The new labour law set to take effect in 2022 is expected to benefit both employers and employees.
The Ministry of Human Resources and Emiratisation (MOHRE) recently announced that the new legislation will take effect on February 2nd, 2022, to replace Federal Law No. 8 of 1980 (current Labour Law).
While Federal Decree-Law number 33 of 2021 (New Labour Law) completely replaces the Current Labour Law, many of its terms remain the same.
- With employers’ hat on, the cost of dismissals does not appear to have increased (in fact, it may have decreased), and the introduction of mandatory fixed-term contracts may make it easier to part ways with employees in situations such as poor performance.
- Employees may welcome the expansion of anti-discrimination articles, but many businesses will be displeased by changes to the calculation of End-of-Service Gratuity (EOSG).
Our key takeaways for employers are summarized below:
- Discrimination protection clauses
The existing Labour Law already includes a general prohibition on discrimination and requires equal pay for men and women performing the same work; however, these provisions have yet to be tested, and the mechanism for wage discrimination has not been confirmed. There are no specific penalties for discrimination in general.
The New Labour Law strengthens this protection by outlawing discrimination based on race, colour, gender, sexual orientation, religion, national origin, social origin, or disability. Employees will also be expressly protected from sexual harassment, bullying, verbal, physical, or psychological violence by their employer, supervisor, or coworkers. It is also illegal for an employer to coerce or threaten an employee into performing work or providing services against their will. The New Labour Law also states that employers may not fire or threaten to fire a female employee because she is pregnant or on maternity leave.
Employers may be fined between AED 5,000 and AED 1,000,000 for violations of the New Labour Law (these are not payable to affected employees).
- All employees go on a three-year limited-term contract
The most extreme change in the New Labour Law is a new requirement that all employees be hired on fixed-term contracts of up to three years in length. This will be of particular interest to organizations that routinely use unlimited-term contracts. This, in our experience, applies to the vast majority of businesses.
Employers have one year from the Effective Date of the New Law to transition employees from unlimited-term contracts to limited-term contracts.
Meanwhile, employees who were on unlimited-term contracts prior to the Effective Date may be terminated for a “legitimate reason” (please see below), taking into account the New Labour Law’s minimum notice periods:
- If the period of service is less than five years, it is 30 days;
- If it is more than five years, it is 60 days; and
- If it is more than ten years, it is 90 days.
Such notice periods do not apply to limited-term contracts in general, where parties are free to agree on a notice period that must be at least 30 days and no more than 90 days.
In addition to providing notice, an employer may be required to pay up to three months’ wages in compensation if the dismissal results in a valid claim to the Court. The fixed penalty of three months’ remuneration or the balance of the remaining term (if lower) in Current Labour law for early termination of a fixed-term contract, which appears to have been abolished and replaced by a more flexible compensation regime. Similarly, it appears that the relatively recent offshore development of fixed indemnities of 1-3 months’ remuneration for early termination of an unlimited term has been abandoned.
We’ll go over the compensation system in more detail later in this article.
- New policies governing probationary period
Probationary periods of up to six months remain an option, during which time employment may be terminated for any reason.
The New Labour Law limits flexibility to some extent, requiring a minimum of 14 days’ notice when terminating an employee on probation rather than allowing “same day” terminations.
If an employee resigns while on probation, the required notice is as follows: a minimum of one month if the employee is joining another employer in the UAE (the new employer must compensate the current employer for the employee’s recruitment costs unless the parties agree otherwise); or a minimum of 14 days if the employee is leaving the UAE. However, if the employee returns to the UAE within three months, any new employer must compensate the previous employer for recruitment costs.
If an employee tries to avoid the penalties for joining a new employer, they may face a 12-month labour ban unless exempted by the MOHRE. In practice, we anticipate some difficulty enforcing the above provisions unless MOHRE incorporates a notification regime to assist employers. It is unclear whether the recruitment costs are intended to cover the costs of an employee’s visa or work permit at this time.
The current position is that these costs are the responsibility of the employer, and it is strictly prohibited to claim these costs back from employees during the hiring process. Assumably, these costs will be borne by the poaching employer in the event of an “unfair” early departure.
- End of service gratuity
Following the implementation of the DIFC Employee Workplace Savings Scheme (DEWS) in February 2020, there was speculation that a similar savings scheme might be implemented ‘onshore’ in the UAE. The New Labour Law does not immediately include these changes, but it does state that the Cabinet may implement alternative contribution-based systems in response to recommendations from the Labour Minister. The New Labour Law’s foundations appear to point in the direction of a funds-based contribution system.
Employees who resign from their jobs now have their EOSG entitlement reduced in accordance with the following:
- Employees on an unlimited-term contract are entitled to one-third of their gratuity entitlement if they resign with more than one year but less than three years of service, and two-thirds if they resign with more than three years of service.
- If an employee is on a limited-term contract and resigns before completing five years of service with the employer, no gratuity is payable.
These tapering provisions on resignation are conspicuously absent from the New Labour Legislation, reflecting the DIFC’s position prior to the implementation of DEWS. As a result, employees who resign from their jobs will still be entitled to their full EOSG (assuming they have at least one year of service with the company). Paying back contributions to the employer based on the reason for termination from what is essentially a trust for employees may not be workable or efficient in the future in a funds-based system, so the change makes practical sense.
Employees terminated summarily for gross misconduct under the New Labour Law will also be entitled to their full EOSG entitlement – a significant change from the current legislation, which awards this benefit on a fault-based basis.
In terms of days, the calculation for EOSG remains the same:
- 21 days for the first five years of service; and
- 30 days thereafter, with a two-year cap.
The “Basic Wage,” on the other hand, has been confirmed as the primary component for calculating a day’s pay. Under the current Labour Law, the legislative equation referred to “Remuneration,” but fewer allowances, which logically led to Court rulings that increments for variable pay, such as commission, must also be included because they fit fairly within the definition of Remuneration and are not an allowance or a discretionary form of bonus. Court-appointed experts can now be asked to begin limiting EOSG to basic pay only, in accordance with many employers’ policies, which were always opened to challenge under the previous regime.
This change may cause some concern for commission-earning employees and employers who, as a matter of custom and practice, honour commission earnings within EOSG. The change may not provide adequate future security for employees who are paid a low basic wage but have the ability to earn a high percentage of their income through commission and other sales incentives. Those employees may now be asked to forego a more valuable EOSG benefit upon termination. In some ways, the principle is similar to using a disproportionately high percentage of allowances to reduce entitlement to EOSG, which is considered unfair.
Employers who offer a more generous benefit package may have a competitive advantage in attracting and retaining the best staff in the market. Some employers will want to keep the value of this benefit for their employees, while others may see it as a cost-cutting measure or confirmation of current policy. However, we believe that this change is intended to simplify the calculation of regular payments into a funds-based scheme in the future, making administration easier and avoiding disputes. We should note that a variable average increment is still required for “piece work.”
There are no longer provisions that allow employees to opt-out of receiving EOSG if they are enrolled in another pension or savings plan. Many employers have already chosen to offer their employees offshore savings plans, occupational pension plans, and other UAE-based solutions. There is still a brief reference in the New Labour Law to pensions and retirement schemes being provided “without prejudice” in some establishments under other legislation, but clarification on the status of all contracted-out arrangements is required while an onshore DEWS-type scheme is still being discussed within government. It is necessary to clarify that opt-outs remain in effect during the interim period. Expectation are that employers will not be prejudiced if they provide, in essence, a scheme that is more beneficial or flexible for their employees or at least matches the basic EOSG. Double payments on termination should be avoided for those employers, which clearly was not the intention.
- Salary payment after termination of employment
The New Labour Law requires employers to pay all final dues to employees within 14 days of termination, mirroring the position in the DIFC to some extent. However, unlike in the DIFC, no compensation is payable to an affected employee if an employer fails to comply. Interestingly, an employer may now agree with an employee to pay their salary in a currency other than Emirati Dirhams, which may help some overseas employers manage currency risk in the case of posted workers.
- Annual Leave.
According to current labour law, an employee’s annual leave entitlement vests over time and cannot technically be forfeited. Many employers include “use it or lose it” clauses in contractual documentation or policies with limited carry-over rights, but the legality of these has always been contested. The New Labour Law significantly alters the situation. Employees may be required to use all of their annual leave in the applicable annual leave year as of the Effective Date – unquestionably a benefit to their well-being!
Employers can now have a clear and legal policy limiting leave carry-over at their discretion. Employees may eventually be required to forfeit their unused leave balance. Employers can now confront the culture of accruing large leave balances and claiming them upon termination with confidence. The importance of vacation as a rest period rather than an additional accrued termination benefit has been emphasized.
- Maternity leave entitlement
Maternity leave will be increased from 45 to 60 calendar days under the New Labour Law, with:
- Full-pay for the first 45 days and
- Half-pay for the remaining 15 days.
If an employee takes maternity leave before completing one year of service with her employer, her maternity pay will not be reduced.
Employees will be entitled to maternity leave as described above if they miscarry after six months of pregnancy, have a stillbirth, or the child dies shortly after birth. When a female employee gives birth to a disabled or sick child, she is entitled to an additional 30 calendar days of maternity leave, which can be extended by another 30 days of unpaid leave.
Nursing breaks have been reduced from 18 to 6 months under the New Labour Law.
Employees’ maternity-related “sick” leave entitlement has also been reduced from 100 to 45 consecutive or intermittent days.
- Leave of absence for compassionate reasons
The New Labour Law establishes compassionate leave in accordance with the following:
- Five days if an employee’s spouse dies;
- Three days in the event of the death of an employee’s mother, father, son, brother, sister, grandson, or grandparent.
- Study leave
- Employees with more than two years of service can now take ten days of study leave per year to prepare for exams.
- The employee must be affiliated with or studying at, an approved UAE educational institution.
- Restrictions after termination
Restrictive covenants are permitted under current labour law; however, they must be limited in geographical scope, time, duration, and the type of business being restricted.
Non-compete agreements have traditionally been limited to six months to a year.
The position is clarified by the New Labour Law, which expressly states that non-compete restrictions may be included in an employment contract and may be in effect for no more than two years from the date of an employee’s termination.
The New Labour Law confirms the Civil Code provisions that nullify restrictions when an employer unlawfully terminates an employment relationship. As a result, if a dismissal is illegal, the post-termination restrictions will be lifted.
- Termination of employment with notice
Within a year of the Effective Date, all UAE employees will be shifted to limited-term contracts. The New Labour Law contains helpful provisions that allow employers to terminate employment prior to the end of the fixed-term contract for a “legitimate reason.” (Under The Current Labour Law and other regulations, limited-term contracts may only be terminated prior to their expiry for an Article 120 summary dismissal reason (e.g. causing a material loss or breach of confidence), failing which a penalty or indemnity is payable.
The term “legitimate reason” is not expressly defined in the new legislation, similar to the current “valid reason,” for which unlimited-term contracts may be terminated under Current Labour Law. It is possible that the Labour Courts will interpret it as a reason related to an employee’s performance or conduct. However, the New Labour Law expressly allows for termination for reasons other than an employee’s performance or conduct. The New Labour Law now goes some way toward recognising redundancy as a reason for dismissal, with termination permitted where the employer is bankrupt, insolvent, experiencing any economic or exceptional circumstances, or closing. This falls short of making a dismissal “fair” because of a need to reduce numbers within a specific role.
An employer may also terminate the employment relationship if the employee fails to meet the requirements for renewing their work permit. Employees are now entitled to one day of unpaid leave per week to look for a new job if their employment contract is terminated by their employer.
- Termination of employment without notice
Although the new “Article 44” may not have the same ring to it as “Article 120” (the current UAE “cause” or “gross misconduct” provision), the circumstances constituting a fair summary dismissal remain virtually unchanged. However, there are a couple of new grounds for employers to consider, most notably where an employee:
- abuses their position for a profit or personal gain; or
- starts working for another employer without following the applicable rules and procedures
In order to protect employees from bullying and harassment, the provision for dismissal for “assault” has been expanded to cover all forms of verbal and physical abuse.
- Unlawful dismissal
The concept of “arbitrary dismissal” is no longer recognized under the New Labour Law. The concept of a dismissal linked to “the work” has been removed. This accommodates the changes made by Article 44 for dismissals based on economic or restructuring factors.
Termination will now simply be illegal if it occurs as a result of:
- the employee submitting a serious complaint against the employer; or
- the employee submitting a successful claim against the employer
In addition to all contractual and statutory entitlements, compensation for wrongful termination remains limited to three months’ total salary. The New Labour Law does state that compensation will be determined based on an employee’s length of service, type of work performed, and the amount of damage sustained. So, if an employee is only employed for a short time and finds a new job quickly, courts should arguably cap damages for early termination of a fixed-term contract at one month plus the relevant notice period. However, the tendency for courts to award the full three months in many cases can be challenged, which may aid in negotiating lower settlements with departing employees.
- Flexible working
Finally, since the beginning of the COVID-19 pandemic, flexible working has been a hot topic. Several arrangements are expressly recognized in the New Labour Law, namely:
- Part-time work
Although onshore companies may use part-time contracts, current labor law does not allow for benefit proration when employees work part-time. The New Labour Law recognizes part-time employees and states that they will be entitled to pro-rated annual leave under the law.
It is unclear whether the legislation will allow for pro-rating of other benefits when an employee works less than full-time. The Executive Regulations accompanying the New Labour Law had not yet been issued at the time of writing.
- Working from home
Although there are no specific guidelines for home-working, the New Labour Law does allow employees to work remotely with the employer’s approval. The legislation makes no mention of any additional responsibilities on the part of the employer. Expectation are that letters continue to be issued that describe obligations for ensuring health and safety and include practical rules for the provision and care of equipment.
The New Labour Law will apply to all private-sector employers in the UAE, with the exception of those in the DIFC or ADGM Free Zones. It is critical that all affected employers ensure compliance well in advance of the Effective Date.