UAE legal reforms – New Labour Law

UAE

Introduction - 2021 Reforms

In Q4 2021, as part of its 50th Year Anniversary, the UAE announced some of the broadest changes to its legal landscape in many years. It also introduced major practical changes, not least announcing the change of the working week for the public sector from Sunday-Thursday to Monday-Friday – a move that we expect the private sector will follow. In this series of articles, we summarise some of the key changes introduced in the Q4 2021 reforms.  

A table listing out the key new or updated laws can be downloaded here.

This article discusses Federal Decree Law No. 33 of 2021 on Regulation of Labour Relations (the “New Labour Law”).

The New Labour Law replaces the Federal Law No. 8 of 1980 on Employment Relationships (the “Old Labour Law”). The New Labour Law introduces some significant changes to the employment law regime in the UAE including with regards to unlimited term contracts, leave entitlements, end of service gratuity, restrictive covenants and notice provisions. However, despite the New Labour Law being the first material overhaul of the labour law regime in the UAE over the last 40 years, the substantive changes made are, in our opinion, actually quite modest.

The New Labour Law comes into effect on 2 February 2022 (the “Effective Date”) and repeals and replaces the Old Labour Law in its entirety. The New Labour Law applies to all entities established in the UAE in the private sector (which includes entities owned "in conjunction with the federal or local government" unless otherwise provided for in the entity's constituent documents). Whilst many of the terms and provisions of the New Labour Law will be familiar to companies operating in the UAE private sector, there are some key changes introduced that will impact business operations in the UAE and employers’ interactions with their employees. We have summarised these below.

It is important to highlight that the New Labour Law envisages ‘implementing regulations’ to be issued pursuant to it (the “Implementing Regulations”) that will contain further provisions with regards to the implementation of the New Labour Law and these are yet to be published. Many of the new provisions that are introduced by the New Labour Law remain subject to anything set out in the Implementing Regulations and this is therefore a space to watch and re-assess once the Implementing Regulations are published.

Anti-discrimination

The New Labour Law maintains and elaborates on the legislative protections already included in the Old Labour Law which prohibits discrimination on the basis of race, colour, sex, religion, national origin, social origin or disability. In addition, the New Labour Law provides that:

  1. employers may not terminate (or threaten to terminate) the employment of a female employee for reasons of pregnancy or absence on maternity leave;

  2. employers are prohibited from coercing or threatening an employee to undertake work or provide services against their will; and

  3. any form of sexual harassment, bullying, verbal, physical or psychological violence against an employee by their employer, supervisor or colleagues or those working with the employee is prohibited.

The New Labour Law confirms the provisions of the Old Labour Law that provides for equal pay for men and women performing the same type of work but as with the Old Labour Law, there are no mechanisms specified as to how wage discrimination will be detected and dealt with and it is thus unclear how these provisions will be enforced in practice by the UAE Ministry of Human Resources and Emiratisation (the “MOHRE”) against employers who are found to engage in discriminatory conduct. 

Whilst there are no specific penalties or other remedies specified in the New Labour Law for discrimination, breaches of the law by employers are subject to fines in amounts between AED 5,000 and AED 1,000,000.

Fixed-term Employment Contracts

The Old Labour Law makes a distinction between “unlimited term” contracts, that are by their nature unlimited in time, and “fixed term” contracts that are for a specified period of time. The New Labour Law abolishes the concept of an unlimited term contract and mandates that all employees must be employed on fixed-term contracts that do not exceed 3 years. Such contracts can be extended though any number of times, for up to 3 years at a time.

Where an employer/employee relationship continues after the natural expiration of the employment contract, the contract is deemed to have been renewed on the same terms. So, employers will not need to re-sign each employment contract every 3 (or less) years, but they should diarise regular meetings and assessments with employees and decide on how and when to extend contracts.

Employers will have 12 months from the Effective Date (i.e. until 2 February 2023) to transition all of their employees currently on unlimited term contracts (or fixed term contracts for a period longer than 3 years) to new fixed term contracts not exceeding 3 years. Any employees on unlimited term contracts may be terminated prior to the longstop date of 2 February 2023 only for a “legitimate reason” (please see the “Termination” section of this article below).

Flexible Working

Since the start of the COVID-19 pandemic, companies and governments alike have been trying to find suitable flexible working arrangements to allow employers and employees to adapt to a new working reality and therefore, perhaps unsurprisingly in today’s business climate, the New Labour Law introduces scope for flexible working arrangements.

Both part-time work and remote working is expressly recognised in the New Labour Law. In respect of part-time working, the New Labour Law recognises part-time employees who will be entitled to annual leave on a pro-rated basis. However, the law does not provide for benefits on a pro-rated basis for part-time employees and it remains to be seen whether the Implementing Regulations will provide for the same. Remote working arrangements are expressly allowed in the New Labour Law, but only with the approval of the employer.

The New Labour Law also envisages that end of service gratuity entitlements may differ for employees on flexible arrangements. It anticipates further detail in that regard will follow in the Implementing Regulations (see further below).

Probationary Periods

Probationary periods may not exceed 6 months and during this period an employer may terminate an employee by providing at least 14 days’ written notice. The requirement for a written notice period to terminate an employee on probation is new (the Old Labour Law provides that the employer can terminate an employee on probation by providing written notice, thereby allowing same day terminations).

If the employee wishes to resign from employment during the probation period, the following notice periods apply:

  • at least one months’ written notice, if the employee resigns in order to change employment to another employer based in the UAE and the new employer is required to compensate the old employer for any recruitment costs to engage the employee; or

  • at least 14 days’ written notice, if the employee resigns in order to leave the UAE. However, if the employee returns to the UAE after resignation to obtain a new work visa within 3 months from the date of leaving, the new employer is required to pay compensation to the old employer for cost of recruitment (unless otherwise provided in any agreement between the employee and the old employer).

In cases of termination of employment in breach of the above provisions, the breaching party is required to pay the non-breaching party an amount equal to the employee’s remuneration for the required notice period (i.e. effectively a payment in lieu of notice option). In addition, if an employee leaves the UAE and does not adhere to bullet-point 2 above (employee resigns to leave the UAE), the MOHRE can deny the employee a work permit in the UAE for 1 year from the date of departure, but it remains to be seen how this will be monitored and regulated in practice.

End of Service Gratuity

The current end of service gratuity regime has been maintained in the New Labour Law (as opposed to the introduction of a pensions/savings regime as we have seen in the DIFC with the DIFC Employee Workplace Savings Scheme), but the New Labour Law has introduced some potential changes to the operation of end of service gratuity. (Note: the New Labour Law states that employees’ end of service gratuity will be calculated on the basis of working (and not calendar) days which would be a significant change from the Old Labour Law. We understand that this is a drafting error in the law which we expect will be clarified in due course. If gratuity is calculated on working days instead of calendar days, it would mean a significant increase in the amount of end of service gratuity payable by employers to their employees. We understand that this will not be the case).

One potential change to the end of service regime is that whereas the Old Labour Law recognised the ability of an employer to deduct amounts from an employee’s end of service gratuity attributable towards a pensions or other savings scheme if agreed between the employer and employee in writing, the New Labour Law does not contain an express provision to that effect. Instead, the New Labour Law provides that the employer may deduct certain amounts “due legally or by judicial ruling” from the end of service gratuity payable to an employee which we anticipate will have the same effect as the relevant provision in the Old Labour Law, but we expect that the Implementing Regulations will provide further clarification on this point.

The amount of end of service gratuity payable by an employer to an employee cannot exceed 2 years’ worth of remuneration for that employee and the New Labour Law confirms that the amount is calculated on the basis of basic salary only. Under the Old Labour Law the Labour Courts were often requested to decide whether an employee’s other benefits (in addition to their basic salary) should also count towards the calculation of their end of service gratuity. In particular, employees whose remuneration included an element of commission would typically be afforded some recognition for that aspect to be included in the calculation of their end of service gratuity amount. We anticipate that similar debates will continue to be held in the Labour Courts under the New Labour Law.  

Maternity Leave and Pay

The maternity leave entitlement for employees is increased in the New Labour Law to 60 days (from 45 days under the Old Labour Law) and is for the benefit of any pregnant employee, regardless of the term of service of such employee with the relevant employer. This is in contrast to the Old Labour Law where the maternity pay to female workers is decreased if the leave is taken before the employee has completed one year of service. Under the New Labour Law, the first 45 days of entitlement are with full pay and the following 15 days with half pay. After the maternity leave period, a female employee is entitled to additional unpaid leave for up to 45 days for illness of the employee or her child as a result of the pregnancy or birth, but such period of leave will not count towards the employee’s end of service or pension scheme.

The maternity leave entitlement applies if an employee has been pregnant for 6 or more months at the time of birth of the child, including in circumstances of miscarriage. If an employee gives birth to a sick or disabled child (that requires constant supervision), she is entitled to an additional 30 days of leave with full pay, which can be extended to an additional 30 days’ leave without pay, in addition to the standard 60 days’ maternity leave.

After returning from maternity leave, a female employee is entitled to up to 2 nursing breaks per day, each one not exceeding one hour, for the first 6 months (reduced from 18 months under the Old Labour Law).

Paternity Leave

Parental leave provisions were introduced in the Old Labour Law and are maintained in the New Labour Law. Male employees will therefore be entitled to 5 days’ paid paternity leave that must be taken within six months following birth of their child. There is no specified length of employment required for employees to qualify for paternity leave.

Other Leave Entitlements

Annual leave

The New Labour Law effectively restates the Old Labour Law position regarding annual leave. Full-time employees are entitled to 30 days’ paid annual leave per year if the length of service is more than 1 year, or 2 days per month if the length of service is between 6 months and 1 year.  

From the Effective Date, employees will be required to use their annual leave entitlement in the applicable year, though any unused days of leave may be rolled over to the next year with the approval of the employer. If an employee leaves employment with annual leave days still remaining, the employer is required to compensate the employee for such unused days and any such compensation is calculated on basic salary only.

Compassionate leave

A new entitlement to leave for employees introduced in the New Labour Law is compassionate leave. Employees are entitled to the following:

  1. five days in the event of the death of an employee’s spouse; and

  2. three days in the event of the death of an employee’s mother, father, child, brother, sister, grandchild or grandparent.

Study leave

Employees who have been employed for more than two years will be entitled to ten days’ study leave per year for the purpose of sitting examinations if the employee is affiliated with, or studying in, an education institution approved in the UAE.

Restrictive Covenants

The Old Labour Law contains some general provisions on employees’ restrictive covenants, mandating that such provisions must be limited in scope as to territory, duration and industry or sector as to reasonably be considered as protecting the employer’s business. It has therefore generally been considered standard market practice to limit employees’ restrictive covenants to anywhere between 6 and 24 months (6 to 18 months generally being the norm). The New Labour Law is more prescriptive however and provides that restrictive covenants should not be for a period longer than 2 years from the termination of employment.

Rest Days

In line with the UAE changing the working week for the public sector from Sunday-Thursday to Monday-Friday, weekly rest days no longer have to be on a Friday – allowing employers in the private sector to freely choose the working week for their employees.

Overtime

Any overtime work is restricted to a maximum of 144 hours every 3 weeks and employees should not work more than 2 hours overtime per day. Payments for overtime work is calculated on basic salary only. Employers shall not require employees to work on more than 2 consecutive days of rest.

The Old Labour Law provides for an exception to the overtime provisions if the employee in question holds a supervisory or managerial position and this is often incorporated into the relevant employee’s employment contract to ensure that the employee cannot claim for overtime against the employer. The New Labour Law however does not contain such an exemption, but the provisions with regards to overtime payments in the New Labour Law are subject to any exemptions specified in the Implementing Regulations and it therefore remains to be seen what (new or old) exemptions will apply to overtime payments.

Termination Provisions

Under the New Labour Law, employers are required to pay all final termination payments to employees within 14 days of the termination date which will include end of service gratuity payable by the employer. This is a new requirement introduced by the New Labour Law as the Old Labour Law is open-ended with regards to the timing of final payments and thus allow for some flexibility for employers.

With regards to notice for termination of employee’s employment contract, either party may terminate a contract for a “legitimate reason” by providing not less than 30 days’ and no more than 90 days’ prior written notice to the other party. A “legitimate reason” includes:

  • agreement between the parties in writing;

  • expiry of the employment term as provided in the employment contract, unless extended or renewed;

  • termination by one party, provided the provisions of the New Labour Law are adhered to, including with regards to notice period;

  • death of the employer (if the employment in question is related to the employer in person);

  • death or permanent disability of the employee;

  • the employee being sentenced to a freedom-restricting penalty for at least 3 months;

  • permanent closure of the employer, in accordance with the laws of the UAE;

  • bankruptcy or insolvency of the employer; and

  • failure of the employee to meet the conditions for renewal of work permit (for reasons beyond the control of the employer).

The New Labour Law allows for flexibility for the employer to agree with its employees exemptions or alterations to the notice period, provided that the employee’s rights as agreed in the employment contract are maintained. That said, the notice period must be the same for both the employer and the employees or otherwise be in favour of the employer (meaning that the employment contract cannot prescribe that the employer is entitled to give a shorter notice period for termination than the employee is entitled to give in case of resignation). If either employer or employee fails to comply with the notice period, it must pay to the other payment in lieu of notice calculated on the employee’s remunerating for the notice period remaining at the time of breach.

Any unlimited term employment contracts in place prior to the Effective Date can also be terminated for a legitimate reason, but specific notice provisions apply in case of termination of an unlimited term contract as follows:

  • at least 30 days’ written notice if the period of service is less than 5 years;

  • at least 60 days’ written notice if the period of service is more than 5 years; and

  • at least 90 days’ written notice if the period of service is more than 10 years.

There are a few limited circumstances set out in the New Labour Law under which the employee can resign without notice to the employer, including in case of breach by the employer of its obligations towards the employee (as set out in the employment contract or the legislation) and if the employer requests the employee to perform work that is fundamentally different from the employee’s agree duties, without the consent of the employer (subject to the caveat of cases of necessity as stipulated in the New Labour Law).

Arbitrary Dismissal Compensation

As under the Old Labour Law, the New Labour Law recognises the potential for employers to compensate employees in the event of an unlawful (“arbitrary”) dismissal situation. That said, the circumstances under which an employee can argue unfair dismissal and claim arbitrary dismissal compensation in the Labour Courts have been significantly narrowed in the New Labour Law. 

Arbitrary dismissal can only be claimed by an employee if the employee has (i) filed a serious complaint with the MOHRE about the employer, or (ii) filed a lawsuit against the employer, and the UAE Court considers that those complaints are “proven to be valid”. However, the New Law includes a new article which states that an employment contract can be validly terminated “At the request of either party, provided that the provisions of [the New Law] regarding termination of the employment contract and the notice period agreed upon in the contract are observed.” This provision did not appear in the Old Law and depending on how this article is applied in practice, it appears that any employer can terminate the employment of any employee “validly” provided that the employer follows correct process and respects the employee’s notice period. As such, if the UAE Courts and MOHRE respect this provision, it means that termination of the employment contract by the employer that adheres to the relevant notice provisions (and has otherwise not breached the provisions of the New Labour Law) in the contract is prima facie evidence of “fair” dismissal and should therefore theoretically not be a ground for arbitrary dismissal compensation to be awarded. It remains to be seen in practice however whether the Labour Courts are willing to adhere to the letter of the law and uphold the provisions relating to termination in the New Labour Law.  

If compensation is awarded, the amount of compensation is still capped at 3 months as per the Old Labour Law, calculated on the employee’s last salary. 

Summary Dismissal

The list of reasons set out in the New Labour Law permitting the employer to dismiss an employee without notice has not been extended much from the provisions of the Old Labour Law and such reasons are largely limited to misconduct and disclosure of the employer’s confidential information. That said, the New Labour Law specifically provides that the employer must conduct a written investigation with the employee in question prior to such dismissal and the dismissal decision itself must be in writing and “justified”, a concept which is not defined in the legislation.

If an employee is summarily dismissed for failure of perform the duties in accordance with the employee’s employment contract, the employer must first conduct a written investigation into the employee’s performance as noted above but must also provide two written warnings prior to dismissal to evidence the employee’s failure to perform.