Outsourcing is a practice used by organisations to reduce costs by transferring portions of work or business functions to third party providers rather than providing the service in-house.

This transfer of portions of work or internal business functions to external suppliers has significant implications for employees of the company that is undertaking the outsourcing.

In some jurisdictions around the world, there are regulations that safeguard employees’ rights in this type of scenario. If the outsourcing is deemed to be a transfer of a business unit, employees in Europemay benefit from an automatic right of transfer, protection from dismissal and a right to consultation. UAE Federal Law No.8 of 1980 as amended (the Labour Law) includes some continuity of employment provisions in the event of any change in the form or legal status of the employer, but in the case of a transfer of business there is no automatic employee transfer regime under UAE legislation.

Accordingly, when considering an outsourcing arrangement in the UAE, a slightly different approach needs to be taken to transfers of staff than international organisations may be used to and there are a number of other complexities that arise through the application of local labour laws:

  • As there is no automatic transfer provision, the contracts of employment for staff who are transferring will need to be terminated by the original employing party. The Labour Law imposes a minimum 30-day notice period unless an employment contract is terminated for cause, although the parties can agree longer. An employee may also become entitled to various categories of compensation upon termination, including payments in lieu of unused holiday, repatriation expenses and an end of service gratuity (ESG). The ESG is a variable amount based, among other things, on length of service, but it could amount to a figure of up to two years’ basic salary.
  • A further complicating factor in relation to the termination and re-hiring of an employee in the UAE is the legal requirement for expatriate workers to hold an appropriate work permit and residence visa. Each transferring individual will need to apply for a new work permit and new residence visa upon changing employment.  With regard to the application for a new residence visa, if the entry requirements for that person’s country have changed since the person was issued with original entry approval, he/she may be unable to secure a new visa and would not be permitted to take up a position with the service provider in the UAE.
  • Emiratisation is an issue covered in more detail elsewhere in this blog: Emiratisation what foreign businesses in the UAE need to know: in essence, it is a government-backed scheme to encourage the employment of UAE nationals in the private sector. In some cases, this takes the form of a quota or minimum commitment in relation to the number of nationals in a company’s workforce. Some companies have explored the extent to which outsourcing can help reduce the perceived burden of Emiratisation, for example, by reducing the employed workforce and, consequently, the number of nationals that an organisation is required to employ (the Emirati population is relatively small and some skills are in strong demand). To our knowledge, this approach has not been tested in the UAE courts to date and should be approached with caution.

The financial and business implications of these labour law issues must all be considered prior to entering into an outsourcing arrangement in the UAE. A company seeking to take advantage of the cost savings or other benefits that outsourcing can bring must ensure that those benefits are not eroded by unforeseen liabilities.

Salma Peacock.