuous basis rather than being paid by their employer when the employment ends. The scheme will be regulated by the Dubai Financial Services Authority. A new law setting out the provision and requirements is forthcoming.

e. Dispute resolution

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.

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 or the Employment Law or Regulations where employer is located in one of the economic fee zones.

For employers on the mainland, 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.

For DIFC and ADGM employers, all employment contracts must be registered with their respective economic free zone authority. Employers in the DIFC may settle employment disputes before a small claims tribunal (SCT). The SCT will hold a consultation to settle the matter and if unsuccessful it will proceed to a hearing before a new SCT or refer the claim to the Court of First Instance. All employment claims in the ADGM are filed before the Employment Court of First Instance which has exclusive jurisdiction.

f. Regulatory pitfalls to avoid

  • Do not do engage in a business activity unless the proper license has been obtained. Government authorities have the option of seizing, destroying products or suspending the license of the business own
  • Never hire a person who is on a visit vi The person must be properly sponsored and registered as an employee of the company or the economic free zone. The government imposes heavy fines as well as blocking further work visa to employers caught with employees that are not properly sponsored.
  • Employers you my restrict use of limited contracts on the mainland, as conditions on the ground change constantly and unexpectedly. Where an employer ends a limited contract before its end, employer will be accountable for paying the remainder of the contract to the employ This is not the case in the DIFC or ADGM.
  • Ensure disciplinary actions are in accordance to company policy and Human Resource procedures which are in line with the Labor Law minimum standards of due process.

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.