Handling redundancies in the UAE
Get a low down on UAE employment law from a partner of Al Tamimi
Employment law in the UAE is a hot topic at the moment. Samir Kantaria, head of employment practice/partner, Corporate Commercial, Al Tamimi & Company, gives you the low down...
The current worldwide economic crisis appears to be settling in for 2009, and perhaps beyond, and has not spared any business sector. One of the natural impacts is for companies to lay off employees as employers seek to reduce their overheads and costs in a declining world economy.
Pick up any newspaper in the UAE and you will come across numerous reports and comment on the redundancies being made across the world. The UAE has had its fair share of redundancies being announced and it is expected, in light of the bleak economic forecast for 2009, that further lay offs are, without a doubt, inevitable.
The UAE has never experienced such mass job losses across the board and certainly not in recent times. HR managers and legal practitioners alike have been furiously researching laws to ascertain the process, regulations, and provisions applicable to redundancies in the UAE.
The laws in the UAE
Until recently the UAE Federal Law no. 8 of 1980 (as amended) (UAE law) was the only statute regulating employment relationships in the UAE. Whilst most free zones, such as Jebel Ali Free Zone and Dubai Airport Free Zone, implemented their own unique employment rules, these have been based on the UAE Law.
With the establishment of the Dubai International Financial Centre (DIFC) in 2004 and its ability to introduce its own legislation in a number of areas which would prevail over UAE law within the DIFC, the DIFC introduced its own employment law by virtue of the DIFC Employment Law No. 4 of 2005 (DIFC Law). The purpose of the DIFC Law was to ensure that employees working in the DIFC received minimum international standards and conditions of employment.
Unlike employment legalisation in most other jurisdictions, neither the UAE Law nor the DIFC Law specifically provide for the concept of redundancy. Consequently there is a degree of confusion and lack of uniformity in their interpretation and application with respect to compensation payments that an employer is legally obliged to make under the laws.
In the absence of the laws recognising the concept of redundancy, instigating a redundancy process involves following the provisions under the relevant applicable law that deals with termination of employment.
Under the UAE Law an employee may only be legitimately dismissed by giving notice in line with the terms of the employment contract or in accordance with the provisions of article 120 of the law which provides an exhaustive list of instances where an individual may be summarily dismissed.
Moreover, the UAE law specifically provides that any termination of an employment contract which is not founded on the basis of performance or for any of the reasons listed under article 120 is deemed to be arbitrary. Similarly the DIFC law prescribes the provision of the contractually agreed notice period and summary dismissal where the employer determines that the employee’s conduct warrants termination for misbehaviour and where “a reasonable employer would have terminated the employee” as legitimate grounds for terminating an employment contract.
Consequently under the relevant laws, and in the absence of any statutory consultation process, a redundancy is generally initiated by the provision of a written notice to the concerned employee.
Ultimately, since one of the major driving forces that leads to the instigation of a redundancy process is the employer’s need to cut overheads, the most important question for an employer is how much is it going to cost to make an employee redundant.
Continued on page 2
Subject to any specific contractual provisions contained in an individual’s employment contract (such as participation in company bonus schemes, employee share option schemes, etc.) there are certain minimum statutory entitlements that an employer is obliged to pay to an employee upon making the redundancy. Both sets of laws set out fairly clearly what an employee is entitled to upon being terminated.
First, the provision of notice, or compensation in lieu as contained in the employment contract subject to the minimum requirements under the applicable law. The UAE law provides for a minimum of thirty days notice which cannot be shortened even with the consent of the employee. The DIFC provides for certain minimum notice provisions however these may be varied by the parties in the employment contract.
Secondly, all accrued benefits, such as accrued but unutilised leave, must be paid out to the employee on the same basis as it would have been paid had the employee taken the accrued leave.
Thirdly, subject to the employee not having agreed to participate in a company maintained pension scheme, end of service benefit, also known as gratuity, must be paid. Both sets of legislation have built into them this concept of gratuity which is payable upon termination of employment for all employees who have completed one year or more of continuous service with an employer. It is calculated on the last basic salary (excluding allowances) paid to the employee at the rate of twenty-one days per year (pro rated) for continuous service between one to five years, and thereafter at the rate of thirty days for continuous service over five years.
Fourthly, the employer is obliged to repatriate the employee to his place of origin upon termination of employment in the event that the employee does not find alternative employment in the UAE within a set period of time. The place of origin generally tends to be the country the employee is a national of and not the country he was recruited from initially. This obligation is clearly set out in the UAE Law however the DIFC Law is entirely silent in this respect. The responsibility to repatriate an employee who falls under the jurisdiction of the DIFC Law is instead contained in the standard personnel secondment agreement entered into between the employer and the DIFC.
Whilst the payments set out above are statutory entitlements a common query from employers is if there is any obligation to pay compensation for redundancy akin to most jurisdictions around the world where legislation provides for specific compensation as a result of redundancy. As mentioned earlier since the UAE laws do not provide for the concept of redundancy, unsurprisingly, there is also no provision for redundancy compensation.
What the UAE Law does contain is provision that where an employer is considered to have terminated an employee, for any reason other than a reason related to his performance, such as redundancy, then the employer will be liable to pay compensation to the employee of up to a maximum of three month’s salary over and above any other contractual or statutory liabilities imposed on the employer.
Therefore, on the face of it, a redundancy could potentially create a liability on the employer to pay compensation to the employee. However, in practice, opinion in the market place varies widely on the subject from some employers refusing to pay any compensation whatsoever to others who are of the opinion that it is only fair to pay a redundant employee some compensation. The UAE authorities have looked into this issue in the past, on a case by case basis, and have ruled on various occasions that some compensation should be paid but not necessarily the maximum under the law.
The DIFC Law does not contain any specific provisions that compensate an employee in situations of arbitrary dismissal or redundancy. However, the director of Employment Standards appointed under scope of the law, does have wide powers to award such compensation (amongst other remedies) where he determines an employee has been unfairly dismissed.
It remains to be seen whether the long-awaited Regulations to the DIFC Law, when finally introduced, provide any guidance in calculating compensation payments in such instances. Furthermore, it would also be of interest to see whether the Small Claims Tribunal at the DIFC Court, which has the power to hear and determine claims where the amount or subject-matter of a claim is less than AED 100,000 arising from a dispute from a DIFC employment contract, delve into this issue at a future date.
It can be argued that the legal regimes in the UAE do not adequately provide for a process of redundancy. However, it is clear that the existing laws do have application in such instances (albeit they are not ideal due to uncertainty regarding the requirement to pay any form of redundancy payment) as well as the minimum obligations for an employer under such circumstances.
In the current climate, the UAE and DIFC authorities will have little choice but to explicitly address the issue of redundancy compensation in an attempt to bring an end to the ambiguity of the legislation. However, one thing is for certain, employers in the UAE were ill prepared to deal with the effects of the volatile world economy and have had little option but to let their employees go, and this will undoubtedly continue throughout 2009.