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Compensation for Arbitrary Dismissal Between the New Labor Law and Recent Precedents

“Pacta sunt servanda” or “agreements must be kept”, is a fundamental general principle of law in both common and civil jurisdictions, which simply indicates that agreements should be binding for its signatory parties and executed in good faith. As a consequence, when a party fails to comply with its contractual obligations or acts in bad faith towards the other party, the latter should be entitled to compensation. 

In this context, the above principle was adopted under Article 246 of Federal Law No. 5/1985 on the Civil Transaction Law which states that “the contract shall be implemented, according to the provisions contained therein and, in a manner, consistent with the requirements of good faith”. In addition, Article 267 of said Federal Law asserts that neither of the contracting parties will have the right to revoke, modify, or rescind a valid and binding contract outside mutual consent, court order or provisions of the law.

Before the issuance of Federal Decree-Law No. 33/2021 on Regulation of Labor Relations (New Labor Law) which entered into force on the 2nd of February 2022, an employee was entitled to a compensation of up to three months’ salary in the event that an employer arbitrarily terminates the employment agreement. However, the issuance of the New Labor Law created confusion in relation to when the employee should be entitled to compensation when the employer terminates an employment agreement, as Article 47 of the New Labor Law states that the employer’s termination to the employment agreement should be considered “illegal” if such termination is due to the employee filing a serious complaint with the Ministry of Human Resources and Emiratization (MOHRE) or filing a claim against the employer that has been proven to be valid. The term ‘’arbitrary dismissal’’ was replaced by ‘’illegal termination’’ and the events where an employee should be entitled to a compensation was limited to the above two scenarios stipulated under Article 47 of the New Labor Law. Under the previous labor law, the same scenarios were mentioned only as examples of arbitrary dismissal.

Furthermore, the New Labor Law grants the employer and the employee the right to individually terminate the employment agreement, as Paragraph 3 of Article 42 of New Labor Law states that “the employment agreement shall be terminated at the request of either party …” 

Given the wording of the above-mentioned Article 47, UAE onshore Courts are refraining from granting employees any compensation following the employer’s termination of the employment agreement outside the two scenarios stipulated under Article 47.
Hence, employees will not be able to obtain any compensation through the courts when an employer acts in bad faith in putting an end to the employment relationship.
It is worth mentioning that the New Labor Law applies to the private sector only, which includes entities fully owned by individuals or jointly with federal or local government and entities wholly owned by federal or local government unless the laws of their establishment stipulate that they are subject to the provisions of another law, without any distinction between nationals and foreigners. However, the New Labor Law does not govern employees of federal and local government entities, members of the armed forces, police and security, domestic workers.

In an employment relationship, the employee is usually the weaker party as in most cases, the employee will agree to the terms of the employment agreement as imposed by the employer, and is therefore worthy of legal protection. Furthermore, in practice, no employee will resort to MOHRE or Courts while the employment agreement is valid. Thus, we believe it would be beneficial if amendments are made to the New Labor Law granting UAE onshore Courts wider discretion to examine whether or not the employers’ decision of early termination is abusive, and to compensate the employee when the dismissal is arbitrary.

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