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Insights UAE: Employee non-compete clauses

UAE: Employee non-compete clauses

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published on 22 November 2023 | reading time approx. 7 minutes

 

In the United Arab Emirates, the post-contractual non-compete clauses as part of employment contracts has become common practice. However, the effectiveness of such clauses has always been debatable, as the enforcement of such clauses often go along with by high requirements for the burden of proof, whereby the employer is at the same time bound to statutory requirements as per the applicable regulations. In particular, when agreeing on a post-contractual non-compete clause, the focus is already on the interests of the employer by virtue of the nature of the thing. Therefore, the legislator and case law intervene if any clauses go beyond what is necessary to protect the legitimate interests of the employer. For this reason, it must be ensured from the beginning that the post-contractual non-compete clause within the employment contract is also in line with the legal framework.

   

 

  

Definition and purpose of a post-contractual non-compete clause

A non-competition clause is generally seeking for restricting an employee from competing with his employer. This is intended to protect the company's interests and avoid economic damage to the employer. In this respect, post-contractual non-compete clauses are suitable for prohibiting employees from entering into a competitive activity upon termination, whether by running their own business or a new employment relationship with a competitor after the cancellation of the employment relationship. Such clauses are also regularly used to sanction further actions such as poaching (former) employees.


The legal basis for the non-competition clause is Art. 10 of the Labour Law (Federal Decree-Law No. (33) of 2021), which is specified in Art. 12 of the Implementing Regulation (Cabinet Resolution No. (1) of 2022), as well as in Art. 909 et seq. of the Civil Code (Federal Law No. (5) of 1985). These provisions reflect the legislator's obligation to ensure that the interests of companies are protected against unfair competition.


Legal framework

  1. What is striking, first of all, is that the legislator – unlike what is known from German legislation, for example – waives the employer's obligation to pay compensation to the employee for the duration of the non-competition restriction, but at the same time, or presumably for this reason in particular, sets specific requirements for the validity of a post-contractual non-compete clause, so that it must not have an excessive effect and be equivalent to a ban on employment.

    Art. 10 of the Labour Law in conjunction with Art. Art. 12 of the Implementing Regulation and Art. 909 et seq. of the Civil Code define the legal requirements for a post-contractual non-compete clause.

    In simple terms, a post-contractual non-compete clause can only be included within an employment contract if the employee has access to confidential data or is aware of the employer's customers and contractual partners by the work entrusted to him. Therefore, a young professional whose significant customer contact is limited from the outset can legally not be subject to the same post-contractual non-compete clause as an employee with a management position, continuous customer contact and significant decision-making authority. A general inclusion of a post-contractual non-compete clause regardless of the employee's respective position is therefore excluded from the outset.

    The limitation of the clause in terms of time, nature of the work and geographical scope is to be considered as an essential requirement for effectiveness, which experience has shown also entails a significant risk of invalidity as a result.

    The scope of the non-compete agreement must be expressly limited to the duration, geographical scope and nature of work. As part of a weighing of interests, the agreement of the post-contractual non-compete clause in this context must not result to an unlawful burden on the employee, so that the employee is de facto forced to maintain the employment relationship. A restricting competition may therefore only be made to the extent that it is necessary to protect the employer's legitimate business interests. Otherwise, the non-compete clause must be considered invalid and abusive.

    With regard to the limitation of the duration, the legislator has stipulated that a post-contractual non-compete clause does not constitute an unlawful burden if it does not exceed a period of two years.

    However, there is a lack of an express provision on the part of the legislator with regard to geographical scope and nature of work, meaning that a balancing exercise must be limited to what is necessary. If, for example, the conducted work extends to only one single emirate, a restriction to the entire United Arab Emirates may already be considered as inappropriate and void.

    As a matter of principle, it is therefore recommended to phrase the post-contractual non-compete clause as specifically as possible within the framework of the legal requirements in order to avoid a divergent interpretation by the parties or a court in any legal proceedings.
  2. From a legal perspective, a post-contractual non-compete clause must also be examined in detail if the employee enters into an employment relationship in the United Arab Emirates as part of a secondment, but at the same time has an employment relationship – which may have been suspended – within a foreign jurisdiction, for example with the foreign parent company. In this respect, it should be noted that the non-competition clause agreed within the local employment relationship regularly influences the foreign contractual relationship and can therefore give rise to obligations under the specific jurisdiction. In particular, the lack of an obligation to pay compensation in the UAE for the duration of the post-contractual non-compete clause, as compared to other jurisdictions, can in principle give rise to cross-border breaches of contract, so that the inclusion of a post-contractual non-compete clause in accordance with local requirements is often prevented. Therefore, a cross-border evaluation in the case of several contractual relationships, taking into account the foreign employment relationship and the applicable regulations is essential.

Applicability, waiver and enforcement of a post-contractual non-compete clause

  1. However, the actual efficacy of a post-contractual non-compete clause appears doubtful, as the enforcement of such an agreement regularly appears difficult as the employer’s remedies are limited.

    Nevertheless, before considering the enforcement of a non-compete clause, it should be noted that a written agreement does not automatically result to the execution of the post-contractual non-compete clause.

    IIn particular, the restriction does not apply if the termination of the employment relationship is due to reasons attributed to the employer or is based on the employer's breach of his legal or contractual obligations, as well as in the event of a termination by the employer in breach of the Labour Law. The same applies in the event of termination during the probation period.

    A further, but unwritten reason for the exclusion of applicability, has recently been accepted by case law if the employer intentionally agrees to a switch to a competing company of the respective employee despite a valid non-competition clause. In this case, it is assumed that the employer waives its right to enforce the non-competition clause and any resulting claims for compensation. 
  2. The parties to the employment relationship may also waive the non-competition restriction by a written agreement in accordance with Art. 12 No. 4 of the Implementing Regulation despite the existence of a post-contractual non-compete clause within the employment contract. In addition, Art. 12 No. 5 a) of the Implementing Regulation clarifies that, subject to the consent of the previous employer, the employee shall be exempted if a compensation of three months' salary is paid to the waiving employer either by the new employer or by the employee himself.
  3. However, the enforceability and prospects of success of a legal remedy in the event of a breach of a post-contractual non-compete clause have always been legally difficult. Experience has shown that the legal enforcement is usually a lengthy and costly process, particularly in circumstances where a breach of the post-contractual non-compete clause is imminent, i.e. between the signing of a new employment contract and the actual start of employment, a preventive injunction often appears to be the most effective remedy. However, except for the legislatures of certain free zones, the UAE jurisdiction lacks such a right and remedy. Therefore, an imminent or even foreseeable violation cannot be prevented by law, leaving only the possibility of asserting a claim for damages. In this context, however, the burden of proof is on the employer with regard to the damage suffered, which is also difficult to quantify and specify in individual cases.

    If, on the other hand, a non-compete clause stipulates that the employee is obliged to pay liquidated damages, i.e. a contractual penalty, the burden of proof that the pre-estimated amount in the clause has not actually been suffered by the employer lies with the employee. However, it should also be noted here that, pursuant to Art. 910 of the Civil Code, the amount of the contractual penalty may not be structured to the detriment of the employee in such a way that the employee is effectively forced to remain with the company within the existing employment relationship. Since Art. 12 No. 5a) of the Cabinet Resolution generally provides for the possibility of excluding the non-compete clause in the event of payment of up to three months' salary, the reference to this amount initially appears to be dogmatically conclusive.

    By including a contractual penalty within the employment contract, the pre-estimated amount of the claim in the event of a breach can be determined from the outset. The difficulty of proving and quantifying the individual damage can be circumvented, especially for the employer, since an impending breach cannot be prevented anyway due to the lack of a corresponding legal remedy. An interpretation and balancing of interests by the respective court, which will differ in each individual case and therefore not contribute to legal certainty, can therefore also be avoided by the contracting parties.

    The assessment of whether a non-compete clause or liquidated damages clause and its amount is effective and reasonable, as well as the question of whether the employee has acted in breach of contract, is at the discretion of the competent court. The courts of the United Arab Emirates examine non-compete clauses in employment contracts on a case-by-case basis and on the basis of the available evidence.

    Summary

In conclusion, standardized clauses regarding post-contractual non-compete restriction of employees in themselves entail a significant risk of ineffectiveness, as the legal requirements must be specific and restrictive with regard to the above-mentioned criteria. In case of doubt, a standardized non-competition clause – even if it is void –, results in a certain moment of deterrence for the employee to actually enter into an employment relationship with a competitor of the employer, but at the same time there is a lack of comprehensive protection of the company's business interests. Moreover, even a legally valid non-compete clause does not necessarily guarantee the legal protection of the employer's business interests, as it has been shown that such a clause can usually only be enforced in lengthy and costly proceedings, even if the prospects of success or the amount of compensation to be enforced are unlikely foreseeable. 

The insertion of a liquidated damages clause as part of a contractual penalty have therefore appeared as an efficient option. Although the mandatory requirements and limits of the non-compete restriction itself must also be ensured in this case, the issue of providing evidence of the amount of the actual damage suffered, which regularly presents the claimant with difficulties, can be circumvented.

Otherwise, the only remaining option is to refer to the general claims for damages as per the civil code. Although those also apply to employment relationships in principle, they do not originate from Labour Law, but from general civil law, so that enforcement is likely to involve much higher hurdles.

If an employment contract does not contain any non-competition clause, which is particularly the case if no supplementary agreements on the standard employment contract issued as part of the visa application have been issued, it can also be inserted within a settlement agreement or an undertaking letter within the (mutual) cancellation of the employment relationship. Although Art. 10 No. 1 of the Labour Law refers to the stipulation within the employment contract, experience has shown that case law also recognizes the above means, although the consent of the employee is legally required. Therefore, if a post-contractual non-compete clause has not been inserted from the outset, the employee is in no way obliged to agree to such a clause and is not already bound to it by law. This means that, unless a post-contractual non-compete clause was already agreed within the employment relationship from the beginning, employees generally are no longer agree to such a clause, particularly when the employment relationship is terminated.

In this respect, it is advisable for employers to choose an appropriate and, in particular, enforceable instrument to protect the company's business interests from a legal and factual perspective when hiring and establishing the employment relationship.

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