Employment law in the UAE – A quick guide for new business owners

The UAE attracts foreign investment from a range of investors across various jurisdictions. A key part of establishing a presence in the UAE is making sure that you have a thorough understanding of your key obligations as an employer and the rights of your employees under UAE labour law. 

Here, we outline some of the key provisions of Federal Labour Law No.8 of 1980 (as amended) – which we refer to here as "the labour law" – pertaining to both onshore businesses licensed by the Department of Economic Development (DED) and companies incorporated within a UAE free zone.

What protections do employees have?

The labour law affords employees certain minimum protections that cannot be contracted out of, including provisions related to:

• working hours
• vacation and public holidays
• medical leave (including maternity and paternity leave)
• safety standards, and
• termination of employment and end of service gratuity payments.

Employees working within one of the free zones – aside from the financial free zones of the DIFC and ADGM, which have their own labour regulations – are subject to both the labour law and any employment regulations in the free zone in which the business is incorporated. These free zone employment regulations are always subject to the labour law, except in instances where the labour law is less favourable to employees.

Obtaining an establishment card

After your business has received its trade licence, you must open its labour and immigration account by:

• applying for an establishment immigration card (establishment card), and
• registering your company with the General Directorate of Residency and Foreigners Affairs (part of the UAE's Ministry of Interior tasked with regulating the entry/exit of travellers to the UAE). 

The establishment card allows your company to recruit staff from abroad and apply for a variety of visa types, such as foreign investor, partner and employment visas. The card is issued for one year and must be renewed prior to its expiry on an annual basis to avoid incurring penalties.

Hiring in the UAE and sponsorship

For each new employee you hire:

• onshore companies must obtain a labour card from the Ministry of Human Resources and Emiratisation (MOHRE), and
• free zone-based employers must obtain an identity card from the relevant free zone authority.

All non-UAE nationals must obtain a work permit and a residency visa to live and work in the UAE. These permits are granted if the employee has the skills/educational qualifications required by the UAE and they are sponsored by an entity (either their employer or the free zone itself). If your business is incorporated in mainland UAE, your company will be the sponsor of its employees, while free zone company employees are sponsored by the free zone itself.

The number of residence visas your business can issue is linked to the size of your commercial premises. For DED licensed companies, the general guideline is 100 square feet of office/warehouse space per visa, although this can be negotiated with the economic department depending on the activity type on the licence. Within the free zones, the relevant free zone authority will advise on how many visas can be obtained prior to the licence issuance.

Types of employment contract

Your employees must sign a standard template offer letter stating the basic minimum terms of employment (in English and Arabic) and an additional longer form contract that contains more detailed commercial terms. Upon termination of employment, or in the event of a dispute, both employment agreements are considered and the provisions that are most beneficial to the employee are applied. The labour law provides that employment contracts can be for a fixed (limited) term or an indefinite (unlimited) period.

Under Article 36 of the labour law, a UAE employment contract must contain the following basic information:

• duration of the contract (limited or unlimited)
• date of commencement of work
• the nature of the work to be performed
• location where the work is to be performed, and
• amount of remuneration.

Some of the economic free zones require the parties to enter into employment contracts on the terms contained in a specific template. Subject to the provisions of the labour law, the information that must be included in employment contracts varies among the free zones.

Terminating an employee's contract

A contract of unlimited duration (an open-ended contract) may only be terminated without cause with notice and for a legitimate work-related reason. If a dismissal is not connected to an employee's work, for cause, or any justifiable reason as defined by Article 120 of the labour law, it may be considered arbitrary. The employee may then successfully claim arbitrary dismissal and be awarded compensation of up to three months' pay by a competent court.

Although the labour law doesn't provide provisions and procedures for redundancies, the UAE courts do recognise the concept of redundancy. In some cases, the courts have held that a termination for redundancy is not a legitimate work-related reason, as it does not relate to the performance or conduct of the employee. Following the COVID-19 pandemic – which has negatively impacted both employers and employees – the UAE courts are more likely to strike a balance between the interests of the employer and employees and may not necessarily award the same level of compensation in a successful arbitrary dismissal claim as they would have done prior to COVID-19.

End of service gratuity

An important consideration for new UAE employers to account for is an end of service gratuity (ESG) payment. This is a payment which is due upon termination of employment if the employee has accrued at least one year's service with your company, provided their dismissal was not for gross misconduct.

The amount of the ESG payment is calculated based on the employee's last basic salary (ie without allowances such as housing) before termination at the rate of:

• 21 days' pay for each year of service up to the first five years' service
• 30 days' pay for each year of service in excess of five years' service.

An employee with an unlimited contract who resigns after serving less than five years is entitled to a reduced gratuity payment, which is calculated as follows:

• more than one year's service but less than three years' service entitles an employee to one-third of the total gratuity entitlement
• more than three years' but less than five years' service entitles an employee to two-thirds of the total gratuity entitlement
• more than five years' service entitles the employee to the full gratuity entitlement.

The maximum end of service gratuity is capped at two years' salary.

When hiring employees in the UAE, it is important to budget for the ESG that is accrued for your employees as an employer-paid benefit.

Find out more

To discuss the issues raised in this article in more detail, please reach out to a member of our Employment, Pensions & Mobility team.