30 Nov 2009

STAFF REDUNDANCIES - THE PAINFUL PROCESS OF DOWNSIZING

Authored by: Alex McGeoch

STAFF REDUNDANCIES - THE PAINFUL PROCESS OF DOWNSIZING

Against the background of the current economic downturn, Alex McGeoch looks at staff re-structuring and redundancy from the perspective of UAE employment law.

In brief:

  • In the current economic climate, many employers are likely to be faced with the challenge of reducing operating costs and inevitably redundancies will be on the agenda.
  • The UAE Labour Law governs redundancies in the UAE. In the DIFC, separate provisions exist.
  • Employers should be careful when making employees redundant to avoid having to pay damages to employees “arbitrarily”.

In good times and bad, the key objective of business managers is to ensure that their company continues to turn in a profit and in difficult market conditions, they are likely to be faced with hard choices. To ensure that the company remains financially viable, it is probable that operating costs will have to be reduced. But where should these reductions be made? There may be various options, however, since the company’s wage bill is likely to be among its largest operational costs, the reduction of payroll expenses is almost certainly going to be on the agenda.

What does the UAE employment law have to say about the process of “letting go” staff members who are considered by management to be surplus to the company’s requirements? The answer to this question is found in the provisions of Part VII (Chapter I) of the UAE Labour Law (Federal Law No.10 of 1980).

Firstly, it is important to note that the Labour Law governs two different types of employment contract:

  • fixed term contracts
  • contracts of unlimited duration.

When staff redundancies have to be made, this distinction is important.

Fixed-term contracts 
In the case of an employee engaged under a fixed term contract, the company is committed to retaining that employee on the payroll until the period of the contract has come to an end. As a result, there can be no “early termination” for redundancy or on any other grounds, other than in circumstances of serious misconduct, as specified in Article 120 of the Labour Law.

The result is that any employee with a fixed term contract, who is terminated early, can claim statutory compensation from his employer and, in the absence of serious misconduct, the employer has no defence. Statutory compensation, in this case, is a maximum of three months remuneration. Under the provisions of Article 115 the court is required to take account of the loss sustained by the employee when making its order and, in practice, the courts tend to award the maximum amount permitted.

Contracts of unlimited duration 
Where an employee is working under a contract of unlimited duration, the position is different. The company can exercise its contractual right to terminate the employee on notice. However, the employer’s freedom to terminate is somewhat restricted under Articles 113 and 117 of the Labour Law which stipulate that there must be a “valid reason” for the termination and it must not be “arbitrary”. So termination must not be for a reason unconnected with the employee’s performance. The courts have consistently held that “redundancy” is a valid reason for terminating an unlimited term contract, but only where the employer can demonstrate to the court by that the employee was genuinely “redundant”. In order to do so, the employer must be able evidence a significant reduction in company business, particularly in relation to the activities in which the employee was engaged.

Redundancy, therefore, must not be used as a pretext for getting rid of an employee so that, within a short space of time, replacements can be hired at a lower rate of remuneration. Termination on grounds of redundancy must be bona fide and hiring new staff can only commence when a pick-up in business justifies this. If not, terminated staff will be able to allege that they were dismissed “arbitrarily” without “valid reason” and are therefore entitled to statutory compensation on grounds of wrongful termination.

It may be noted that, under Article 123, the court is expressly required, when assessing compensation for wrongful termination of an open-ended contract, to take account of the following factors:

  • the nature of the employee’s duties
  • the employee’s length of service
  • the amount of loss the employee has sustained as a result of the termination.

In practice, the court will award the full three months remuneration unless there is compelling evidence of consistently poor performance over a significant period or misconduct outside the categories listed in Article 120.

It should not be forgotten that in the Dubai International Financial Centre (DIFC) a separate legal regime applies, and employment relationships are governed by the DIFC Employment Law of 2005 and not the UAE Labour Law. 
 
With regard to unlimited duration contracts, there is no statutory restriction (corresponding to the provisions in Article 113 of the Labour Law) that prevent an employer from terminating the contract in accordance with the contractual notice period.  In other words, the employer is not required to justify the termination with a “valid reason”.  In the case of fixed term contracts, an employer within the DIFC has no right to terminate such a contract early any more than he could lawfully do so outside the DIFC area. Even if, because of a downturn in business, there is no useful work for the employee to perform, the employer must “live” with the situation until the expiry of the contract. Termination before the contract end date would be a breach of contract by the employer entitling the employee to damages. The only exception to the rule that fixed term employment contracts in the DIFC cannot be terminated early, arises under Article 60(4) of the Employment Law, which provides that, where an employee has behaved in such a way that no reasonable employer would be expected to tolerate, the employee can be dismissed forthwith.

Looking to the future it may be noted that the DIFC Employment Law envisages the formulation of rules in relation to unfair dismissal and the laying down of procedures to be followed by employers when terminating staff.  However, no such rules have been issued, and no such procedures have been implemented, as at the present date.

Conclusion
In the UAE, generally, redundancy may be a valid reason for terminating staff, provided that the employer (if challenged) is able to persuade the court that there is no longer any useful work for the employee to do within the company.  In the DIFC, the employer has the right to terminate a staff member on notice, in accordance with the terms of his or her contract, and currently need not disclose any reason for the decision.

You may also be interested in reading our guide about the factors to consider when deciding to retain or dismiss employees and the regulations governing the employment of UAE nationals.