New year, new employment laws: Your guide to the key changes

Employment United Arab Emirates Client Alert February 2016 New year, new employment laws: Your guide to the key changes Recent developments 1 January 2016 saw a new set of Ministerial Decrees issued by the UAE's Ministry of Labour come into force, following their publication on the Ministry of Labour's website and in the Federal Official Gazette in October 2015. With the objective of stabilising the market and economy, these new labour rules and regulations introduce more equilibrium and transparency into employment relations, tighten the monitoring of the terms and conditions of employment, and, ultimately, curb violations of the Federal Labour Law. These new rules are enacted in: • Ministerial Decree No. 764 of 2015 regarding the issuance of new Template Ministry of Labour employment contracts; • Ministerial Decree No. 765 of 2015 regarding the termination of fixed term employment contracts, and • Ministerial Decree No. 766 of 2015 regarding authorising the transfer of employment between establishments, (referred to hereinafter as the "Decree(s)"). One of the most substantial changes is the relative liberalisation of the mobility of blue collar employees and de-linking sponsorship and employment relations. Below is an analysis of the salient features of the Decrees. It appears that some of the provisions of the Decrees may not be entirely in line with certain provisions of the Federal Labour Law and it remains to be seen how the provisions of this secondary legislation will apply. Ongoing analysis will be needed until best practice is established by the Ministry of Labour. New templates for employment contracts – Decree No. 764 What additional steps do employers need to take prior to obtaining the necessary governmental approvals for hiring new employees? The submission of an employment offer letter which is compliant with the template employment contract has become a pre-requisite for the issuance of the preliminary approval to sponsor a foreign employee. Hence, the hiring of any new employee, whether from within the UAE or abroad, requires executing an offer letter and submitting it to the authorities to obtain the necessary governmental approvals for hiring the new employee. The terms of the offer letter must reflect the terms of the final employment contract that will be executed at a later stage. This is a novel requirement as there was no such an obligation before the issuance of the new Decrees. Who is required to enter into the new template employment contracts annexed to Decree No. 764? This Decree has introduced the following new elaborate and detailed templates: (i) fixed term employment contract; (ii) renewal of fixed term contract; and (iii) indefinite term employment contract. The Decree unquestionably applies to any new hires subsequent to the entry into force of Decree No. 764, i.e. 1 January 2016. However, the text of the Decree does not address the issue regarding its retrospective effect or, more precisely, if existing contracts will be affected. Interestingly, based on verbal discussions with the Ministry of Labour, the following has been communicated: (i) Each time the renewal of labour cards is due (every two years), even for those employment relationships pre-dating the coming into force of the new Decree, employers will have to submit a copy of the employment contract which complies with the new templates. This applies to both indefinite term and fixed term contracts. This position does not seem reasonable, in particular with regard to indefinite term contracts, since practical issues will arise. The current practice of the Ministry of Labour is that, at the time of renewal of the labour card, the new indefinite term contract is automatically produced in which all the details of the original employment are imported including the original commencement date of employment. The Ministry of Labour requests the re-execution of this new template by the employer and the employee. (ii) Each time a fixed term contract is renewed, the template for renewal of a fixed term contract must be executed, even if the original contract provided for an automatic renewal for subsequent fixed terms. It is worth noting that, although Article 38 of the Federal Labour Law states that a fixed term contract could be of a duration not exceeding four years, Decree No. 765 stipulates that the fixed term can be up to two years only, likely to align the term with the labour card expiration. The implementation of the new Decree is very recent and, therefore, the practice and position of the Ministry of Labour may vary over time to overcome any hurdles or issues that could potentially arise throughout the process. Therefore, the seeking of clarity and guidance is ongoing at this stage. If there is an imminent renewal of labour cards, employers are urged to seek specific legal advice and contact the Ministry of Labour with any enquiries. How different are the new templates compared to the previous templates used by the Ministry of Labour? The new templates are more elaborate and detailed in comparison with the previous basic templates. Generally, the fixed term and indefinite term contract templates are composed of: (i) Twelve clauses covering specific/individual details of employment, such as a financial package, role, employee’s data, etc. Moreover, there is a placeholder for any additional provisions to which the parties agree, provided that these provisions are in line with the applicable laws and template contracts and are subject to approval of the Ministry of Labour. (ii) A comprehensive annex reproducing pertinent parts of the Federal Labour Law and the new Decrees which address the rights and obligations of the employer and the employee, working hours, grounds of termination and vacations, amongst other things. Can employers introduce amendments to the templates? The Decree expressly states that new clauses may be added to the template only if these additional clauses: (i) are in compliance with all the regulations of the Ministry of Labour; (ii) do not contradict the remaining provisions of the template; and (iii) are approved by the Ministry of Labour. The former templates of the Ministry of Labour were basic templates, with all additional provisions and details customarily included in an addendum privately signed between the employer and the employee despite the fact that these former templates had a placeholder for additional terms, but such additional terms were rarely included therein. The question is whether the practice of signing supplements or addendums may continue in light of the clear requirement to include any special provisions in the template to be approved by the Ministry of Labour. The answer will depend on how efficient the Ministry of Labour is in approving any such additional terms. If it is proven to be a speedy and efficient process, it would be recommended to include any additional terms in the template of the Ministry of Labour in order to ensure they are granted the necessary authenticity and to mitigate any risk regarding challenges to the validity of such terms. We have been informed that the process for approving supplemental terms will take three to seven business days. We have also been informed that it is not possible to amend the detailed annexes. Any amendment must be reflected in the template contract itself in the placeholder for “amendments”. In case an employer omits to include any such provisions in the template, it is the view that the legal position will remain as is, i.e. if the provisions do not contradict existing laws and are more advantageous to the employee, the addendum will most likely remain recognised by courts in the event of a dispute, but will not be recognised by the labour office. Moreover, it is worth noting that Decree No. 764 does not contemplate any sanctions or fines in the event of a failure to approve the supplemental terms by the Ministry of Labour. However, the Federal Labour Law provides that the violation of any imperative provisions of this law and any of its implementing decrees shall be penalised by the payment of AED 10,000 for each violation. If the requirement to include additional provisions in the templates is deemed an “imperative” provision, this penalty may be payable by the employer. Termination of employment contracts – Decree No. 765 Are there any new restrictions on the termination of fixed term contracts? In principle, fixed term contracts may still be terminated upon the expiry of the term or by mutual agreement of the parties. The restriction introduced by Decree No. 765 appears to only affect “renewed” fixed term contracts. By way of illustration, if the fixed term is renewed once or for additional subsequent terms, the employment relationship then becomes subject to the below described restrictions. Obviously, the rationale for these novel restrictions is likely to ensure that both the employer and the employee who have been customarily renewing the employment relationship in a certain pattern are not suddenly faced by a non- renewal by either one of them, leading to the disruption of business or life, respectively. In brief, we note the following: (i) Notice period: A fixed term contract that has been renewed becomes subject to a compulsory notice period, i.e. a notice period of at least one month but no more than three months for premature termination, while the Federal Labour Law does not impose a notice period for the premature termination of any fixed term employment contract and only includes an obligation to pay compensation if the contract is terminated before the expiry date. To clarify further, if, after the “first” fixed term expires (e.g. the first two-year term), the employer or the employee does not renew the contract for another term, the employment relationship ends and such relationship is not continued by conduct. There is no requirement to serve a notice advising on the intention to not renew the contract. It is important to note that a default notice period of three months applies to existing renewed fixed term contracts that were entered into prior to Decree No. 765 coming into force and which do not already include a contractually agreed notice period. (ii) Termination remuneration: The position under the Federal Labour Law is that the termination of a fixed term employment agreement before the expiry of its term without cause: (a) if terminated by the employer, triggers the payment of damages equivalent to either three months’ salary or the salary of the remaining balance of the contract term, whichever is lesser; and (b) if terminated by the employee, triggers the payment of damages equivalent to one and a half months’ salary or the salary of the remaining balance of the contract term, whichever is lesser, without prejudice to any contractual agreement between the parties. Decree No. 765 states that both the employer and the employee (as the case may be) is required to pay a “termination remuneration” not exceeding the equivalent of three months’ salary, unless otherwise agreed between the parties, if a “renewed” fixed term contract is prematurely terminated before the expiry of its term and even if the notice period has been observed. Moreover, the template of renewal of a fixed term contract annexed to Decree No. 764 suggests that the minimum termination remuneration is one month’s salary. This is another complexity since the template is not in line with Decree No. 765, which does not set a minimum in terms of termination compensation. In relation to existing renewed fixed term contracts that were entered into prior to Decree No. 765 coming into force and which do not already include a contractually agreed termination remuneration, a default termination remuneration of three months’ salary is payable (by either the employer or the employee depending on . In brief, here are a few important tips: • Employers may consider signing addendums with current/existing employees who are employed through renewed fixed term contracts to add: (i) a shorter pre-agreed contractual notice period (otherwise the default three-month notice period will apply to both the employer and the employee); and (ii) a pre-agreed termination remuneration, otherwise the default three-month termination remuneration period will apply (to both the employer and the employee). • The amount of compensation set out in Decree No. 765 (and the template annexed to Decree No. 764) could ultimately be more onerous than the indemnification amount stipulated in the Federal Labour Law on both the employer and the employee (and thus not in compliance with the Federal Labour Law), in the event that the remaining balance of the contract is shorter than three months and in cases where the renewed contract does not include an agreed compensation. The argument could be that these payments have a different nature since the Federal Labour Law provides for “damages/indemnification” while Decree No. 765 refers to “termination remuneration". This is a legal point that is certain to raise discussions. • The notice period and the termination remuneration are cumulative i.e. the employer is required to undertake both requirements to lawfully terminate a fixed term contract prematurely. Are there any new restrictions on the termination of indefinite term contracts? Terminating indefinite term contracts remains subject to the same original legal framework. However, a cap of three months is now imposed on notice periods. Employers will not be able to include contractual provisions stipulating for a longer notice period. This may prove particularly important for executives and senior employees. A key point to consider is that Article 117 of the Federal Labour Law sets a notice period of at least 30 days for the termination of an indefinite term agreement, and does not include a maximum notice period. The issue is whether a ministerial regulation could effectively impose more stringent rules than federal law. In addition, there is a further point under consideration regarding the retrospective effect of this new restriction. Specifically, the issue being considered is whether a notice period of six months, comprised in an indefinite term contract pre-dating the coming into force of Decree No. 765, would be invalidated. In theory, the answer should be "no." However, as a matter of fact and practice, since the Ministry of Labour requires the execution of the new indefinite term employment contract templates (replacing the former versions) at the time of renewal of the labour cards, longer notice periods will, de facto, be replaced with notice periods within the guidelines. Transfer of employment – Decree No. 766 To what extent has the transfer of employment from one establishment to another been liberalised? Transfer of employment has been considerably liberalised for unskilled employees, commonly referred to as blue collar employees. The position under the former Decree No. 1186 of 2010 was that a worker could only be granted a new work permit without the approval of the former employer and without observing the six-month ban, if: (i) the termination of the employment was mutual and the worker had spent at least two years working for the employer; or (ii) the termination or non-renewal was inflicted by the employer without the submission of a resignation by the employee, in addition to a number of other exceptions, such as a breach of contractual obligations by the employer. Additionally, these restrictions did not apply to skilled employees of the first, second and third skill level (being those positions requiring a high school education certificate as per the classification applied by the Ministry of Labour), as well as if the salary was within a certain de minimis amount or in the case of a transfer of employment to another establishment owned by the same employer. However, Decree No. 766 now stipulates that workers could be granted a new work permit, without the approval of the former employer, provided that they have completed at least six months of employment with that employer. These restrictions do not apply to: (i) skilled employees of the first, second and third skill level; and (ii) a number of other scenarios, such as in the event where an employer has breached any of the obligations under the employment contract. * * * These new regulations are an important step in the ongoing development of the UAE's employment laws and enhance the country's attractiveness as a global trade and business hub. Businesses operating in the UAE should carefully review the implications of the new rules on their current practices and seek legal advice on the potential impact on their existing and prospective employment contracts. Authors Dr Habib Al Mulla Chairman T: +971 4 423 0000 habib.almulla@bakermckenzie.com Omar Momany Partner T: +971 4 423 0019 omar.momany@bakermckenzie.com Hani Naja Senior Associate T: +971 2 696 1200 hani.naja@bakermckenzie.com Ghada El Ehwany Knowledge Manager T: +971 4 423 0065 ghada.elehwany@bakermckenzie.com www.bakermckenzie.com This memorandum is for informational purposes only and does not necessarily deal with every important topic or cover every aspect of the topics with which it deals. Recipients are not to construe its contents, or any prior or subsequent communications as legal, investment or tax advice, and should make their own evaluation of the relevance and adequacy of the information, seeking appropriate legal or other professional advice as deemed necessary. Baker & McKenzie International is a Swiss Verein with member law firms around the world. 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