Alex McGeoch investigates the emergence of the Order No. 19 of 2005, and the incentivised requirements fashioned to encourage Labour Law compliance.

In brief

  • As the UAE developed rapidly, the demand for civil servants had increased steadily to keep pace with the country's growth.
  • Efforts to protect the national workforce in light of the surge in foreign labour and various additional factors encouraged the government to take heed and respond to protect both the Emirate and foreign workforce by attempting to instil a degree of discipline in the business community with regard to the issue of Labour Law compliance.
  • The resultant legislation, which has continuously developed over the years, dissuades companies from violating employment and immigration rules by rewarding those that comply with the labour law requirements, and enforcing stricter obligations on those that are not as compliant.

Introduction

In the early years of the new century, the UAE went through a stage of rapid development. This remarkable surge forward, from relative backwater to important regional centre, was characterized by a spate of construction and civil engineering projects, an increasingly diversified economy and a dramatic increase in population.

Justifiably the UAE government viewed the country's remarkable achievements with a sense of pride. However, at the same time those with responsibility for determining the composition of the national workforce and controlling the inflow of foreign labour had certain concerns, from a demographic, security and regulatory point of view.

Concerns

First, although it was apparent that the number of civil servants, employed at both the federal and emirate levels, would for the time being need to be steadily increased, in order to keep pace with the country's rate of growth, government strategists realized that the public sector would not in the long term be able to absorb every Emirati national who was seeking work. It was clear that policies encouraging UAE nationals to find employment outside government offices would need to be actively pursued and private sector companies would, in turn, have to play their part by offering more job opportunities to Emiratis.

Secondly, there was a perception in official circles that it was undesirable to have large numbers of foreign workers, with a shared ethnicity and culture, assembled together within the borders of this small country. Such an imbalance between the citizens of the UAE and identifiable and cohesive groups of non-nationals could, it was thought, pose a potential threat to social order in the UAE.

Thirdly, the authorities were aware of a widespread failure on the part of private sector companies to honour their financial obligations towards those that they employed and a tendency to disregard immigration rules when recruiting staff. No doubt this "cavalier" attitude towards the laws of the UAE was connected with the fact that, as a phenomenon of the "boom years", a vast number of new businesses had been set up which were in many cases, doubtless as a result of inexperience, badly managed and also frequently under-funded.

Incentivised solutions

By 2005 the government had decided that the time had come to act and, under a Council of Ministers Order (Order No. 19 of 2005), an entirely new scheme was introduced with the objective of significantly improving levels of compliance by private sector employers. A key feature of the scheme was that, in future, all companies would be classified into three employer grades – Categories A, B and C.

The criteria to be used for classification purposes were threefold – (a) record of compliance with employment law obligations; (b) level of attainment of "emiratisation" targets and (c) adherence to the new "cultural diversity" requirement.

In so far as concerns emiratisation targets, a suite of ministerial orders earlier in the year (Ministerial Orders No. 41, No. 42 and No. 43 of 2005) imposed on private sector companies a "quota" system, whereby every company had to recruit (and retain on the payroll) a sufficient number of UAE nationals to ensure that the Emirati component of its workforce constituted a specified (minimum) percentage of the overall number of staff. Ordinary commercial companies were required to maintain an emiratisation level of at least 2%. In the case of banks and insurance companies, the levels were set at 4% and 5% respectively. Furthermore, the quota maintenance was not a static obligation but in terms of the relevant Ministerial Orders, required a commitment on the part of the employer, to a year-on-year build-up of Emiratis, (as an element in the workforce), at the same percentage. In reality the private sector has been given some latitude in regard to the progressive annual "build-up" obligation, but the legislation imposing this rule remains in place.

As to the "cultural diversity" requirement, this initiative was directed at those companies that were heavily dependent upon workers from the same geographical region, with a shared ethnicity, language and culture. The objective of this policy was to cause such companies to start recruiting staff from other countries so that the preponderant element in the workforce would be "diluted" to an acceptable percentage in proportion to the total headcount.

New rules were also put in place requiring all private sector companies, with the exception of those receiving a Category A classification, to furnish a financial guarantee in favour of the MOL. The purpose of the guarantee was to underwrite the company's Labour Law obligations - specifically the duty to pay staff remuneration and leaving entitlements in a timely manner.

In addition, as an incentive to persuade companies to improve their level of compliance with employment and immigration rules, standard charges for different MOL transactions (e.g. applications for approval to recruit staff from abroad) were replaced by a scale of fees for each such transaction, the amount payable (in many, but not all, cases) being dependent on the category of the applicant company.

Five years later, under a two-step legislative process (see Council of Ministers Order No. 26 and Ministerial Order No. 1187, issued in August and November of 2010 respectively), a revised system of classification was introduced. Hence, although there are still three principal company grades - Categories 1, 2 and 3 - Category 2 has been subdivided in Categories 2A, 2B and 2C.

Category 1 classification is reserved for those companies which maintain the highest standards of compliance with employment law obligations and strictly observe government policies with regard to emiratisation and cultural diversity.

Companies that attain Category 1 status are to be exempted from the financial guarantee requirement.

As regards companies with a lower grading, Order 26 set the value of the mandatory financial guarantee, in the case of each category, at the following levels: Dhs. 1,500,000, Dhs. 3,000,000, Dhs. 5,000,000 and Dhs. 10,000,000, for Category 2A, Category 2B, Category 2C and Category 3 companies respectively.

Where, for any reason, a company fails to pay contractual and statutory entitlements to one of its employees, the MOL can encash the value of the guarantee and itself make the necessary payment to the employee concerned.

A company may only instruct the issuing bank to reduce the value of the guarantee, or cancel it, with the express consent of the MOL. The MOL will only give such consent where the company satisfies the MOL (a) that the employee has received his (or her) full leaving entitlements and that the employee will not be replaced on the company's payroll or (as the case may be) (b) that the company intends to close down its operations and apply to be removed from the MOL register of employers.

Later in 2010, under the provisions of Ministerial Order No. 1187, detailed new criteria for the classification of employers were introduced.

The criteria provisions of Order 1187 are complex to a degree but are particularly notable for imposing two additional criteria for the purpose of company classification, namely (i) extent of "professionalization" of work force and (ii) minimum rates of pay (for "professional" staff)

Order 1187 also established a new system of penalties (the "Black Points" system) as a further means of discouraging companies from violating employment and immigration rules.

In the case of Category 1 companies, the focus of the assessment is on the extent to which the workforce has become "professionalized" and on the levels of remuneration paid to staff. Thus, not less than 20% of the company's workforce must be employed in occupational grades 1, 2 and 3 (that is to say: holders of university degrees, diplomas/technical qualifications and high school leaving certificates respectively). Persons employed in a grade 1 professional position must be paid a minimum Dhs. 12,000 per month. Those in grade 2 must be paid not less than Dhs. 7,000 per month and those in grade 3 must be paid at least Dhs. 5,000 per month.

In the case of Category 2 companies, the focus is on the "cultural diversity" factor, the scaled workforce diversification ratios being as follows: 25% or less, between 25% and 50% and over 50%, in the case of sub-categories 2A, 2B and 2C companies respectively.

In the case of Category 3 companies, it is the company's "black point" record that determines the classification1

A company will find itself with a Category 3 grading in any of the following situations: (i) if, having already received a Category 2 C classification, it then accumulates 100 or more black points (ii) if it is convicted of hiring "illegals" (i.e. persons who have entered the UAE illegally) or for the offence of "human trafficking"; (iii) if it has falsely reported that it has hired Emirati staff when it has not done so; or (iv) if it has provided misleading information to the agencies charged with operating the Wage Protection System, with a view to evading its financial obligations towards staff members.

A company can achieve promotion to a higher category by improving its compliance record, with respect to the specific cultural diversity and emiratisation norms, the professionalization of its workforce and remuneration of professional staff at prescribed levels, according to grade.

Conclusion

It is safe to say that the UAE government is still seeking new methods of instilling discipline in the business community, with regard to the issue of Labour Law compliance. Little doubt also that the government remains ambitious to see a much greater percentage of Emiratis working in the private sector and a more skilled and culturally diverse workforce overall. In these circumstances, further developments in the rules and policies relating to employer classification can confidently be expected.

Footnote

1. Note: Attached to Order No. 1187 is a table of employment and immigration law violation, with columns showing the number of black points "earned", and financial penalties imposed, in respect of each type of violation

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