Redundancy in the United Arab Emirates – What do you need to know?

The Law

Importantly, if the employer is a company incorporated on-shore in the United Arab Emirates (UAE) or a free zone (other than the Dubai International Financial Centre(DIFC) which needs consideration separately particularly in light of the coming into force of the new DIFC Employment Law No. 2 of 2019), the concept of redundancy does not exist in law.

Law No. 8 of 1980 (“UAE Labour Law”), which applies on-shore and to all free zones (except the DIFC), does not set out any express statutory definition of redundancy or redundancy procedure.

With economic uncertainty being experienced locally and globally, companies operating in the UAE may be considering or planning a reorganization, restructuring and/or some other form of cost-cutting exercise. There are difficult decisions for management to make and, clearly, consideration of the process of redundancy raises some important questions. In our experience, employers not only need clarity on the correct legal approach under UAE law, but also want to undertake the process fairly in order to ensure employees are treated with respect, receive what they are legally entitled to, avoid employee claims and, to the extent possible, ensure the good reputation of the company is preserved.

In countries like the United Kingdom, employers have been used to working with well defined redundancies processes set out under English law. This is not the case in the UAE and, as a consequence, there is often a lot of uncertainty and misunderstanding around the correct legal approach. While there is no statutory concept of redundancy, the courts have in the past acknowledged that where a business dismisses an employee for a cost-saving reason, this can amount to a “legally fair and valid reason” for dismissal under Article 117 of the UAE Labour Law.

Pursuant to Article 117 of the UAE Labour Law, a company may terminate an unlimited term employment contract for a valid reason at any time by providing at least 30 calendar days’ notice of termination to the employee (or longer, if the employment contract provides for a longer notice period).

It is important to note that Article 117 applies to the terms of an unlimited term employment contract and not a fixed term employment contract.

The Redundancy Process

Once again, the UAE Labour Law does not set out any express statutory redundancy procedure. To this end, employers can be confused as they are left to determine their own internal “policies and procedures” for handling situations of redundancy. Many international companies operating in the UAE look to the English model for guidance on how to deal with redundancy and, whilst not a legal requirement in the UAE, it is extremely helpful in determining “best practice” for the company.

The elements of the redundancy process the company chooses to adopt will be particular to the circumstances and the size of the workforce which the process will affect.

Based on the English model as a guide, a genuinely transparent, fair and thorough process should broadly involve:

  • management (HR and other departments as affected) undertaking a careful review of the needs of the business and determining (based on market, financial and other reports/criteria) whether or not a reduction in the workforce is genuinely required and, if so, does it apply to one or all departments;
  • if the management review process concludes a workforce reduction is required (whether generally or specific to certain departments), then a meeting should then be held with all employees to alert them to the issues the company is experiencing and the need to consider reducing the workforce, and, thereafter, one to one meetings with each affected employee. The process should provide the company and the affected employees with the opportunity to consider alternatives to redundancy; including changes in employee benefits (salary, housing allowance, schooling or other), alternative roles within other parts of the business, or a reduction in working hours/shift to part-time working. Redundancy situations are hard for any employer, but the impact on staff morale is equally tough and can significantly harm an already wounded company – it needs to be managed carefully;
  • the company should also provide the affected employees with letters and formal updates throughout the review process, and appropriate documentary evidence relating to the redundancy process, the criteria for redundancy and the wider economic situation; and
  • finally, if the decision is taken to terminate any employee(s) for reasons of redundancy then the employer must ensure they effectively and quickly communicate this clearly to the affected employee(s) (and simultaneously, if possible, where groups of employees are affected, particularly within the same team) by way of letter setting out the reasons for termination and outlining their legal entitlements to salary and other benefits as a consequence of termination. At this difficult time all parties will want certainty in the path forward including dates of termination, notice and final payments.

If the process is conducted properly, an employer will be in a good position to defend any subsequent labour claims as it will be able to set out a clear rationale for the redundancy dismissal which is supported by evidence, and if a fair and thorough process is undertaken. However, it is essential that the grounds for dismissal and the process are supported by clear documentary evidence. Transparency is key to the process of avoiding/defending any labour claims.

The consultation process and documentary evidence can be issued to the employee(s) in English. If a dispute is later pursued before the Labour Courts, the employer will need to translate the documentation into Arabic to submit before the courts.

Redundancy payments

Most labour claims arise from (a) a poorly handled redundancy process; and/or (b) mistakes in relation to the calculation of statutory and contractual entitlements following termination. When a company dismisses an employee from an unlimited term employment contract for a redundancy-type reason, the employee should be provided with the following payments on termination of employment:

  • notice pay – minimum of 30 days, subject to the employee completing their probationary period;
  • end of service gratuity – subject to the employee completing one year’s service;
  • payment for accrued and untaken annual leave;
  • repatriation flight – subject to employee returning to their home country; and
  • any other contractual payments arising on the termination of employment.

Unless you are a seasoned HR professional it is always worth having your process and termination payment calculation vetted by an expert, particularly where there are a large number of employees involved.

Compensation for arbitrary dismissal

In the event of a labour claim, it is worth considering that the Labour Courts may also award employees with compensation for “arbitrary dismissal”. An arbitrary dismissal is the unfair and/or unlawful dismissal of an employee who is party to an unlimited term employment contract, as determined by the Labour Court. In these circumstances, the court may award the employee up to three months’ remuneration as compensation.

As we have stated, as there is no statutory concept of redundancy, a company which fails to engage in a reasonable process or does not retain sufficient evidence to support the dismissal will always face an element of risk that an employee will refuse to cancel their visa and/or pursue labour claims for arbitrary dismissals in a redundancy-type situation.

Conclusion

If the employer adopts a transparent, fair and thorough process and has evidence to support the circumstances of the redundancy, it will be in a strong position to defend a claim of arbitrary dismissal and/or mitigate the level of compensation awarded to any dismissed employee. The safest practice is to carefully plan the redundancy procedure, and to take commercial and legal advice before proceeding.