Update: UAE Government extends deadline to adopt limited term employment contracts to 31 December 2023

Employment contracts: Transition from unlimited to limited term and removal of three-year cap

Summary

The deadline of 1 February 2023 looms as the date by when employers must move employees from unlimited to limited term contracts. This move follows changes introduced by Federal Law 33 of 2021 ("New Labour Law"), which came into effect on 1 February 2022, and its subsequent amendment by Federal Law 14 of 2022 effective from 8 October 2022. 

What has changed?

The New Labour Law initially stipulated that all employees must be employed on limited term contracts, and provided a transition period of one year to convert existing unlimited term contracts. Initially, an upper limit of three years was also set for the limited term. However, that requirement was amended to remove the cap and allow employers and their employees to agree between them what the length of the limited term will be.

What does this mean for employers?

Certainty is often stated as a key benefit of adopting limited term contracts as the default position. Theoretically, limited terms (and the potential security that comes with it) could assist employers with attracting new employees (especially those from abroad). However, this is blunted by the ability (of either party) in the New Labour Law to give notice to terminate the contract at any time during the term and without an initial guaranteed period of employment, or a penalty for early termination.

The relaxation of the prescription on the length of the limited term will provide employers and employees with more flexibility and minimise the administration of contracts for talented employees who employers want to retain long term. Of course, many employers will have already amended their template contracts, and/or re-issued or varied contracts with existing employees, to comply with the initial three-year cap. The natural temptation for employers will be to adopt, or revert to, longer terms. However, employers should avoid making 'knee-jerk' changes and first consider the advantages of a shorter contract term, which, for example, includes the opportunity at regular intervals to review and update terms of employment to reflect changes in the employee's role and developments in the employer's business, especially in the relation to employee benefits, incentive arrangements, and non-compete restrictions.

Income protection: New Involuntary Loss of Employment ("ILOE") Insurance Scheme

Summary

In September 2022, the UAE Ministry of Human Resources and Emiratisation ("MoHRE") introduced (by Federal Law 13 of 2022) a mandatory unemployment insurance scheme designed to provide greater financial security to employees in the event of their employment being terminated by their employer for non-disciplinary reasons, such as redundancy.

What has changed?

Since 1 January 2023, employees must, by 30 June 2023, register and pay a premium for an insurance policy from an approved insurer. The premium differs depending on the category the employee falls into, which is determined by reference to basic salary.

The insurance policy will pay to the employee, in respect of each claim, 60% of the employee's monthly basic salary (averaged over the last six months of employment) until they find new employment for up to three consecutive months from the date on which the termination of employment becomes effective, subject to a monthly cap of AED 10,000 - AED 20,000 depending on their insurance category. The amount that employees may receive over the course of their UAE employment under the scheme is capped at 12 months' pay in aggregate. To be eligible to claim, the employee must have been registered and paid the insurance premium for at least 12 consecutive months.

What does this mean for employers?

The onus is wholly on the employee to register and pay any premiums and so there is, in principle, no obligation on employers to take action. However, as a matter of good employment relations practice, employers should consider providing employees with information about their obligations especially if any penalties imposed for non-compliance may impact that employee's ability to continue to work lawfully. Employers may wish to consider introducing measures to encourage or require employees to confirm their compliance with the scheme.

Additionally, employers who provide enhanced terms of severance in redundancy or other 'no fault' dismissals may wish to review and revise those terms in the knowledge that unemployed employees may be benefitting from the statutory "safety-net" that the ILOE scheme provides.

What are the penalties for failure to comply?

Employees who fail to register in time are liable to pay fines of AED 400 and those who persistently default on payment of the policy premium will face fines of AED 200. Failure to pay fines may lead to a block on the employee's ability to apply for a work permit.

Emiratisation targets

Summary

On 6 June 2022, the MoHRE issued Ministerial Decision 279 of 2022 that introduced new measures aimed at increasing the number of UAE citizens working in the private sector. This builds on previous initiatives, in particular, the Nafis programme launched by the UAE Government in September 2021 (as part of its 'Projects of the 50' programme) to create job opportunities and professional training for Emiratis across the private sector. Further guidance was provided in December 2022 by Ministerial Resolution 663 of 2022.

What has changed?

Private sector companies with 50 or more employees must maintain prescribed Emiratisation rates (i.e. the proportion of Emirati employees employed in the workforce in skilled roles). Employers were required to have achieved a rate of 2% by the end of 2022. For 2023, the prescribed rate is 4% by the end of the year, and the rate will continue to increase by 2% each year so that employers must have at least 10% of UAE citizens employed in skilled roles by the end of 2026.

Employers who meet the targets will be bestowed with enhanced status that will entitle them to discounts on administrative service fees such as those charged for applications for employee work permits and transfers.

What does this mean for employers?

Employers who have surpassed, or will in the foreseeable future approach, the headcount threshold (50+ employees), should take account of this development in their workforce planning. Careful thought is required about what measures the business already has in place, or may need to be introduced, to attract, train, and retain Emirati talent in good time to avoid a shortfall. Employers have been warned against adopting practices that are inconsistent with Emiratisation, such as advertising roles that do not meet the required skill level, and paying Emirati employees at lower rates of pay compared to expatriate employees in equivalent roles. Employers will also need to prepare to deal with the financial consequences of not meeting the targets in any particular period so as to avoid operational constraints on their business.

Employers who are not already familiar with the administrative arrangements required for employing UAE citizens should make sure that they are set up to fulfil all of the procedural requirements associated with employing UAE citizens. This includes making sure that employees are duly registered with the applicable pension authority and that statutory pension contributions are paid.

What are the penalties for failure to comply?

Effective from 1 January 2023, non-compliant employers are liable to pay a fine in respect of each UAE citizen by which there is a shortfall, initially (in respect of 2022) in the amount of AED 6,000 per month per Emirati for every month that the shortfall persisted (save for an initial grace period of two months after falling into a deficit). The rate of the fine is set to increase by AED 1,000 each year. Employers who default on the payment of fines will also be subject to measures that would impede their commercial licence. This includes restricting the ability to obtain new work permits and to renew work permits of existing employees. Such restrictions could be extended to apply to the licence of associated companies with common sole ownership.

Immigration: Work and business-related visas

Summary

As part of its continued efforts to attract and retain global talent, the UAE Government introduced a series of changes to the entry and residence visa options for individuals working, or exploring business opportunities, in the UAE.

What has changed?

A number of developments relevant to employment and business residency visa routes were introduced by Cabinet Resolution 65 of 2022 (issuing the executive regulations for Federal Law 29 of 2021 regarding the entry and residence of foreigners), which came into effect on 5 September 2022 as part of a refresh of the UAE entry and residence visa system. The developments include, amongst other changes:

• Reducing the length of work permits to two years from three years.
• An expansion of the eligibility criteria for the Golden Visa and Green Visa, which allow skilled workers, freelancers, investors, and high-skilled individuals to self-sponsor their visas. For example, highly- skilled workers holding at least a bachelor's degree and earning a monthly salary of at least AED 30,000 in a wide array of disciplines became eligible for the Golden Visa.
• An extended grace period of up to six months (instead of around 30 days) for individuals in certain visa categories to remain in the UAE following the cancellation of their visa.

What does this mean for employers?

The extension of eligibility for self-sponsoring visas naturally provides individuals with greater independence and security in the event of the termination of their employment, and the freedom to explore alternatives to the traditional employment model. Employers may embrace this and actively seek to support employees in moving to a Golden Visa or Green visa that provides longer term residency as a means of reducing the expense and administration associated with more frequent visa renewal fees and the responsibility of providing health insurance under a sponsored employment visa.

Wage Protection System ("WPS")

Summary

On 20 December 2022, the MoHRE issued a Ministerial Decision 598 of 2022, which replaced Ministerial Decisions 43 and 346 issued earlier in the year, to clarify employers' obligations in the operation of the UAE's WPS. The WPS is the electronic system that facilitates the tracked transfer of employee salaries via financial institutions that have been approved by the UAE Central Bank, which is aimed at ensuring the transparent and timely payment of employee salaries.

What has changed?

• Further to the obligation on employers to pay salaries on time, delays of more than 15 days will officially be treated as payment arrears.
• Employers are required to process salary transfers of 80% of their eligible employees through the WPS.
• A new schedule was introduced that lists various sanctions to be imposed on defaulting employers.
• The categories of employees excluded from the WPS requirements include seafarers, and expatriate employees working in branches of foreign companies in the UAE but who (by agreement) receive their salary outside of the UAE.

What does this mean for employers?

Employers should proactively manage their payroll planning and processes and ensure prompt updates to the MoHRE (which oversees the WPS) of any contractual or other changes to normal employee remuneration that is processed via the WPS so as to avoid inadvertent breaches and thus incurring the consequent sanctions. High risk areas for non-compliance include periods of unpaid leave and any other periods of employment where salary reductions or deductions may apply.

What are the penalties for failure to comply?

Employers who fail to adhere to the WPS requirements, whether by failing to pay salaries at all, or failing to pay salaries on time, may be subject to a number of penalties depending on the size of the workforce. Such penalties range from increased scrutiny and monitoring, to the suspension of their ability to obtain new work permits (for the defaulting company and potentially associated companies with common sole ownership), to referral to the relevant Public Prosecution office.

Bank guarantees and Employee Protection Insurance Scheme

Summary

The MoHRE has amended the requirements in respect of private sector employers providing bank guarantees of AED 3,000 per employee to cover certain termination payments that are due to employees in circumstances where the employer does not make the payments on termination.

What has changed?

In June 2022, the MoHRE issued Ministerial Resolution 318 of 2022 regarding bank guarantees and employees’ protection insurance scheme in the private sector, which provided employers with an alternative to providing the traditional bank guarantee. Now, employers may opt to either:

• provide a bank guarantee of no less than AED 3,000 for each employee that is valid for at least one year, and which can be renewed automatically and paid at the MoHRE's demand, without any other restrictions; or
• take out an insurance policy for a term of at least 30 months, at a minimum value of AED 137.50 per skilled worker, AED 180 per low-skilled worker, and AED 250 per worker paid by high-risk establishments not registered with the WPS.

What does this mean for employers?

The new two-pronged system gives employers more flexibility over their upfront business expenses by providing two options to discharge their employee insurance duties.

Who do these changes apply to?

On the face of it, the majority of the requirements arising from these recent legislative developments apply to employers registered with the MoHRE and do not have automatic binding effect on employers established within any of the commercial or financial free zone areas. However, certain free zone authorities may choose to adopt certain measures - for example, the Dubai Multi Commodities Centre Authority has decided to introduce WPS in February 2023 - and so it is necessary for UAE employers to be aware that there are nuances to the jurisdictional application of these changes and to consider seeking advice to determine whether or not they apply to their organisation.

What else is on the horizon?

The last 12 months have seen an intense period of activity for new initiatives and change in HR and employment law matters in the UAE. The indications are that there is plenty of scope for that pace to continue not least considering the announcement by the UAE Government in November 2022 of a new long-term national strategy program ‘We The UAE 2031’, which is aimed at shaping the country’s direction over the next 10 years with a focus on social and economic investment and development. Undoubtedly, this will have implications for fine-tuning policy in areas such as immigration, investment, and employment.

On a related note…employee data protection

The executive regulations in relation to the new data protection law (Federal Law 45 of 2021 on the Protection of Personal Data) remain awaited following its coming into force on 2 January 2022. The law heralded a shift towards bringing the data protection framework in the UAE closer into line with other international standards, such as the European Union's General Data Protection Regulations ("GDPR"). The regulations are expected to provide guidance on how the new rules will impact the obligations on employers when handling their employees' personal data across the employment lifecycle, including in the context of recruitment, workplace monitoring, sensitive internal investigations, and responding to employee requests for copies of their personal data. In the meantime, there is enough in the law for employers to be gearing up for dealing with such requests and implementing systems to safeguard employee personal data, report security breaches, and securely transfer personal data across different geographical jurisdictions.

Get in touch

For help in preparing for, or implementing, the challenges outlined above or if you have any related questions, please contact Kiersten Lucas, Emily Aryeetey or your usual contact at Stephenson Harwood.