The UAE – and the Emirate of Dubai in particular – have witnessed in the past decades a remarkable and seamless growth on multiple levels, including foreign investments and employment opportunities, especially for the so-called skilled professionals (one thing, usually, leads to the other).
Such an impressive trend has fostered a dynamic and competitive labour market, calling for talents from across the globe: the UAE is home to one of the most ethnically diverse populations in the world, and it is estimated that individuals from over 200 different nationalities reside in the UAE.
Typically, rising demand for qualified professionals results in a corresponding expansion of the domestic job market, increasing internal competition, and ultimately internal transition of employees between employers within the country.
In such an evolving landscape, we are frequently approached by clients – whether employers or employees – seeking guidance on how to interpret and manage the so-called post-termination restrictive covenants.
These requests often arise not only when an employment relationship comes to an end – whether due to resignation or dismissal – but also at its outset, during the negotiation among the involved parties.
Moreover, employees reach out to us when they are on the verge of embarking on a new professional opportunity and wish to understand the implications of any restrictions agreed upon with their previous employer.
What kind of restrictions are we referring to? Are these restrictions enforceable under UAE labour law system? If so, at which conditions and limits?
The following analysis aims, on the one hand, to provide a brief overview of the local legal framework in this regard, and on the other hand to offer a practical guidance both to employers seeking to safeguard their business and interests through tailored contractual provisions, and to employees who are about to begin – or closing – an employment relationship.
The post-termination restrictive covenants: overview
As said, our analysis is referring to the – commonly referred as – post-termination restrictive covenants[1], with a specific focus on non-compete regime in force in the UAE.
Post-termination restrictive covenants are contractual clauses that restrict a former employee’s activities after the end of the employment relationship.
Common types of covenants include:
- non-compete clauses, which prohibit a former employee from working for a competitor of the employer or starting a competing business for a specified period, and within a defined geographic area;
- non-solicitation clauses, which prevent the former employee from approaching or enticing the employer’s clients, customers, or staff after leaving the company; and
- non-disclosure clauses, which typically restrict the former employee from sharing or using the employer’s confidential information or trade secrets after the termination of employment[2].
All the above referred covenants are aimed at protecting the employer’s legitimate business interests, such as confidential information, client relationships, and competitive advantage.
The non-compete regime under employment laws and regulations in the UAE
The non-compete regime in the United Arab Emirates is regulated by the Federal Decree Law No. 33/2021, on labour relations in the UAE (the “Labour Law”), and by the relative Implementing Regulation (issued by the Cabinet Resolution No. 1/2022 – the “IR”)[3].
The applicable regime is the result of a balance among opposite, yet both legitimate, reasons and interests, i.e.:
- on the one hand, the protection of the employer’s business and the non-disclosure of industrial secrets, owned by the same; and
- on the other hand, the employee’s faculty to opt for the most suitable place of work and opportunity.
Under Article 10 of the Labour Law and Article 12 of the IR, non-compete covenants are legitimate in so far, they are detailed:
- in terms of time (as it must not be in force for a period longer than two (2) years from the effective termination date); and
- in terms of place and kind of work.
- As to the place of work, although not specifically provided by the Labour Law, the majority jurisprudence developed under the previous labour law (i.e., Federal Law No. 8 of 1981, repealed only in February 2022) tent to consider valid a non-compete clause in force within the territory of the UAE, whereas an employer may not challenge the violation of non-compete if the employee began to work for a competitor outside the “local jurisdiction”[4].
- As to the kind of work, it is typically requested an accurate and precise description either of (i) the type of conduct which may be seen as non-compete violation, and (ii) the business of reference (a too broad, and ultimately vague, description may be successfully challenged by an employee before local courts in case of judicial dispute).
It is worth considering two crucial aspects when it comes to non-compete clauses, namely:
- pursuant to Article 12.3 of the IR, any restriction on non-compete shall not be applicable whether the “reason for terminating the contract is attributed to the employer or the breach of his legal or contractual obligations”. This may lead to consider non-applicable a non-compete covenant, not only in case of occurred dismissal of the employee, but also whether the latter is brought to leave his/her job (by reason of unfulfillment from employer’s side of any of its obligations); and
- an eventual challenge and lawsuit (from employer’s side) having as object the alleged violation of non-compete covenants from the employee may be heard by the competent court not later than one (1) year from the date of the employer’s discovery of the violation, and the burden of proof (under the terms set below) is on the employer.
Legal protection in case of breach of a non-compete clause
Touched the above, it is worth clarifying which kind of protection may be seek by an employer who claims a breach of a non-compete clause from the employee[5].
This protection may consist of “only” compensation for damages. In such cases, thus, there is no specific performance as an available remedy: a local judge, in fact, cannot order the restoration of the ex-ante situation, i.e. as it was prior to the alleged breach. In other terms, the employer rather than preventing the employee from working for the competing employer, may claim and obtain from the same the sole compensation of the damages suffered.
To this extent, the employer for a successful challenge on the violation of a non-compete covenant, shall substantiate and proof before the competent court:
- the violation of the non-compete clause (see the above-mentioned criterion);
- the suffered damage; and
- the causal link among the violation under paragraph a) and the damage under paragraph b)[6].
A few pieces of advice
The above scenario may lead, from a business standpoint – to the impression that the applicable legal framework ultimately offers quite limited protection for the employer’s rights, whereas, from the employee’s standpoint, restrictive covenants may be seen as…too restrictive.
In this context, certain contractual remedies may serve as useful tools to safeguard the positions of both parties.
For instance, to render imposition of restrictive covenants more acceptable, it may be advisable to offer the employee with an economic incentive (a sort of additional remuneration). Although Emirati employment legal framework does not require such an economic remedy (unlike other jurisdictions, mainly European), granting the employee with a supplementary financial benefit solely by agreeing to a restrictive covenant may encourage the employee to accept this limitation more willingly.
Another remedy, and common practice for the employers, is setting in the employment agreements, along with the said restrictive covenants – a penalty clause, whereby the parties agree that a fixed sum shall be paid by the employee to the former employer in the event (and automatically upon) proof of breach of the non-compete clause, with no further burden – i.e., no need to prove actual damage suffered.
Penalty clause is a legal concept recognised under UAE civil law, which allows for the inclusion of the same in contracts, provided that the stipulated amount shall not be excessively burdensome for the obliged party.
Pursuant to Article 390 of Federal Law No. 5 of 1985 (UAE Civil Code), the parties may agree on a fixed sum as compensation in the event of breach; however, it is prohibited to stipulate an “exorbitant” amount. In such cases, the courts are empowered to apply the principle of reductio ad aequitatem, thereby reducing the agreed sum to a just and equitable amount.
The automatic enforceability of a penalty clause applies strictly within the limits of the pre-agreed amount. Should the employer seek compensation exceeding the fixed penalty, he/she bears the burden of proving both the breach and the actual loss suffered beyond the agreed amount.
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We trust the above may be of help. We understand how challenging it may be navigating these legal complexities, whether as an employer rightly seeking protection of your industrial secrets and business, or an employee looking to safeguard your rights and opportunities.
Our team is here to support You with a tailored guidance and – why not – practical solutions. Do not hesitate to reach us out – your peace of mind and success is our priority.
[1] For the purposes of this discussion, we will not address duties (namely, the exclusivity or loyalty duty) which statutorily apply in the course of the employment.
[2] In this regard, it is worth recalling that even during the course of the employment relationship, employees are bound by a duty of confidentiality. Under Article 16.4 of the Labour Law in fact the employee is requested to “maintain confidentiality of the information and data to which he has access by virtue of his work, not disclose trade secrets, and return anything under his custody to the Employer at the end of his service”.
[3] The local labour laws and regulations seem to only regulate the non-compete and confidentiality covenants as post-termination restrictions. Nonetheless, it is a common (and widely accepted) practice by local operators setting in specific contractual clauses a discipline among the parties on further restrictive covenants, such as the so-called non-solicitation and non-enticement clauses (prohibition on approaching the former employer’s clients, or engaging in so-called poaching – i.e., acting to systematically transfer employees from the former employer’s establishment to competing ones).
[4] Besides, in several jurisdictions- UAE included – labour law provisions are considered as mandatory rules of law, with an exclusive jurisdiction being vested in local courts. Thus, even assuming that an employee was to breach a non-compete clause by taking up employment with an employer/competitor in a third country outside the UAE, even in the remote case a local court provides for a favourable ruling to the employer, the enforcement of the same in the jurisdiction where the employee has started his/her new employment, would most likely face significant challenges.
[5] It goes without saying, being a non-compete clause set with the aim of protecting the employer’s interests, for most of the cases, a law dispute may only arise by input of the employer, who claims for the breach of such clauses and obligations from the employee’s side.
[6] Therefore, the general principle set forth under the Emirati codified legal system applies. Under Article 113 of Federal Law No. 5 of 1981 (UAE Civil Code), the burden of proof lies with the party who asserts a fact in court.