For almost any business their most valuable asset is their employees and for their staff to perform effectively they are likely to have access to confidential and commercially sensitive information. They will also be required to communicate with customers and suppliers, encouraged to build strong, lasting relationships for the benefit of the business. However in the event that the employee leaves the business how does the management protect their business and reduce the risk that the individual will use the confidential information and contact details of customers, for example, whilst working for a competitor?
Like many other jurisdictions, there are limitations on the enforcement of restrictive covenants in the United Arab Emirates (UAE) and in the UAE these will only be enforced to the extent necessary to safeguard the employer's lawful interest and subject to specific conditions set out below.
However, applying an employer's international standard form post-termination restrictions in the UAE is not likely to put the employer in the best position as there are practical difficulties in enforcement of these in the UAE. Whereas injunctive relief (i.e. a mandatory order by the Court prohibiting an employee from taking certain actions, such as poaching of employees) is usually available in western jurisdictions, this type of protection is not provided for within the employment environment in the UAE although recent legislation may result in a visa 'ban' being imposed on employees.
This article highlights the drafting considerations that employers should consider from the outset of the employment relationship as well as practical steps that can be taken when employers wish to rely on post termination restrictions.
Protecting an employer's secrets generally falls outside of the restrictive covenant regime, even though the misuse of confidential information post termination is often linked with restrictive covenants. Article 379 of Federal Law No. 3 of 1987 (Penal Code) provides that the disclosure and/or misuse of confidential information in the UAE is potentially a criminal offence, compared to the contractual or civil remedies that a previous employer can pursue if a post termination restriction has been breached.
This update highlights the advantages and potential problems when restraining an employee from using contacts and their previous experience, which would not be deemed as confidential. Although the difference is slight, it is significant when contemplating this issue.
In the UAE Article 127 of Federal Law No. 8 of 1980 (Labour Law) and Article 909 of the Law of Civil Transactions of the State of the UAE (Civil Code) sets out the basic requirements for a post termination restriction to be enforceable. As such, for a post termination restriction to generally be enforceable in the UAE the following must exist:
- The employee must be over 21 when they sign up to this restriction
- The work of the employee must allow them access to confidential information or the employer's clients
- The restriction must be limited concerning time, place and nature of the business (ie geographical scope must be clear for example the Emirate of Dubai)
- The restriction must be limited to the extent necessary to safeguard the employer's lawful interests
Drafting restrictive covenants
If you are contemplating including post-termination restrictions in contracts it is advisable to seek specific legal advice at the outset to ensure that they are enforceable. In the UAE any restrictions on competition must be reasonable and must only limit conduct in a way that is necessary to protect legitimate business and legal interests. The clauses must be limited in duration, geographical scope and by the nature of the business itself. Additionally, each covenant should reflect the differing business needs of the employer and the specific employee to which the covenants apply so a 'one-size-fits-all' approach is unlikely to be successful. The more tightly drafted a covenant the more likely it is to be enforced as it will demonstrate to the court that there is a particular lawful interest that the employer needs to protect.
Before speaking with legal advisers, employers should have proper understanding of the business that they are seeking to protect and also an awareness of the risk imposed by the employee(s) in question if they started working for a competing business. This will help them to understand how the covenant would assist.
In the UAE the courts often take a paternalistic view in regards to covenants. In the event they consider them to be unsuitable, the courts will generally amend covenants so they are more palatable. The risk for employers is that the court has discretion to amend (or not) so care should be taken when drafting to reduce the likelihood of them being changed during litigation. By way of comparison, in other jurisdictions such as the UK where a court deems a covenant to be wider than necessary to protect the employer's legitimate business interests, the court will not amend this so as to add or change parts of the restriction to make it acceptable (eg replacing 12 months with six months).
Article 910 of the Civil Code provides:
"If both parties agree to hold the employee liable in case he commits a breach of a condition restraining competition and this clause is so onerous as to act as a pressure on the employee to compel him to remain in the service of his employer, the condition will not be valid."
Therefore in direct contrast to some jurisdictions, the UAE law does allow for liability clauses or penalty clauses in employment contracts which are tied in with post termination restrictions. These clauses will specify an amount to which an employee is automatically liable if he breaches these restrictions. Employers must carefully consider the amount to be specified to ensure it is not exorbitant and unenforceable in accordance with the Civil Code. The courts have accepted AED 150,000 as a reasonable figure, but the court has discretion in the particular circumstances of the case to decide whether it is an appropriate amount.
The insertion of a valid penalty clause also has the added advantage of shifting the burden of proof in a damages claim from the employer to the employee (further detail below). However for those employers with a high proportion of international staff they may encounter difficulties when recruiting employers as individuals may be reluctant to agree to such provisions.
Scope of the covenants
Although the Labour Law provides a restriction against non competition the form in which this can be applied is usually specifically broken out into particular restrictions. It is usual to see covenants not only opposed to competition, but also non solicitation and non dealing of an employer's staff and/or non solicitation or dealing with customers or suppliers. As long as these covenants adhere to the basic drafting requirements detailed above they have previously been upheld by the Ministry of Human Resources and Emiratisation (MOHRE) and the courts as being enforceable and legal within the UAE.
Clarity and a realistic view of what the employer wants and can achieve with restrictions is key. Some businesses will be satisfied with damages whereas others will wish to prevent loss of business or clients. Others will take enforcement action to show their market strength. Planning the strategy and what is important to the business is key as pursuing ex-employees can be expensive and can have a negative impact on the business.
When deciding whether to enforce employers should consider the following:
- Cost/benefit analysis: the benefits of enforcing post termination restrictions are obvious, but the cost of doing so can be exorbitant. Legal costs will accrue when considering whether to enforce restrictions and there is the cost consideration of the time spent by management dealing with the issue which may also be a significant cost to the business
- Impact on the business and its reputation in the market: the market in the UAE is quite small and the enforcement (or not) of an anti competition clause is likely to be known within the market. For employers that wish to be regarded as powerful in their sector they may welcome the awareness that they enforce restrictions but it could also lead to other competitors choosing to enforce their non compete clauses when they may have previously avoided from doing
- Appearance to clients: given the limited size of the market, enforcing a restriction that allows non dealing or solicitation with clients may alienate businesses and make them hesitant to work with the employer in future. The previous employer will need evidence that covenants have been breached and if the only way to obtain this evidence is to speak to clients this may cause issues
- Impact on remaining staff: if the departing employee is popular within the business treating them harshly may detrimentally affect morale and motivation with remaining employees. Alternatively, an employer may regard enforcement as a deterrent for other employees who are considering leaving the business
- Who does the employer pursue? The options are usually the employee and/or the new employer and whilst the employee is the easiest target, where the main consideration is damages, the pockets of a corporate are considerably deeper
If the employer wishes to proceed with enforcement it is then important to consider the manner of the employee's departure. Article 909(3) of the Civil Code provides that an employer cannot rely on a post termination restriction, "if he terminates the contract without any cause attributable to the employee; nor can he avail himself of such agreement if he himself has given the employee adequate grounds to resiliate the contract." Therefore, if the previous employer dismissed the employee for an invalid reason or the employee resigned for cause, the post termination restrictions may be judged by to be unenforceable by the courts. It is harder for an employee to argue that the covenants should not be enforced if he resigns as opposed to being dismissed.
There are two options available for employers in the UAE when seeking enforcement against a non national employee; apply to the courts of the particular Emirate or to the MOHRE. The courts will allow an employer to claim damages where these are appropriate to compensate its loss. However it can be a lengthy process to get to court and the need to prove actual financial loss which was caused by the breach of the covenant, together with the associated costs, often does not assist where an employer needs immediate protection. The insertion of a penalty can assist here as there is an automatic assumption that the breach has caused damage to the value of the clause. The obligation is then on the employee to show that such damage has not been caused, which can be extremely difficult. The inclusion of such a clause therefore increases the strength of the previous employer's negotiating position.
However, where injunctive relief is usually available in western jurisdictions, this type of protection is not provided for within the employment environment in the UAE. The exception is in the DIFC free zone which provides for injunctions (ie a mandatory order by the court prohibiting an employee from taking certain actions, such as poaching of employees).
As a result of legislation introduced in 2016, if an employer wishes to prevent a departing employee from joining a competitor or breaching the post termination restrictions they may be able to apply to the Ministry of Human Resources and Emiratisation (MOHRE). If the MOHRE decides that there has been a breach of an enforceable covenant, it can place a visa ban on the departing employee, to prevent him from working in the UAE (or working within the scope of the restriction) for the prescribed period in the covenant. This is an old process which has been reintroduced (by a Ministerial Decision during 2016) and it entitles the MOHRE to reject requests for new work visas, or revoke existing permits, pursuant to Article 127 of the Labour Law. Such a rejection can be up to two years though it will inevitably mirror the duration of the non-compete provision. The Decision does provide that the Ministry will grant or revoke according to as 'final court judgment' though so it may still be that to request the ban an employer has to liaise with a court. As a result, it remains to be seen how it will be used in practice but we will be monitoring this and will provide updates in due course.
Please note that if employer that wishes to make an application to the MOHRE they must provide evidence to demonstrate that a breach has occurred as the concept of anticipatory breach will not work. This does mean, therefore, that an employer must wait for the employee to commit a breach and gather all possible evidence when making the application.
Finally, it may be possible to obtain necessary protection by placing the departing employee on garden leave for the entirety of their notice period. This could be used instead of or in conjunction with a post termination restriction. It is a breach of the labour and immigration law for an employee to work for another employer during their notice period and whilst under their employer's sponsorship.
It may also assist to discuss the restrictions with the departing employee and/or their new employer to agree a feasible and realistic way forward. Neither the employee nor their new employer will want to be drawn into litigation or applications before the MOHRE and it may be possible to find a solution that balances all parties' interests such as entering into a new agreement that describes particular clients, suppliers or employees that are to be protected. This mediatory route (or even arbitration) may be something employers could consider when looking to enforce restrictive covenants.
Post termination restrictions are a way to protect an employer's interests when employees leave. However, despite considerable legal reasoning as to how they work, an employer wishing to incorporate them into their employment contracts or who is seeking to enforce them must be aware of the practicalities and potential complications when relying on them. As the UAE marketplace continues to develop more businesses will seek to rely on these post termination restrictions as a way to protect their lawful business interests. Ultimately, employers should seek specific legal advice if queries arise when considering whether and how to use restrictions.
Practical steps for employers
- Carefully consider post termination restrictions in your employment contracts to ensure these are drafted clearly and limited in duration, geographical scope and nature so that they provide protection to your lawful business interests
- The courts can rewrite clauses to an extent but don't rely on this!
- Consider whether it would assist to add an appropriate penalty clause in your contracts to cover damages
- Ensure notice periods are sufficient for key employees and insert garden leave clauses in their contracts
- If a breach occurs consider the possible outcomes and how you wish to resolve the matter. Be realistic and evaluate the options against the costs involved