UAE employers encouraged to ensure restrictions imposed on leavers are proportionate

In the UAE, employers are increasingly relying on strong and effective restrictive covenants to protect their legitimate interests and those employers have been urged to take a proportionate approach to contracting for such restrictions if they want to ensure those provisions are enforceable.

Dubai-based employment law experts Luke Tapp and Emma Noble of Pinsent Masons were commenting amidst a growing trend of UAE employers imposing post-termination restrictions.  This has been the trend across all jurisdictions in the UAE, and in particular in the DIFC, the ADGM and the other free zones and onshore mainland of the UAE.

Post-termination restrictions are contractual measures employers can apply to restrain what employees can do in the aftermath of leaving the organisation. Those restrictions may, for example, prevent employees from working for competitors for a period of time, reaching out to client contacts, taking key personnel with them to a new business or otherwise using confidential business information in their new role.

Tapp said: “As markets grow across the Middle East, competition to attract talent is intensifying. We are increasingly seeing individuals and entire teams move between businesses in this context. In response, there is a growing trend towards employers seeking to impose post-termination restrictions on leavers to protect their legitimate business interests.”

Noble added: “Post-termination restrictions are commonly used by employers in many jurisdictions. In the UAE, such restrictions are enforceable in principle, but employers need to be aware that their use is subject to some constraints. This is a contentious area where we are seeing increasing amounts of litigation”

Tapp and Noble highlighted how the rules applicable to the use of post-termination restrictions by employers in the UAE differ depending on which jurisdiction employers are operating in within the state – whether ‘onshore’ or in one of the different ‘free zones’ that each have their own legislative frameworks.

Onshore, the use of post-termination restrictions is governed by the UAE Labour Law. It permits restrictive covenants to be included in employment contracts where it is necessary to protect a legitimate business interest, provided that the restrictions are limited in time, geographical location and type of work. The law specifically provides that the duration of a restrictive covenant must not extend to more than two years from the date of expiry of an employee’s employment. Employers will frequently, although not always, include a restrictive period which is much shorter than two years. Proper notice of the restrictions must also be given to the employee.

Employers should also be aware that in the UAE – unlike, for example, the UK – courts courts will be more willing to amend post-termination covenants. 

In contrast, in the Dubai International Finance Centre (DIFC) freezone, the starting position is that an employee is free to work when, where and in what manner they wish and that any restraint of trade is unlawful. Employment law in the DIFC does not explicitly permit the use of post-termination restrictions on former employees. However, English law is highly persuasive and referenced in the DIFC courts. Therefore, provided the use of post-termination restrictions satisfy various legal tests – namely that they go no further than necessary to protect legitimate business interests – the DIFC courts will accept their legitimacy and allow employers to enforce them in the context of, for example, non-solicitation, non-dealing, and non-poaching.

The position in the Abu Dhabi Global Market (ADGM) freezone is similar to that in the DIFC. In the Dubai Multi Commodities Centre (DMCC) freezone, however, the courts do not recognise post-termination restrictions. However, employers do have a route to redress against former employees that breach the terms of their termination agreements if they can demonstrate financial loss.

Tapp said: “In a recent case under UAE Labour Law, an employer tried to enforce a post-termination restriction that had a broad geographic scope – covering the entirety of the UAE. The geographic scope of this restriction was considered too wide by the courts, providing a lesson to other employers that the scope of such restrictions should generally be limited to specific emirates in order to be enforceable. Employers seeking to enforce a post-termination restriction should also be prepared to provide evidence of financial loss or damages, if possible, to strengthen their case. In the DIFC, we have worked on disputes where the courts have awarded compensation to employers where there has been evidence of loss arising from an employee’s express breach of a restrictive covenant.”