Non-Compete Clauses in the UAE

Introduction

The UAE has become one of the fastest growing nations in the field of international business and skilled manpower. In consequence, the battle between companies to obtain skilled workers has rendered post-termination restraints, especially non-compete clauses – an ever more prominent aspect of employment in the UAE. The interests of an employer who invests heavily in training its employees, building client relationships, and establishing specific working methods may require such post-termination protection measures against its former workers.

On the other hand, the UAE government has been well aware of the negative implications of imposing excessive limitations on the movement of workers on both workers and economy, including stifling innovation. Indeed, the new Federal Decree-Law No. 33 of 2021, dubbed the Labour Law, enacted effective 2 February 2022, shows the delicate balance the country wishes to establish. Under its Article 10, non-compete clauses are finally regulated with clarity.

A. The Threshold Condition: Access to Sensitive Information

Under Article 10(1) of the Labour Law, there is a threshold condition, which serves to limit the pool of employees who can be made subject to the non-compete obligation. The article is valid only if the employment in question allows the employee to have access to customers of the employer or to confidential business information. In other words, the legislature has associated the non-compete clause with a particular justificatory reason, which is information, not competition.

This represents a huge contrast from the absolute freedom of contracting principle. It is not possible for an employer to include the non-compete clause in the agreement of an ordinary employee who has no access to any confidential business information.

B. Tripartite Conditions for Non-Compete Provisions Validity

In addition to Articles 7 and 9 of the law, Article 10 and Article 12 of the Implementing Regulations (Cabinet Resolution No. 1 of 2022) stipulate that for a non-compete provision to be legally binding, there are three essential conditions that need to be specified:

1. Temporal Condition

A non-compete agreement cannot extend beyond two years after the expiry of the employment contract. Shorter terms are acceptable and might prove more effective in many situations. However, it is crucial to keep in mind that this limitation is an upper limit but not a norm, as courts have discretion to deny its enforcement even in case of a less restrictive term that protects the employer adequately.

2. Territorial Scope

Non-competition can only be applied in a certain region determined by the parties to the agreement. Though no explicit territorial limitation is included into the statute, the Implementing Regulations state that a non-competition area should correlate with the territory within which the employee worked and the employer operated. Therefore, it is recommended to narrow the territorial scope to the emirate(s) in which the employee was active commercially.

3. Nature of the Restricted Activity

It should reasonably state the type of profession or business activities which the employee is barred from. It is important to note that a restriction preventing one from engaging in ‘any competing activity’ is too wide in scope and may be deemed invalid in court. Furthermore, it must cover only those businesses or areas of work that fall under the same category as that in which the employee works for and that in which the employer carries out its operations.

Mandatory Inclusion of the Non-Competing Clause in the Employment Agreement

Section 10 of the Act stipulates that the non-competing agreement must be included in the employment agreement itself. Any clause that is placed only in a separate document such as a supplemental contract, an offer letter, company policies, etc., would not be enforceable at all. There can be no doubt about the formality of this provision as well.

Grounds of Non-Enforceability

There are several situations under the Labour Law and its implementing regulations where the non-compete obligation, despite being technically legal and binding, will become void:

• Contract termination in probation period: If the contract is terminated by either party (the employer or the employee) during the probation period, all restrictions contained in the non-compete clause become nullified. This is quite logical since the probation period allows both parties to determine compatibility before establishing any restrictive arrangements.
• Legal termination of contract: In case the employer terminates the contract illegally – that is, does not provide proper notice or terminates the contract in retaliation to the complaints raised by the employee against him (arbitrary termination), the non-compete obligation becomes non-enforceable. It means that the clause is considered as dependent on the performance of obligations by the employer.
• Mutual written agreement: The parties can decide to mutually waive their obligations under non-compete agreement post-termination of the contract through a written document.This offers flexibility and can also be used in the negotiations towards settlement of disputes.
• Pay-off by the new employer or the individual himself: Another significant characteristic of the UAE legislation is that it allows the non-compete clause to be bypassed through pay-off. As per the provisions of the Implementing Regulations, the individual is released from his non-compete obligation if the new employer or the individual himself makes a payment of up to three months’ remuneration at the employee’s last agreed salary to the former employer, provided this is approved in writing by the former employer.
• Exceptional ministerial decisions: The minister of Human Resources and Emiratisation has been granted the power to exempt individuals in professional groups that are highly needed in the national labor market from non-compete agreements. This provision is proactive and reflects an explicit policy objective in terms of maintaining a flexible workforce in such labor markets.
• Time limitation on claims: Claims based on non-compete clauses can only be made within a one-year period commencing from the discovery (or the discovery ought to be) of the violation of the non-compete agreement by the former employer.

Drafting Considerations And Practical Guidance

For Employers

Employers who seek to benefit from binding non-compete agreements must adhere to the following practical considerations:

• The non-compete agreement must be included in the employment agreement, not in any secondary documents.
• The list of activities prohibited under the non-compete agreement must encompass only those activities related directly to the position held by the employee and his/her industry sector.
• The geographical extent of the non-compete must be limited to the area of operation of the business and the clients served by the employee; nationwide non-competes are generally unenforceable before the courts.
• The duration of the non-compete should be for the minimum period necessary to safeguard the stated legitimate interest, which may not exceed one year unless there is a reasonable justification for a longer period.
• It is preferable to include a penalty clause in order to avoid demonstrating actual loss in case of breach of contract.
• Records of the information and relationships with clients, known to the employee, must be kept up-to-date to serve as evidence during any legal proceedings.
• In cases involving sensitive positions, an employment contract under the jurisdiction of the DIFC or ADGM may be considered.

For Employees

An employee who is restricted by a non-compete obligation ought to know that:

• A non-compete provision that is too extensive in its scope (duration, geographical area, or type of restricted business) may be contested in the Labour Court or MOHRE.
• The termination of employment by the employer in contravention of the rights of the employee (e.g., terminating without notice, or in retaliation for filing a complaint) invalidates the non-compete provision.
• The buy-out provision under the Implementing Regulations may provide an avenue of commercial settlement, provided that the ex-employer agrees.
• The claim must be made within one year from the day when the violation becomes known to the former employer; any delay in filing the claim will cause the claim to become statute-barred.
• The employer has to prove actual damage, being employed competitively by itself does not mean that there is liability.