Validity of employee non-compete clause in UAE

Every person owning a business has a right to take all due steps to ensure that the interests and the growth of one’s business are safeguarded. On the other hand, it only takes one sign by the employee on the employment contract which contains a non-compete clause, to create a wall of restriction to switch to another company that is in the same business. The legality of the restrictive covenant or the non-compete clause is one of the most argued terms of the employment contract, as it imposes a restraint on the employee, upon his termination, to accept a better job offer from another company which is the same business as that of the previous company. While on the other side, if viewed from the employer’s perspective, it is necessary to incorporate a non-compete clause in the employment contract to protect the legitimate interests of his trade. 

The non-compete clause is a very prevalent practice in many countries across the globe to protect the interests of the employers, and the United Arab Emirates (UAE) is no exception too. UAE being the global commercial hub has become the most preferred company for establishing various commercial ventures and for professional endeavours. UAE is known to always strive to provide for favourable work environment for all the people working here. Accordingly, the non-compete clause happens to be a common practice in UAE; and the UAE courts have justly determined the criteria for the enforceability of such restrictive clauses included in the employment contracts. The theme line of this non-compete clause or the restrictive covenant is based upon the fact that during the business, the employee is likely to obtain knowledge of the trade secrets, confidential data, potential clients and many other such valid information. Leaking of such information can jeopardize the growth of the employer’s business.

 

UAE contains the legislative provisions governing the non-compete clause or the restrictive covenants in article 127 of Federal Law Number 8 of 1980 on the Labor Law (the Labor Law), articles 909 and 910 of the Federal Law Number 5 of 1985 on the Civil Transactions Law (the Civil Code), article 379 of the Federal Law Number 3 of 1987 on the Penal Code (the Penal Code) and the Commercial Companies Law. The non-compete clause can be defined as a restrictive term imposed on the employee on his agreement, to refrain from entering into a business or engaging with any action which is directly in competition with that of the employer, for a specific period, geographical limit and a specified sphere of activities upon the termination of the employment contract. Drafting such a clause to the employment contract could give an employer edge over maintaining good business operations and stabilize disciplinary code in between employee-employer relation. 

Article 127 of the Labor Law stipulates that ‘if the work assigned to the employee is such that it exposes him to come in contact with the clients of the employer, or obtain access to the trade secrets of the employer’s business, the employer may incorporate a clause in the employment contract, refraining the employer to engage or take part in any business which competes with that of the employer’s business, upon the termination of the employment relationship between them. Such clause shall specify the period of restraint, the geographical area and the kind of work. The employee signing such agreement should have attained twenty-one (21) years at the time of entering into such contract. 

The specifications of the non-compete clause shall be limited to the extent required for protecting the legitimate interests of the employer’s business”. This article is interpreted in collaboration with articles 909 and 910 of the Civil Code. Article 909 of the Civil Code specifies the same scenarios as stated in article 127 of the Labor Law, to restrict participating in any work which competes with that of the employer’s work. It emphasizes that such clause shall be valid only if it is restricted to a specific time, place and type of work and to the extent necessary to safeguard the employer’s interest. Further, it states that the employer is prohibited from enforcing the non-compete clause in case the employee is terminated by the employer without any reason contributed by the employee or where the employer has given rise to such grounds which forced the employee to terminate the contract. Article 910 provides that if the agreement between the employer and employee as to the amount of compensation to be paid by the employee upon breach of the restrictive conditions in the agreement, is such that it forces the employee to continue in the employer’s business, will make such clause invalid.

 

In the light of the above-stated provisions of law, the non-compete clause will be considered valid only if it satisfies the conditions specified below:

• The employee should be twenty-one (21) years old at the time of signing such agreement;
• The clause should specify the period of the restraint, the restricted geographical area and the kind of business activities in which the employee is prohibited to take part.
• The specifications in the clause shall be limited to the extent required to protect the legitimate interests of the employer;
• The amount of compensation shall not be in a manner coercing the employee to continue with the employer, it should be reasonable;

 

Validity of the Non-Compete Clause:

In the Dubai Court of Cassation, the court stated that the non-compete clause shall be valid only if it meets the conditions specified in articles 127 of the Labor Law and article 909 of the Civil Code. Failure to meet any one of those conditions can render the agreement invalid and shall relieve the employer from the obligations specified in the agreement.

 

To Safeguard the Legitimate Interests of the Employer:

The non-compete clause should contain specifications to the extent required to protect the employer’s interest and also the UAE courts will hold such agreements valid if it is imposed on an employee who is assigned with the work that requires to establish a relationship with the employer’s clients or obtain access to confidential data or trade secrets of the employer’s business. For instance, this clause can be deemed valid on the employee’s considered for the role of a senior manager or executive for the reasons that they can have access to such information which may jeopardize the employer’s business if leaked to the competitors than on a clerk of the company.

Period: The reasonable duration of the restraint accepted by the UAE courts is from three (3) months to twelve (12) months, or where necessary can be extended up to twenty-four (24) months.

Geographical Area: The geographical restraint is limited to the extent of the area where the employee worked. For instance, if the employee’s work was limited to only one Emirate, then the restriction shall not be stretched to be beyond that one specific Emirate. Where the employee’s work is extended to the entire UAE, then the employee is restrained from working with the competitor company in the entire UAE. However, the geographical restrain shall only be to the limit required and should not amount to an unlawful or unfair restriction of the employee right to work.

 

Type of business activity:

Article 127 clearly states the restriction shall be limited to the type of business activities and not all kinds of work. Therefore, the non-compete clause shall not prohibit the employee from obtaining a different role based upon his experience and qualifications in a similar sector of business. The Dubai Court of Cassation held that “the employee’s liability is limited to only the specifications mentioned in the non-compete clause and shall not prevent the employee from entering into a second employment contract as long as the employee’s commitment to non-competition was impossible to implement”.

 

Breach of the Non-Compete Clause:

In cases of breach of the non-compete clause by the employee, the employer can only claim for damages incurred by him due to the breach of the terms specified in the non-compete clause, but has no option to obtain a court order restraining the employee from joining the competitor’s company. The claim for breach of the non-compete clause can only be made within one (1) year from the date when such breach occurred. In the Dubai Court of Cassation, the court held that the burden of proof lies on the employee in cases where the compensation is predetermined to prove that the employer has not suffered any actual loss or that the loss incurred is not equal to the amount agreed, due to the breach of his non-competition obligations. Accordingly, the court may either dismiss the claim for compensation or award the amount equal to the actual loss suffered by the employer. In the Dubai Court of Cassation, the court stated that the employer can file for a civil suit claiming for damages incurred due to the breach of the non-compete clause by the employee, as long as the employer can establish the damages incurred are a direct consequence of the breach. However, unless the court is satisfied with evidence proving the actual loss incurred by the employer is the direct result of the breach of the non-compete clause by the employee, the case will be dismissed.

 

Criminal Penalty for Disclosing the trade secrets:

Article 379 of the Penal Code, imposes criminal liability on the person who is assigned with a work that required him to know the trade secrets of the company or business, misuses or discloses such information for his benefit or the interests of another person unless such action was in line with provisions of law or has been authorized by the competent authority to disclose such information. The person convicted of this offence shall either be detained in jail for one (1) year or shall be subject to a fine of UAE Dirhams twenty thousand (AED 20,000). The Dubai Court of Cassation states the four requisites to enforce this article as:

1. The main purpose is to disclose the secrets, and such disclosure was for his interests or the benefit of another person;
2. Such disclosure should be done discreetly;
3. The person disclosing could obtain access to such information only because of his work or profession
4. Lastly, his work demanded such information be revealed to him.

The Ministerial Resolution Number 297 of 2016, provides for the way to implement the non-compete clause specified in article 127 of the Labor Law. The Ministry of Human Resources by the virtue of this Ministerial Resolution, on any case before the court upholding the non-compete clause, can withhold new working permits for the employee, for the period as stated in the non-compete clause where such work is relevant to the type of work previously performed by the employee. Further, the Ministry can cancel any previously issued work permits in cases where the court has found the employee to be in breach of the non-compete clause. However, this shall be subjected to the conditions mentioned in the above provisions.

The courts evaluate the non-competent clause on various relevant factors like the value of information, the amount of compensation or actual loss incurred by the employer among others, before enforcing the non-compete clause. For instance, if the employer’s business is not well-spread internationally, but the non-compete clause restricts the employee from joining a business abroad, which competes with that of the employer, the court may consider such clause to be invalid as it is an unfair restriction and all the conditions required to enforce the non-compete clause are not satisfied. The Commercial Companies Law contains provisions about transparency among them and non-disclosure of secrets of the company to others, and as well as not to undertake any management of a competing company without due consent. It is very difficult to succeed in a case of a non-compete clause without sufficient evidence establishing the actual loss suffered by the employer due to the breach of the non-compete clause by the employee.