United Arab Emirates

The United Arab Emirates, or UAE, which comprises seven Emirates (i.e., Abu Dhabi, Dubai, Sharjah, Fujairah, Ajman, Um Al-Quwain, and Ras Al Khaimah) is an increasingly popular destination for businesses. It has been known for a relatively commercial and regulation-light place to operate, as well as for allowing expats to be paid tax-free as a major incentive. But with the New Labour Law, which came into force on 2 February 2022, the UAE has moved closer to the West, with the introduction of increased protections as part of modernising the workplace for employers and employees. With only a few months left to comply with changes under the new law and recent policy developments, we highlight the main action points and changes.

Note, the New Labour Law does not apply in the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market Free Zones.

Key Changes

  • Mandatory fixed term contracts – three months to go: Strict requirements have been imposed, which means all employees must be engaged under fixed terms by 2 February 2023. Initially the law stated these must be capped at three years (terminable on notice). However, this has now been amended to provide the fixed term can be uncapped. If employers have already agreed three-year fixed terms, and now want to tie in employees for longer, they can either wait until expiry to renew or look to amend the contracts to include a longer term.
  • Discrimination – new protections: Discrimination based on race, colour, sex, religion, national or ethnic origin or disability is now prohibited. However, this does not apply to Emiratisation policies.
  • Part-time working/Flexible working arrangements: Working part time is now formally recognised which means employers can now lawfully pro-rate entitlements for part-time employees, without running the risk of employees claiming they are due benefits equivalent to full-time employees.
  • Notice periods: Following completion of the probationary period, a minimum notice period of 30 days continues to apply, however notice periods are now subject to a maximum cap of 90 days.
  • Non-competes: Now permitted for up to two years with limits on scope.
  • End of service gratuity: Now payable in all terminations, even resignation and cause.

The UAE has introduced an unemployment insurance scheme to protect those who lose their jobs (onshore and in the free zones). We understand UAE residents will pay between USD 11 to USD 28 annually into an insurance scheme, and in return will be eligible to receive up to 60 per cent of their base salary, or up to USD 5,445 per month, if they lose their jobs for a maximum period of three months following the date of unemployment. The scheme came into effect in October and applies to both expats and Emirati nationals.

These changes are geared towards promoting confidence amongst expats that the UAE is a long-term destination, with mandatory fixed term contracts intending to demonstrate job security, and the changes to the gratuity regime and unemployment benefit providing more financial security, should employees wish to change roles. However, the impact on workplace relations with the introduction of discrimination legislation is less clear. The new law does not clarify what compensation or remedies are available to employees if they bring a successful discrimination claim. It remains to be seen how the UAE labour courts will interpret these new rules.

Emiratisation – Two Months to Go

On the flip side, whilst seeking to attract expat talent, the UAE government is actively pushing its Emiratisation drive with the imposition of new quotas. The new Emiratisation requirements will take effect from 1 January 2023, although they will not apply in the free zones. The quotas will operate in the private sector as follows:

  • 0-50 skilled employees: one national
  • 51 to 100 skilled employees: two nationals
  • 101 to 150 skilled employees: three nationals
  • 151 skilled employees or more: one national for every 50 employees

The aim of the Emiratisation requirements is to ensure that the private sector workforce comprises a minimum of 10% UAE nationals by 2026. Non-compliance will mean fines of USD 1,634 per month in respect of each UAE national not hired, with the fine being increased annually by USD 273 per month. Aside from the fines, the UAE government is highly active in this area, so it is best for employers to introduce Emiratisation initiatives sooner rather than later.

There are separate Emiratisation quotas for the banking and insurance sectors, which will continue to remain at 4% and 5% respectively.

Action Points

Employers should immediately take the following steps:

  • Updating employment contracts so they are up to date with the fixed term requirement, and compliant with the New Labour Law (e.g., gratuity and termination provisions);
  • Carrying out a policy review to ensure policies are in line with the above developments, e.g., implementing equal opportunities and anti-bullying and harassment policies and devising a long term Emiratisation strategy; and
  • Reviewing their current immigration and sponsorship practices. The UAE government introduced various types of work permits to account for part-time/flexible working arrangements. Employers must ensure employees are operating under the correct permit to avoid fines and penalties being issued by the authorities.

Severance Payments in the DIFC Free Zone

A recent DIFC Court of Appeal case shows the dangers of failing to pay an employee's contractual and statutory termination entitlements within the 14 day deadline.

In this case, an employer fired an employee for Cause. It then reduced the severance pay due to him, to offset its losses because of his own misconduct—he had siphoned off business profits—as well as for private airfares he had wrongly claimed, and a personal loan. Even though the employee owed his employer more money than was due to him on termination, the DIFC Court imposed a penalty payment of USD 380,000 for failure to make the severance payments within 14 days, as these were seen as free standing and not impacted by the Cause termination.

DIFC Employers need to handle severance payments with care, to either pay out the legal minimum and then sue the employee for repayment, or try to agree deductions with the employee in writing.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.