30 Oct 2014

The Prestige

Authored by: Jamie Liddington

The Prestige

DIFC Law No 3 of 2012 ("DIFC Employment Amendment Law") came into force on 23 December 2012. Jamie Liddington, Senior Associate in our Employment team, explores the impact of the penalty payment introduced under Article 18(2) and the likely interpretation and application of Article 18(2) when the DIFC Court of First Instance has its first opportunity to consider the new provision (possibly in the first half of 2015).
 
In brief:

  • This article considers the effect of Article 18 of DIFC Employment Amendment Law for which there is no equivalent in the wider UAE (or other free zones);
  • Article 18 is very clear in its construction and leaves little room for interpretation;
  • At the date of this article, Article 18 has only been considered and applied by the DIFC Small Claims Tribunal;
  • Clarification is expected early next year when the DIFC Court of First Instance has its first opportunity to consider and rule on Article 18;
  • Article 18 may have unintended consequences which may result in further amendments to DIFC Employment Law.
  • In the 2006 movie "The Prestige", Michael Caine's character - “Cutter" - explains that every great magic trick consists of three parts or acts. The first part is called "The Pledge" - the magician shows you something ordinary. The second act is called "The Turn". This is where the magician takes the ordinary something and makes it do something extraordinary. The third act, the hardest part, is called "The Prestige". This is the unpredictable part which leaves the audience in a state of shock and believing that they have just witnessed the impossible.

 It is probably an exaggeration to describe a piece of employment legislation as being magical but Article 18 of DIFC Employment Amendment Law certainly bears some similarity with the three constituent parts of a great magic trick.
 
The Pledge
 
Article 18(1) of DIFC Employment Amendment Law states that:
 
An employer shall pay all wages and any other amount owing to an employee within fourteen (14) days after the employer or employee terminates the employment.
 
At first glance, this appears to be a fairly ordinary provision. Upon termination of an employee's employment, the employer should take steps, without unreasonable delay, to satisfy its obligations by paying the employee in respect of all accrued end of service entitlements.  In particular, the employee may be entitled to receive salary up to the date of termination and/or payment in lieu of vacation leave or notice pay, end of service gratuity, commissions/bonus or expenses. It is only in exceptional cases where it is not feasible for such payments to be settled within 14 days.
 
The Turn
 
Article 18(2) of DIFC Employment Amendment Law goes on to state that:
 
If an employer fails to pay wages or any other amount owing to an employee in accordance with Article 18(1), the employer shall pay the employee a penalty equivalent to the last daily wage for each day the employer is in arrears.
 
Did you see it? To the untrained eye, it was barely noticeable but something ordinary just became extraordinary.
 
The first part of Article 18(2) is noteworthy for the all encompassing nature of the wording "any other amount owing". There is no "de minimis" qualification.  In theory, even in the event of an honest or inadvertent mistake by an employer which results in an end of service entitlement not being paid in full by the end of the specified 14 day period (e.g. a miscalculation resulting in a shortfall of one dirham) the qualification is satisfied on the basis that an amount remained owing. 
 
But the truly extraordinary element of Article 18(2) is the unlimited scope of the penalty payment that could be awarded in the event that the employee can show that wages or any other amount remained owing after 14 days.
 
Article 18(2) uses the terms "daily wage" and "day" in relation to the penalty payable where Article 18(1) is satisfied. Both terms are defined in Schedule 1 of DIFC Employment Amendment Law. Daily wage is defined as meaning the compensation received by an employee as “wages” for services performed during a working day. "Wages" is itself a defined term and includes all payments made to an employee in return for work done or services provided under a written the contract of employment. The daily wage shall be calculated taking into consideration the total amount of working days in a year. Therefore, in calculating the daily wage, the Courts should consider the employee's total remuneration (basic salary and bonuses/commission) and then, in most cases, divide that sum by 261 (being the number of working days in the calendar year for a full time employee who works five days per week). On a per diem basis, the penalty amount would therefore exceed the basic salary that would have been payable had the employee's employment been continuing.  Once the daily wage amount has been ascertained, Article 18(2) then states that the same sum is payable for each day ("day" is defined as a calendar day) that the employer is in arrears.
 
The majority of employment cases issued in the DIFC Courts are heard by the DIFC Small Claims Tribunal (“SCT”). One of the defining features of the SCT is the speed with which most claims are processed. Since 2007, the SCT has maintained a record of resolving 90% of all claims issued in the SCT within three weeks. In the context of Article 18, this means that where the claim is heard by the SCT, there is often going to be a much shorter period over which any penalty payment is payable by an employer who has not complied with Article 18(1).
 
But what will happen when the DIFC Court of First Instance (“CFI”) is asked to consider an Article 18 penalty payment?  CFI claims often take more than a year from commencement up to the final hearing. Furthermore, there can be considerable delay between the termination date and the date upon which the claimant employee commences his claim  as the limitation period applicable to employment claims in the DIFC Courts is 6 years from the date of the cause of action arising. As a consequence of these factors, a penalty payment could easily exceed an amount equivalent to a year’s salary plus bonuses.
 
For example, consider the following scenario: an employer terminates an employee’s employment “for cause” under Article 59A of DIFC Employment Amendment Law. As a result, the employee forfeits the right to receive notice (or payment in lieu thereof) as well as end of service gratuity. If the employer’s decision is successfully challenged by the employee (thereby resulting in a finding that the dismissal should have been on notice and that the end of service gratuity was payable) will the CFI then, as an automatic consequence of that finding, award a penalty under Article 18(2) for each day that has passed between the fourteenth day following the effective date of termination and the trial date? Similarly, what happens where the parties have a dispute as to the amount or calculation of some other entitlement?  Even more severe, what happens if the employer innocently miscalculates a payment (but acknowledges the entitlement from the outset)?  Would an underpayment of any amount regardless of how small the underpayment was then qualify the employee to receive a penalty award under Article 18(2)?
 
As legislation goes, Article 18 is very clear in its construction and leaves little room for the application of rules of statutory interpretation to be applied. Employers faced with the prospect of having to pay a penalty payment will no doubt go to great lengths to convince the Courts that Article 18 should not be applied but the clarity of Article 18 doesn’t appear to leave much by way of a chink in the armour.
 
The Prestige
 
In the introductory paragraph of this article, it was explained that in the context of magic tricks, “The Prestige” is the unpredictable part which leaves the audience in a state of shock and believing that they have just witnessed the impossible. Given the dearth of judicial interpretation it is certainly fair to describe Article 18 as unpredictable at this stage. Whether we are left in a state of shock remains to be seen.
 
The SCT has considered Article 18 in two published cases (both Judgments dated 5 December 2013).  In one of the two Judgments, a penalty payment of AED 14,950 was awarded though it appears that the SCT miscalculated the penalty payment by awarding a penalty for each working day following the expiry of the 14 day period prescribed in Article 18(1).  Both the term “working day” and “day” are defined in DIFC Employment Amendment Law and Article 18(2) uses the latter. Therefore, the penalty payment ought to be payable for each calendar day that passes after the last date for payment under Article 18(1).
 
Curiously, in the second SCT judgment of the same date, the SCT awarded the Claimant AED 20,569 in relation to unpaid end of service entitlements but then went on to state that:
 
“the evidence submitted by the Claimant is neither sufficient nor reasonable [our emphasis] to establish that the Defendant is contractually or legally liable to pay any extra amount beyond what has been decided in paragraph 8 of this Order.”
 
In this case a total of 42 days had passed between the date on which the 14 day period in Article 18(1) had expired and the date of the Hearing. By refusing to award a penalty payment, it appears that the SCT has applied a discretion to the application of Article 18(2) that was not included by the legislature when drafting DIFC Employment Amendment Law.
 
However, it appears that the CFI may have its first opportunity to consider Article 18 in the early part of 2015 in the case of Mr Pierre-Eric Daniel Bernard Lys v Elseco Limited.  In that case, Mr Lys is claiming that his employment was unjustly terminated with immediate effect and without payment of a number of entitlements including notice pay, bonus, expenses and a number of allowances. The trial of the case is expected to take place on or after 19 March 2015. If the case proceeds to trial and Mr Lys succeeds in his claim, the period for which a penalty payment could be payable in accordance with Article 18 could be in excess of 400 days. Given the clarity of the drafting of Article 18, it would be surprising if the CFI decides that no penalty payment should be awarded.
 
In the CFI decision in Hana Al Herz v The Dubai International Financial Centre Authority [2012], Deputy Chief Justice Sir Anthony Colman dismissed the Claimant’s creative arguments that DIFC Employment Law should be interpreted as including protection from unfair dismissal by application of implied duties arising under the common law.  In his Judgment, the Deputy Chief Justice expressed reluctance to introduce principles of law by judicial innovation rather than by the conventional method – legislation.
 
Accordingly, there exists a real possibility that the CFI may examine the issues raised in this article and (reluctantly?) apply Article 18 as set out in DIFC Employment Amendment Law. The CFI may, at the same time, note the need for the DIFC Authority to consider commencing further consultation in relation to Article 18 and the possibility of further amendment to DIFC Employment Law.
 
In the event that further amendments are considered, it is likely that the term “any other amounts owed” requires some clarification. It would seem absurd and totally disproportionate if an employer who inadvertently miscalculated an employee’s payment in lieu of notice by a tiny amount could then be made to pay a penalty in excess of a year’s salary plus bonus. 
 
The second amendment which is likely to be considered in future is the introduction of a shorter limitation period for employment claims (as exists in comparable jurisdictions such as England & Wales where claims must be brought within three months of the termination date) and/or the imposition of a cap on the amounts which can be awarded under Article 18. By introducing a shorter limitation period, both the employee and employer will be incentivised to progress the dispute whereas the current framework of laws, rules and practices means that the employee who is convinced of his right to receive a penalty award may be inclined (in some cases) to sit back and allow the clock to keep running! Likewise, a cap on the maximum award would provide a benchmark from which parties to any claim which includes an Article 18 penalty argument could negotiate on the basis of known parameters.
 
The Brazilian football player Pele once said that a penalty is a cowardly way to score but in the context of DIFC Employment Law, it may prove to be a lucrative score.

 

This article, including any advice, commentary or recommendation herein, is provided on a complimentary basis without consideration of any specific objectives, circumstances or facts. It reflects the views of the writer which may, in some cases, differ from those of the firm, especially in the develop jurisdiction of the UAE