Employee Termination and Severance Payment

The UAE’s labor regulations, governed by Federal Decree-Law No. 33 of 2021, establish clear guidelines for both employers and employees. These laws are designed to foster fairness and transparency in workplace practices, covering various scenarios related to termination, including voluntary resignation, redundancy, and dismissal.

Contributing Advisor

Jacob Thomas

Senior Associate, Corporate Accounting Services

Legal framework governing employee termination

The legal framework governing employee termination in the UAE is centered around Federal Decree-Law No. 33 of 2021, which, along with its amendments and Cabinet Resolution No. 1 of 2022, provides clear and structured guidelines for managing employment relationships in the private sector. These regulations aim to balance the interests of both employers and employees by defining rights, responsibilities, and processes in termination scenarios.

Key elements of the law ensure that terminations are conducted transparently, adhering to procedural fairness. For example, an employer must have valid reasons for termination, such as underperformance or misconduct, and must follow due process to avoid disputes. The law also introduces measures to protect employees from arbitrary dismissal, reinforcing the UAE's commitment to creating a fair and equitable labor market.

Types of Employment Contracts

A significant feature of the UAE's labor law is the distinction between limited-term contracts and unlimited-term contracts, each carrying specific implications for termination processes.

• Limited contracts
  A limited-term contract is set for a fixed duration, often aligned with the completion of a project or a specified period. Termination of such contracts before their end date typically requires justifiable reasons. If either party terminates the contract without valid cause, the aggrieved party may claim compensation equivalent to the remaining period’s wages, subject to the terms of the agreement.
• Unlimited contracts
  Unlimited-term contracts, by contrast, offer greater flexibility but are bound by notice periods stipulated in the law or employment agreement. Termination under this contract type must also be supported by legitimate grounds, such as redundancy or breach of contractual obligations. Employees terminated under an unlimited contract are generally entitled to their end-of-service gratuity and other benefits, provided they comply with notice period requirements and the terms of their agreement.

The type of contract significantly influences the procedural requirements for termination. For limited contracts, early termination without valid cause may involve financial penalties, while unlimited contracts require adherence to minimum notice periods, typically ranging from 30 to 90 days. Employers are also expected to document the reasons for termination to safeguard against potential disputes or claims of wrongful dismissal.

Grounds for termination

The UAE Labour Law, as outlined in Federal Decree-Law No. 33 of 2021, establishes comprehensive regulations regarding employment termination. The law categorizes valid grounds for termination into performance-related issues, misconduct, and redundancy due to economic necessity.

• An employer may terminate an employee if they consistently fail to meet job expectations or fulfill the duties outlined in their employment contract. Before termination, the employer must typically provide documented warnings and opportunities for improvement.
• Misconduct, particularly gross misconduct, can lead to immediate termination under Article 44 of the UAE Labour Law. Gross misconduct includes falsifying documents, breaching workplace safety, disclosing company secrets, or engaging in behavior that jeopardizes the employer's operations. Such terminations require written justification and a documented investigation to uphold procedural fairness.
• Employers may terminate employment due to operational changes, such as the permanent closure of the business, economic challenges, or restructuring that eliminates certain roles. These terminations are legally valid as long as they are not discriminatory or arbitrary.

Arbitrary dismissal

While employers are entitled to terminate employees for legitimate reasons, the law prohibits arbitrary dismissal, ensuring protection for workers from unfair treatment.

Arbitrary dismissal occurs when an employee is terminated for reasons unrelated to their performance, conduct, or operational necessity. Examples include dismissal for filing a complaint with the Ministry of Human Resources and Emiratisation (MoHRE) or initiating legal action against an employer for valid grievances.

Article 47 of the UAE Labour Law empowers employees to seek recourse through MoHRE if they believe their termination was unlawful. If the dismissal is proven arbitrary, the court may order the employer to pay compensation of up to three months' salary, calculated based on the employee’s most recent wage.

In addition to compensation, employees are entitled to other financial benefits, including gratuity, payment for the notice period, and any outstanding dues. Employers are also obligated to provide a written explanation for the termination and ensure the employee receives all documentation necessary to seek alternative employment or residency.

Termination of UAE nationals

UAE nationals enjoy enhanced protections in line with the government’s Emiratisation policies, which aim to increase their participation in the private sector. Employers seeking to terminate UAE nationals are required to navigate additional steps to ensure compliance with laws and safeguard the rights of national workers.

• Before terminating a UAE national, an employer must notify and seek approval from the Ministry of Human Resources and Emiratisation (MoHRE). The ministry reviews the case to verify that the termination is justified and not discriminatory.
• UAE nationals may receive priority consideration for new positions within the organization if they meet the qualifications for the role. Employers are often encouraged to explore alternatives, such as redeployment or training, to avoid termination.
• Upon termination, UAE nationals remain eligible for government-provided social security and unemployment benefits, ensuring financial stability as they transition to new opportunities.

While expatriate employees are subject to the general provisions of the UAE Labour Law, their employment is closely tied to their residency status, creating unique considerations during termination.

Termination of an expatriate's employment typically results in the cancellation of their work visa, requiring them to secure a new job or leave the country within a grace period. This dependency on employment for legal residency underscores the importance of fair notice periods and sufficient severance to enable a smooth transition.

Unlike UAE nationals, employers do not need special approval from MoHRE to terminate expatriates. However, the same legal standards for legitimate termination, notice periods, and severance payments apply, ensuring protection against arbitrary dismissal.

Key differences in protections

Notice period requirements

Under Article 43 of the UAE Labour Law, the notice period for terminating an employment contract ranges from 30 days (one month) to 90 days (three months). The length of the notice period typically depends on the terms specified in the employment contract. Employers and employees may mutually agree to waive or shorten the notice period, provided that neither party's rights are compromised.

Employees retain their full contractual rights during the notice period, including:

• Employees must continue to receive their full salary, as outlined in their employment contract, throughout the notice period.
• If an employee is terminated, they are entitled to one unpaid day per week to seek alternative employment.
• By mutual consent, the notice period can be adjusted without undermining the rights of either party.

If either party fails to honor the agreed-upon notice period, they are required to compensate the other party with an allowance equivalent to the full salary for the unobserved portion of the notice period.

Immediate termination without notice

The UAE Labour Law, under Article 44, permits immediate termination of an employment contract without notice under specific conditions. These provisions apply equally to employers and employees and aim to address severe breaches of contractual or legal obligations.

Conditions allowing for immediate termination

• An employer may terminate an employee without notice if the employee:

• Submits forged documents or assumes a false identity.
• Causes significant financial loss to the employer or intentionally damages property, provided the employer informs the Ministry of Human Resources and Emiratisation (MoHRE) within seven working days.
• Violates workplace safety instructions, provided the rules are clearly communicated.
• Repeatedly fails to fulfill basic contractual duties despite two prior warnings.
• Divulges confidential company information, resulting in financial loss or personal gain.
• Is intoxicated, uses illegal substances, or behaves in a manner violating public morals during work.
• Engages in physical or verbal assault at the workplace.
• Is absent without valid justification for more than 20 non-consecutive days or 7 consecutive days in one year.
• Uses their position for personal gain or works for another employer without proper authorization.

• An employee can leave without notice if the employer:

• Fails to meet contractual or legal obligations despite 14 days’ notice to MoHRE.
• Assaults or harasses the employee, provided the incident is reported within five working days to relevant authorities and MoHRE.
• Assigns tasks fundamentally different from those agreed upon in the contract without the employee's written consent.
• Neglects workplace conditions that pose serious safety risks.

For immediate termination to be lawful, employers must conduct a formal written investigation and allow the employee an opportunity to present their case. A written and justified termination notice must be delivered to the employee, outlining the reasons for dismissal.

Similarly, employees must notify MoHRE of any breaches by their employer and ensure that their resignation follows the outlined procedural requirements.

Employee rights upon termination

Unlawful termination

Employees in the UAE have the right to contest dismissals that they believe violate labor laws or their employment contracts. Unlawful termination includes dismissal due to discriminatory reasons, retaliation for filing complaints, or violations of due process.

The Ministry of Human Resources and Emiratization (MOHRE) is the designated authority for addressing employment disputes. Employees can file a complaint with MOHRE, which will mediate between the parties. If a resolution cannot be reached, the case may be referred to labor courts for adjudication.

• Employees must submit a formal grievance with supporting documentation, such as termination letters or evidence of workplace violations.
• MOHRE facilitates negotiations to settle disputes amicably.
• If mediation fails, employees can pursue legal action, where courts may award compensation for wrongful termination.

Employees dismissed unlawfully may be entitled to compensation of up to three months' salary, depending on the severity of the breach and the impact on the employee’s livelihood. This includes unpaid wages, notice period compensation, and other damages recognized by UAE labor courts.

Calculation of Gratuity/End-of-Service benefits

End-of-service gratuity is a cornerstone of UAE labor protections, ensuring financial security for employees upon termination. According to Article 51 of the UAE Labour Law, gratuity is calculated as follows:

• 21 days’ basic wages for each of the first five years of service.
• 30 days’ basic wages for each year beyond five years.

To qualify for gratuity, employees must:

• Have completed at least one year of continuous service.
• Not be dismissed for gross misconduct.

The gratuity amount is calculated using the employee's last drawn basic salary (excluding allowances and bonuses). For example:

• Calculate annual gratuity:
• First 5 years: (21 days x basic daily wage) x years of service
• Beyond 5 years: (30 days x basic daily wage) x additional years of service
• Ensure it does not exceed the equivalent of two years’ total salary.

In addition to gratuity, employees are entitled to several other financial benefits upon termination. Employers must settle any pending wages and payments for accrued overtime. Failure to do so can result in legal penalties. Employees are entitled to compensation for unused annual leave calculated based on their basic salary.

For expatriate employees, termination may include:

• Repatriation Costs: Employers must bear the cost of returning the employee to their home country unless the employee is transitioning to another employer.
• Housing Allowance: Any contractual benefits tied to housing or relocation must be honored until the end of the notice period.

Termination procedures

The UAE Labor Law mandates that terminations be documented with a written notice or termination letter. If dismissal is without notice, it must follow a thorough written investigation, as stipulated under Article 44 of the Labor Law, with justified reasons clearly outlined. For terminations with notice, the letter should specify the notice period and reason for termination, in compliance with Article 43.

Maintaining accurate records of employee performance is essential, especially if performance issues lead to termination. Employers should:

• Document regular performance reviews.
• Issue and record formal warnings, particularly in cases of repeated misconduct or underperformance.
• Ensure employees acknowledge warnings in writing.

These records can serve as critical evidence in case of disputes or complaints.

Employees must sign a final settlement form, confirming they have received all legal entitlements, such as unpaid wages, gratuity, and other benefits. This step is essential for visa and labor card cancellations.