PROTECTING YOUR BUSINESS - POST-TERMINATION RESTRICTIONS IN THE UAE
Post-termination restrictions, often referred to as restrictive covenants, are the clauses in a contract of employment most people are not particularly interested in when they commence employment, but become important once the employee decides to leave the Company, is headhunted or is dismissed. These clauses aim to restrict the activity of a departing employee in order to protect the business interests of the Company – or at least this is what they are designed to do. How enforceable are they in the UAE? What are the options with regards to enforcement?
We are often asked about the legal position of restrictive covenants in the UAE. Restrictive Covenants are recognized and permitted with reference to Article 127 of the Federal Law No 8 of 1980 as amended (the UAE Labour Law). The Civil Code at Articles 909 and 910 also goes further than the UAE Labour Law. Specifically, Article 127 allows for restrictive covenants (non-compete) clauses to be included in employment contracts, however the drafting must be clear on the restrictions in terms of duration, geography and business activity. Any restriction drafted to completely block the employee from working in a certain geographical area or type of business and is too broad will not be enforceable as it must demonstrate that it extends only for the purpose of safeguarding the legitimate interests of the Company.
With regards enforcement, if an employee breaches his contractual post-termination restrictions, the employer’s remedies are limited.
The most effective remedy, in circumstances where an employee intends to breach or has breached post-termination restrictions, is an injunction. However this is only available in the DIFC and not provided for in the UAE. Therefore, given that the UAE does not have a preventative measure by way of injunction, the relief is compensatory only (i.e. a claim for damages). This is not ideal due to the fact that loss cannot often be quantified and prevention is the only real way to protect the business. The damage has already been done.
In order to bring a claim for damages, a court will initially consider whether the relevant restrictions are reasonable. The employer will also have to evidence (very difficult) the actual loss suffered as a result of the employee’s breach of the post-termination restrictions.
Best practice, however, is to carefully draft post-termination restrictions and include a liquidated damages clause. A well drafted restrictive covenant and a liquidated damages clause (which sets out an estimate of the likely loss suffered by the employer in the event of a breach of a restriction) does work as a deterrent given the legal position.
Employers should also use garden leave provisions in their contracts of employment to restrict their departing employees. This allows the employer to keep the employee away from the competition, removing them from the field of work by delaying their exit as they are contractually bound to spend all or part of the notice of termination period at home. The employee is obviously prevented from working for another Company during this period and if found to be working during the notice period for another employer, this would be in breach of immigration regulations and the employee would face substantial fines as well as potential of a labour ban.
In addition, confidentiality goes hand in hand with non-compete restrictions. If a breach in confidentiality can be proven, criminal complaints can be filed against the employee and this acts as a further deterrent for employees.
Please contact the Employment Department at James Berry & Associates (firstname.lastname@example.org) to discuss restrictions in employment contracts and how we can review your current contracts and help to ensure they sufficiently protect the Company in accordance with the UAE Law.
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