Cost Cutting in the UAE – Legal Risk of Arbitrary Dismissal

15 November 2018

In a competitive business environment, many companies try to cut costs by reducing their head count. However, it is important that employers follow the statutory framework applicable in the UAE when terminating employment relationships to mitigate the risk of claims for arbitrary dismissal.

In the UAE, employment relationships are governed by the UAE Federal Law No.8 of 1980 (“UAE Labour Law”), which provides guidelines and procedures for termination of employees. Even if an employee’s conduct calls for action, a non-compliant procedure could be found to be unlawful according to the Labour Law and action could be taken against the employer. Whether such action will be successful will ultimately depend on the reasons of termination and the procedures undertaken by the employer.

In accordance with article 117 UAE Labour Law, an employer may terminate an employee working under an unlimited term contract at any time on written notice, provided that the employer:

  1. Gives the employee the correct written notice of termination in accordance with employment contract; and
  2. Termination of the employment is made for ‘valid’ reason

Unfortunately, the term ‘valid reason’ is not clearly defined in the UAE Labour Law. In accordance with article 122, an employee’s termination will be deemed to have been arbitrary if the reason for the termination was “not relevant/related to the work”.

In our experience, the courts tend to accept a reason for termination to be valid and hence decline to award compensation for arbitrary dismissal in case the employee violated one of the misconduct reasons specified in article 120 of Labour Law, or is a poor performer. In both cases the misconduct and the poor performance should be supported with adequate documentation/evidence.

The exhaustive list of misconduct by an employee is provided in Article 120 and covers the following reasons:

  • The employee assumes a false identity or nationality or submits forged certificates or documents;
  • Is engaged on probation and is dismissed during or at the end of the probationary period;
  • Commits a fault resulting in substantial material loss to the employer, provided that the latter notifies the labour department of the incident within 48 hours of his becoming aware of its occurrence;
  • Disobeys instructions on the safety of work or workplace, provided that such instructions are in writing and posted at a conspicuous place and are communicated verbally to the worker, in case he is illiterate;
  • Defaults on his basic duties under the contract and fails to redress such default despite a written interrogation and a warning that he will be dismissed if such default is repeated;
  • Is finally convicted by a competent court of a crime against honour, honesty or public morals
  • Reveals any confidential information of his employer;
  • Is found in a state of drunkenness or under the influence of a narcotic drug during working hours;
  • Assaults the employer, the manager in charge or any of his workmates during working hours; or
  • Absents himself from work without a valid reason for more than 20 non- successive days in one single year, or for more than seven successive days.

In case the reason for termination is considered arbitrary, the employee can be awarded compensation of up to 3 months’ remuneration which would be calculated based on the last full pay received by the employee prior to dismissal. The actual amount to be awarded will ultimately be determined per the Court at its sole discretion.

In order to mitigate the risk of compensation claims for arbitral dismissal, we would recommend that the employer follows a reasonable procedure before terminating an employee and any action taken should be supported by substantial evidence and documented appropriately. Communication should not be overlooked, and employers must take care to deliver proper notices where required. It further can be beneficial for the Employer to put a disciplinary policy into place outlining all the reasons and requirements mentioned in the Labour Law.