Labor Law in the UAE
Content provided by Hadef & Partners, firstname.lastname@example.org
In the UAE, all matters concerning employer-employee relationships are, as a general rule, governed by the Labor Law of 1980. Since the Labor Law is a federal enactment, it applies throughout the UAE. The provisions of the Labor Law are monitored and enforced by officials of the UAE Ministry of Labor & Social Affairs.
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- Is it possible to include a notice provision in a fixed term contract?
- In accordance with the UAE Federal Labour Law, which regulates labour relations, an employment contract may either be for a fixed or unlimited duration.
Fixed period contracts must expressly state the duration of the contract, for example - this contract will continue until 1 January 2010 or the period of service is 3 years. The contract will continue until the specified date or terminate at the end of the designated contract period.
Under the current Labour Law provisions fixed duration contracts must not exceed 4 years. However, fixed period contracts may be renewed by mutual agreement. In addition, if both an employer and employee continue to observe the contractual terms after the contract period has expired, the contractual relationship will survive (and will probably take on the form of an unlimited period agreement).
Therefore, a notice period in a fixed term contract would be inconsistent and not effective.
By contrast, if an employer or employee wants to terminate an employment contract of unlimited duration, notice of a minimum of 30 days must be provided, together with a valid reason to terminate the contract.
- What payouts am I entitled to if I'm dismissed?
- Your payouts must include end of service gratuity (if you have more than one year's service); salary and allowances during your notice period (on an open-ended contract); payment for holiday days you have not taken and an air ticket to your home country. You should also check if your employment contract contains any other benefits and allowances to be paid at the end of your contract, such as relocation expenses.
- I have worked for the same company for over 6 years on an unlimited contract, but have just received a notice letter terminating my services. The notice does not state any reason for the termination. Am I entitled to any compensation?
- In addition to end of service gratuity and the other statutory and contractual payments to which you are entitled on leaving the company, you may also have a right to claim compensation for “arbitrary” (i.e. wrongful) termination under the provisions of the UAE Labor Law. Article 117 lays down the rule that an employer has the right to terminate a contract of unlimited duration on notice, provided he has a "valid reason". Article 122 goes on to explain that the termination will be considered to have been "arbitrary", and hence not for a valid reason, if the reason for the termination is "irrelevant to the (employee’s) work". It is clear from court judgments in the UAE that any of the following reasons would, by way of example, qualify as valid grounds for termination and not be considered arbitrary in terms of Article 122: failure to meet reasonable performance targets over an extended period; failure to comply with company rules and policies (e.g. consistently poor time-keeping); inability to master new technology; becoming surplus to the employer’s human resource requirements (i.e. redundant).
You should therefore ask your company’s HR manager to specify in writing the reasons as to why the decision to terminate you was taken.
If no reasons are given or if the reasons stated are unconnected with your work performance, are unsubstantial in character or show prejudice on the part of the company, you will have a good claim for statutory compensation.
Under the provisions of Article 123 of the Labor Law, the court has the power to award up to 3 months remuneration by way of compensation and will usually make the maximum award.
- I work in the DIFC and was recently terminated. My employer made me "redundant", but I know that someone else has now been recruited to perform my old role. Can I claim up to three months compensation for arbitrary termination?
- The DIFC Authority is responsible for the laws and regulations that govern non-financial civil and commercial matters, including employment. In the DIFC, employment matters are regulated by the DIFC Employment Law. Unlike the provisions of the UAE Labour Law, the DIFC Employment Law does not require an employer to provide a valid reason for dismissal, nor does it currently specify the maximum compensatory awards for employment claims. Further, "redundancy" is not defined in the DIFC Employment Law. Subject to any contractual provisions, your employer can therefore dismiss you for any reason provided the minimum statutory notice provisions are observed.
However, this rule is subject to the qualification that your employer should also have acted in good faith and reasonably, in accordance with implied contractual obligations. The DIFC courts have not yet fully considered a case for breach of these implied obligations.
- Wage Protection System (WPS) - What are the consequences of not submitting a declaration form by the deadline? What enforcement has actually taken place?
- Companies in this situation are refused the right to new work permits. The period of time for which companies are refused new work permits increases according to the number of offenses. Thus:
i. A first offense results in a ban on new work permits until the declaration form has been submitted;
ii. A second offense results in a ban on new work permits until a month after the declaration form has been submitted;
iii. A third offense results in a ban on new work permits until two months after the declaration form has been submitted; and
iv. A fourth offense results in a ban on new work permits until three months after the declaration form has been submitted.
In serious cases of deadline breaches, the Ministry of Labor is able to refer the matter to court, with work permits being refused until either the court proceedings have concluded OR the declaration form is submitted, whichever comes first.
As of 15 March 2010, 800 firms were banned from hiring new workers as they had not joined the Wage Protection System by the final deadline for their registration. The Ministry of Labor will continue to crack down on non-participants.
- Wage Protection System (WPS) - Do companies bear all costs associated with joining the WPS, or is any compensation provided?
- No compensation is provided. Any bank fees, costs charged by service providers or other associated costs must be borne by the company. Additionally, the company must not in any way share such costs amongst workers, whether through reduced wages or otherwise.
- Wage Protection System (WPS) - Is the Wage Protection System applicable in the Free Zones?
- The WPS is not currently applicable in the free zones. The WPS currently applies only to those companies that are registered with the Ministry of Labor. Please note that as the WPS is rather new, its scope and extent are subject to change and free zones may come under its ambit in the future.
- Wage Protection System (WPS) - Is there any requirement to register "private" employment contracts with the Ministry of Labour?
- As a matter of practice, virtually all international companies and well-established local entities also (i.e. in addition to the standard form local "government" employment contracts) enter into "private" employment agreements with their newly engaged staff, so as to record the detailed terms of service that will apply as between company and employee. There is no need to register these “private” agreements with the MOL and they are perfectly valid and enforceable, subject only to two conditions: (i) the agreement must be compliant with the provisions of the UAE Labour Law and (ii) the agreement must not contain terms which are less favourable to the employee than those contained in the standard form contract.
- Are individual employment contracts transferred between the seller entity to the buyer entity in a transfer of business/asset purchase scenario?
- No. There would be no automatic transfer of the employees' contracts of employment under UAE Labour Law. The contracts of employment would have to be terminated and new contracts of employment concluded between each transferring employee and the buyer entity.
- In asset purchase scenarios, how is end of service gratuity calculated for the transferring employees?
- All the "transferring" employees are, as a matter of UAE employment law, entitled to receive their ESG in cash at the time of "transferring" to their new employer. Moreover, since they are, in effect, being "terminated" (ie for the purposes of UAE legalities), they have a right to be paid ESG at the full accrual rate. It should be noted that in asset acquisition scenarios, it will in most cases work to the benefit of the employee to have his (or her) accrued ESG entitlement "credited to their account" with the company to which they are "transferring". In other words the new employer will need to make provision in its accounts to meet the eventual ESG pay-out obligation. However, it is the employee’s right to elect whether they want to have their accrued ESG entitlement "credited" in this way or whether they wish to take "cold cash" at the time of "transfer" to the new employer.
- How is End of Service Gratuity (ESG) to be calculated in Dubai? Based on basic salary alone or including commission/bonus payments?
- Although all forms of allowances are to be excluded for the purposes of ESG computation, this is not so with respect to other forms of regular remuneration over and above basic salary - eg regular monthly/quarterly/annual commission payments, regular annual bonuses. If properly interpreted, Article 134 requires that such payments (in contrast to ordinary allowances) should be factored in for the purposes of ESG calculation.
The Abu Dhabi Cassation Court has given judgment in these terms. However, so far the Dubai Cassation Court has not ruled on the issue and there is no doubt that, so far as Dubai concerned, market practice is still to pay ESG solely on a “basic salary” basis. Therefore, you will not be out of line with the general market if you continue to pay out ESG on a basic salary basis.
As to whether, in the light of the Abu Dhabi Cassation Court rulings, this “restricted” approach to ESG computation constitutes “best practice” is rather more difficult. The best course of action would be for you and your fellow managers to discuss the issue thoroughly and to take a collective decision whether (a) to stay in line with current Dubai market practice or (b) to move to a “best practice” position and pay out ESG on the more generous basis.
- I am the HR manager of a large manufacturing company operating in the UAE. I have been asked by the Board of Directors whether it would be possible for the company to hire between 20 to 30 workers to help deal with a particularly large customer order. It is envisaged that, after a brief 10 day training period, the hired workers would be needed for a period of 3 to 4 months. I have been told that the temporary hiring of personnel is unlawful in the UAE. Is this correct?
- You have been wrongly informed. It is not illegal under UAE law to enter into an outsourcing arrangement with a labour supply company. However, only a very few such outsourcing companies have been licensed and any arrangement whereby your company took on staff on a temporary “loan” basis from a labour supplier which did not possess a licence to carry on “outsourcing” activities would be directly contrary to UAE immigration and employment rules and could result in heavy penalties. Your company’s plan to make use of hired workers to ensure timely delivery of the large customer order, that has been placed with your company, is legally viable but you must take great care to ensure that you only deal with a licensed “outsourcer” and the only way to do this is to ask for some evidence from the company concerned that it has been duly licensed in the terms required.
- I work in the financial services industry and have been employed as a product salesman for a number of years by the same company. I enjoy my work and have been quite successful. However, I have recently received a job offer from a competitor which would lead to a considerable increase in my responsibilities and potential earnings and I have decided to accept the offer. I have informed my current employers accordingly and, although they have not objected to my decision in principle, they have pointed out to me that, under the terms of my contract, I have agreed not to join a competitor concern, anywhere within the UAE, for a period of 12 months after leaving the company’s employment. However, as a compromise, they have suggested that I should remain with the company for a period of 6 months on “garden leave. This six-month period would include the 2 months contractual notice I am required to give the company. It looks as though I have no choice other than to accept my employer’s proposal, but I would like to know what is meant by “garden leave”?.
- The expression “garden leave” (or “gardening leave”) refers to the recognised legal device whereby an employee is retained in the employment of a company for a specific period but precluded from doing any further work for the company during that time. This arrangement is put into effect by the imposition of a ban on the employee concerned, preventing him (or her) from attending the company premises unless invited there for a specific purpose (e.g. to process the handover of work assignments or to assist with the training of junior staff). The object of “garden leave” is to isolate the employee so as to ensure that by the time the employee is free to join the competitor concern, his knowledge of the confidential affairs of the current employer will have become out-of-date and his business connections (which may potentially be of great value to the new employer) will have grown “cold”. “Garden leave” provisions are often inserted in financial industry service contracts as a means of “giving teeth” to the restrictive covenants that are invariably found in such agreements. Restrictive covenants (in this context) are contractual clauses whereby the employee undertakes, for a certain period of time, not to start working for a competitor of his current employer nor to divulge the current employer’s business secrets etc. In general, but particularly in this jurisdiction, such covenants are difficult to enforce through legal proceedings and hence “garden leave” arrangements, whether contractual or subsequently agreed, are used as an indirect means of bringing about the intended effect of the restrictive covenants (as considered above). In case you are in any doubt, you would be entitled to receive your full remuneration throughout the “garden leave” period, if you decided to agree to the proposed compromise.
- I work in the accounts department of a large local company. I was recruited from India three years ago. On arrival in Dubai, I was asked to sign a standard form Ministry of Labour contract, which I did. This agreement stated that the contract was to be for a fixed period of two years but was silent with regard to the question of renewal. The expiry date of my contract came and went but nothing was said to me and I just kept working. I now wish to leave the company and take up other employment in Dubai. However, I have been informed by the company that since the original contract was stated to be for a fixed term, there was an automatic renewal for a further fixed two year term as from the original expiry date. This means, according to the company, that I may not leave the company’s service for another year, when the “renewed term” of my contract expires. Alternatively, if I wish to leave, I must pay the company an amount by way of statutory compensation corresponding to 50% of my total monthly remuneration for 3 months.
- In regard to the point you have raised, the Labour Law is quite clear. In Article 40, the Law provides that “where the parties continue to perform a fixed term employment contract after the original contract period has expired and there is no express agreement between the parties as to the terms of renewal, the contract shall be deemed to continue on the same terms as the original contract, otherwise than in relation to the contract period. In effect this means that the employee, in such a situation, continues to be entitled to the same remuneration and other benefits provided for in the contract, and likewise subject to the same conditions (e.g. restrictive covenants preventing the employee from going to work for a competitor concern immediately after leaving his/or her current employer). However, the contract ceases to be a fixed term agreement but “mutates” instead into a contract of unlimited duration. You are therefore free to leave your present employment, provided you give the company at least 30 days written notice (the minimum notice requirement provided for in the Labour Law), and go to work for any company you like in the UAE, subject to (i) Ministry of Labour approval and (ii) any restrictive covenants that may have been imposed upon you. Your employer is quite mistaken in contending that, if you leave the company without “working through to the expiry date of your contract”, you will be required to pay the company statutory compensation.
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