“Pacta sunt servanda,” which means “agreements must be kept,” is a fundamental principle of law in both common and civil jurisdictions. This principle indicates that agreements should be binding for the signatory parties and executed in good faith. When a party fails to comply with its contractual obligations or acts in bad faith toward the other party, the latter should be entitled to compensation.
Article 246 of Federal Law No. 5/1985 on the Civil Transaction Law adopted this principle. According to this law, “the contract shall be implemented according to the provisions contained therein and in a manner consistent with the requirements of good faith.” Additionally, Article 267 of this law asserts that neither party has the right to revoke, modify or rescind a valid and binding contract outside of mutual consent, court order, or provisions of the law.
Prior to the issuance of Federal Decree-Law No. 33/2021 on the Regulation of Labor Relations (New Labor Law), which came into effect on February 2, 2022, an employee who had their employment agreement terminated by an employer without just cause was entitled to compensation of up to three months’ salary. However, the introduction of the New Labor Law caused confusion regarding when an employee is entitled to compensation in the event of termination, as Article 47 of the New Labor Law states that an employer’s termination of an employment agreement is considered “illegal” if it is due to the employee filing a serious complaint with the Ministry of Human Resources and Emiratization (MOHRE) or filing a valid claim against the employer.
The term “arbitrary dismissal” was replaced with “illegal termination” under the New Labor Law, and the scenarios in which an employee is entitled to compensation were limited to the two situations stipulated in Article 47. These scenarios were only mentioned as examples of arbitrary dismissal under the previous labor law.
In addition, the New Labor Law grants both the employer and the employee the right to terminate the employment agreement individually. Paragraph 3 of Article 42 states that “the employment agreement shall be terminated at the request of either party.”
However, due to the wording of Article 47 as mentioned above, onshore Courts in the UAE are refraining from awarding employees any compensation in cases where the employer terminates the employment agreement outside the two scenarios stipulated in Article 47. As a result, employees will not be able to obtain compensation through the courts in cases where the employer acts in bad faith to terminate the employment relationship.
It is important to note that the New Labor Law only applies to the private sector, which includes entities fully owned by individuals or jointly with federal or local government, as well as entities wholly owned by federal or local government unless their establishment laws stipulate that they are subject to the provisions of another law. This law applies equally to both nationals and foreigners. However, it should be noted that the New Labor Law does not apply to employees of federal and local government entities, members of the armed forces, police and security personnel, and domestic workers.
In an employment relationship, the employee is often considered the weaker party and may agree to the terms of the employment agreement as imposed by the employer. As a result, employees are deserving of legal protection. However, in practice, employees may be hesitant to seek recourse through MOHRE or Courts while their employment agreement is still in effect. Therefore, we recommend that the New Labor Law be amended to grant UAE onshore Courts greater discretion in examining cases of early termination by employers, particularly in situations where such termination is deemed abusive. This would provide employees with better legal protections and compensation in cases of arbitrary dismissal.
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