The Enforceability of Restrictive Covenants: Navigating Non-Compete Clauses Under the UAE Labour Law Framework
Introduction
Under the old law (Federal Law no. 8 of 1980), the determination of the enforceability of non-compete clauses was highly dependent on the discretion of the court. The new UAE Labor Law (Federal Decree-Law no. 33 of 2021) and its Executive Regulations (Cabinet Resolution no. 1 of 2022) provide specific grounds for the enforceability of restrictive covenants. For corporate employers, this is an essential guide to post-employment restrictions which protect their interests.
Statutory Prerequisites for Enforceability
According to Article 10 of the New Labor Law, a non-compete clause is only applicable if the employee’s work allows them access to the company’s client database or other confidential information. In addition, to stand a chance of being enforced in court, a non-compete agreement must pass a “reasonableness test” by limiting the employee’s ability to compete on three levels:
- Time – the restriction only applies for two years after the contract’s termination.
- Territory – the employee must only be restricted in the area where the business operates.
- Scope – the work that the employee does must not directly compete with the former company’s products or services.
UAE Courts are more likely to rule out broad, unfocused, or “boilerplate” restrictions as invalid because they limit an individual’s right to work, violating public policy.
Statutory Exemptions and Voidability
Article 12 of the Executive Regulations stipulates several crucial circumstances that may render a non-compete clause void or unenforceable and significantly shift the balance of power between the contracting parties.
- Firstly, the non-compete agreement is considered void in case the employer terminates the employment contract illegally or refuses to perform his obligations under the contract, for instance, withholding the wages due to an employee.
- Secondly, another scenario under which a non-compete covenant may be declared unenforceable is when an employment contract is terminated during the probationary period, and the contract contains a clause preventing the employee from working for the competitor firms.
- Finally, Article 12 of the Executive Regulations also stipulates a new possibility for an employee to ‘buy out’ a non-compete restriction. According to the new rules, an employee or his new employer may make a written request to the former employer to release the employee from a non-compete obligation. The release would be granted if the payment for such release, which should not exceed three monthly salaries, is agreed upon by the former employer.
Evidentiary Burden and Judicial Precedent
From the perspective of litigation practice, an injunction (specific performance) preventing an employee from working for a competitor is difficult to enforce in the UAE.
The most common legal remedy is a claim for financial compensation for damages. Firstly, according to the jurisprudence of the Dubai Court of Cassation, the claimant (employer) bears the burden of proof that the employee caused him actual, tangible damage. Secondly, pursuant to Article 10(4) of the New Labor Law, a claim for breach of duty may only be brought up within one year from the date of discovering the breach.
Strategic Recommendations for Employers
To reduce litigation risks and increase the chances that a court will enforce them, employers should consider the following practices:
- Forming the Covenant Carefully:
Instead of using generic language, employers are advised to tailor the language of the covenant to the employee’s access to the business’s confidential information and the extent of their influence in the relevant market.
- Liquidated Damages:
Although the use of liquidated damages – a predetermined amount of compensation that would be paid by an employee in the case of a breach is an effective way to deter employees from violating the covenant. It bears nothing that UAE Courts may still adjust the amount depending on the damage the employer has actually incurred.
- Additional Covenants:
Due to the limitations imposed by law, it may be useful for employers to include additional agreements, such as non-solicitation and confidentiality agreements, to the main covenant in the contract. They tend to be more effective for the courts.
Conclusion:
The New Labor Law seeks to balance the right of the employer to protect legitimate commercial interests with the employee’s right to make a living. In this regard, the practice of imposing blanket prohibitions is inappropriate, and tailored restrictions based on commercially reasonable justifications are in order, writes the author, citing Federal Decree-Law No. 33 of 2021.
Navigating the enforceability of non-compete clauses and other post-employment restrictions requires careful legal analysis and a thorough understanding of the UAE Labour Law and judicial practice. At Khalifa Bin Huwaidan Alketbi Advocates and Legal Consultants, our experienced advocates and legal consultants are well-equipped to advise employers and employees on drafting, reviewing, enforcing, and challenging restrictive covenants, while ensuring compliance with the applicable legal framework. For tailored legal advice and strategic assistance on employment and labour law matters, we invite you to get in touch with our team.
FAQ’s:
Yes, non-compete clauses are enforceable under Federal Decree-Law No. 33 of 2021, provided they are reasonable and necessary to protect the employer’s legitimate business interests. To be valid, the employee must have had access to confidential information, trade secrets, or customer relationships, and the restriction must be limited in terms of duration, geographical area, and scope of activities. Excessively broad or generic restrictions are unlikely to be upheld by UAE courts.
A valid non-compete clause must satisfy the statutory requirements under Article 10 of the UAE Labour Law. Specifically, it should:
Apply only where the employee had access to confidential information or clients;
Be limited to a maximum of two years after termination of employment;
Cover only the geographical area where the employer conducts business; and
Restrict only activities that directly compete with the employer’s business.
The restriction must be proportionate and no broader than necessary to protect the employer’s legitimate commercial interests.
A non-compete clause may be rendered unenforceable in several situations under the Executive Regulations, including:
Where the employer unlawfully terminates the employee or fails to fulfil contractual obligations, such as withholding wages;
Where the employment relationship ends during the probation period in circumstances covered by the Regulations; or
Where the former employer agrees to release the employee from the restriction upon a written request, subject to mutually agreed compensation (not exceeding three months’ salary).
These exceptions are intended to ensure fairness and prevent unreasonable restrictions on an employee’s right to work.
In the UAE, employers typically seek monetary compensation rather than court orders preventing an employee from joining a competitor, as injunctions are rarely granted. The employer bears the burden of proving that the breach caused actual financial or commercial loss. Additionally, any claim arising from a breach of a non-compete obligation must generally be filed within one year from the date the employer became aware of the breach. Employers can strengthen their contractual protection by combining non-compete clauses with well-drafted confidentiality and non-solicitation provisions.
