The federal law
In these times of economic uncertainty, employers are always considering implementing cost cutting including reducing their payroll costs. In the UAE, the Federal UAE Labour Law n°8 of 1980 (UAE Labour Law) does not make express reference to the concept of redundancy. Consequently, instigating a redundancy process involves following the provisions that deals with termination of employment.
Under the UAE Labour Law an employee on an unlimited term contract may only be legitimately dismissed:
(a) by the provision of notice in line with the terms of the employment contract provided that the employee is dismissed for a valid cause (which must be connected to the employee’s work); or
(b) in accordance with the provisions of Article 120 of the UAE Labour Law which provides a list of instances where an individual may be summarily dismissed (for cause).
Moreover, the UAE Labour Law specifically provides that any termination of an employment contract which is not for a valid reason (for example, performance or misconduct), or for any of the reasons listed under Article 120, is deemed to be arbitrary.
How much will it cost?
One of the most important questions for an employer who wants to reduce overheads is how much will it cost to make an employee redundant? Subject to any specific provisions contained in an individual’s employment contract, there are certain minimum statutory entitlements that an employer is obliged to pay upon termination.
The UAE Labour Law sets out an employee’s entitlement upon the termination of his/her employment:
(a) the provision of notice or compensation in lieu of notice. The UAE Labour Law provides for a minimum of 30 days notice which cannot be waived even with the consent of the employee
(b) all accrued benefits (such as accrued but unutilised leave) must be paid to the employee
(c) provided the employee has not participated in a company maintained pension scheme, end of service benefit (or gratuity) must be paid
(d) the employer is also obliged to repatriate the employee to his place of origin if the employee does not find alternative employment in the UAE within a set period of time.
Whilst the payments set out above are statutory entitlements, a common query from employers is if there is any obligation to pay compensation for redundancy as is the case in many jurisdictions around the world. Since the UAE Labour Law does not provide for the concept of redundancy, consequently, there is no provision for redundancy compensation. Moreover, the UAE Labour Law states that where an employer is considered to have terminated an employee for any reason other than a valid reason, or one of the grounds set out under Article 120, the employer will be liable to pay compensation to the employee. The maximum compensation is three months salary to be paid over and above any other contractual or statutory liabilities.
Therefore, on the face of it, a redundancy could potentially create a liability on the employer to pay compensation to the employee. However, the UAE labour courts have recognised an employer’s right to restructure its business and have held that redundancy is a valid non-arbitrary reason to terminate an employee. As the UAE courts do not follow a binding process of precedents, it is prudent to organise a limited consultation process and make sure that any decision to make a particular employee, or group of employees, redundant is capable of justification and is reasonable, fair and transparent to limit the risk of defending a claim by an employee for arbitrary dismissal.