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En route to a more transparent and flexible UAE Labour market

En route to a more transparent and flexible UAE Labour market

31 Dec 2015

En route to a more transparent and flexible UAE labour market

On 27 September 2015, the Ministry of Labour had announced that three new Decrees, shall come into force on 01 January 2016. These Decrees are expected to have wide reaching implications for both employers and employees in the UAE, however the full impact of the changes will have to be closely monitored and reviewed.

At this stage we set out an overview of what the changes may entail for both employers and employees in the UAE.

Standard Employment Contracts

Pursuant to Ministerial Decree 764 of 2015, the Ministry of Labour will have standard templates for offer letters and unlimited and limited contracts. Employers would be required to ensure that the terms contained in the offer letter are identical and consistent with the terms contained in the standard Ministry of Labour contract.

We understand that in the first instance, when making an offer of employment to employees, the employers would enter the key terms of employment, such as the wages, notice period, annual leave, allowances etc, on to the offer letter template. Once the offer letter has been signed by the parties it will need to be filed with the Ministry of Labour. Subsequently the employer would then enter into a standard Ministry of Labour Contract with the employee, and in doing so the employer would need to ensure that the terms contained in the standard Ministry of Labour contract, mirror the terms of the offer letter. The employer will only be able to alter the terms in the standard contract, if the terms are more advantageous to the employee.

This change promotes transparency between the employer and the employee. It protects employee, (particularly those recruited from abroad), by ensuring that when the employee arrives to the UAE to commence his/her employment, the employer honours the same terms and conditions that it has stated in their offer letter to the employee.

Termination

Under the Ministerial Decree 765 of 2015, there will now be certain rules governing the termination of both fixed term and unlimited contracts.  These rules do not impact on the parties’ ability to terminate the contracts by either mutual consent, or where the contract expires, or where one party commits a fundamental breach of the contract.

In relation to fixed term contracts, these will now be limited to a maximum period of two years (previously four years). According to this Decree, an employee or an employer may terminate a fixed term contract, by giving a notice of between 1-3 months, a contrast to the previous position where fixed term contracts contained only non-renewal provisions but no notice provisions.  

In relation to the notice provisions in unlimited contracts, the minimum notice period remains one month. However, it is our understanding that the maximum notice period to terminate an unlimited contract will be three months, whereas previously there had been no maximum length of notice period.

With regard to the early termination of the fixed term contract, according to the Decree, the employer and the employee should agree at the outset (this is in the offer letter and the standard Ministry of Labour Contract), the amount of compensation payable in the event of early termination of a fixed term contract by either party. The compensation amount agreed between the parties cannot be more than 3 months.

However, in the case where an employee terminates the contract early, there appears to be a potential conflict between Article 116 of the UAE Labour Law and this Decree. This is because, under Article 116 of the UAE Labour Law, the maximum amount that an employee may be liable to pay for an early termination is 45 days’ salary.  In such circumstance it would be the Labour Law that takes precedence.

Another, matter that is not clear at this stage is the impact that early termination of a fixed term contract by an employee may have on the employee’s gratuity.  Pursuant to Article 138 of the UAE Labour Law, where an employee terminates their fixed term contract early, the employee will not be entitled to receive gratuity unless they have had a continuous period of service for more than five years.  

Therefore, at the moment it is not clear whether an employee who terminates their contract early, by giving the relevant notice period (as stated in their contract), would still be entitled to receive gratuity.  As we progress through the year, it would be interesting to see how this provision is interpreted, in light of the new Decrees.

The Decree does make it more flexible for parties to terminate fixed term contracts early, by giving the relevant notice period stated in the contract. However, it appears that whichever party is terminating the contract early, would still need to pay the non-terminating party, compensation for early termination.

Increased work mobility and labour bans

The Ministerial Decree 765 of 2015 sets out certain requirements for new work permits to be granted to an employee, upon the termination of their employment.  This should result in the easing of labour bans on employees who upon the termination of their employment, wish to move to a new employer.

Our understanding is that an employee who would like to commence employment with a new employer would be granted a new work permit, under the following circumstances:

  1. If it is proved that the employer did not meet their legal or contractual obligations;
  2. The employee submits a complaint to the Ministry of Labour that an entity has been inactive for two months, and therefore the employee has been unable to perform their work duties; and
  3. If the Ministry of Labour refers the complaints to the Labour Court, which issues a final ruling in the employee’s favour.

Conclusion

We are of the view that the three new Decrees would create a more transparent and flexible labour market, in which the employees have enhanced protection under the UAE labour law. 

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