Business Formation Laws in the United Arab Emirates - Assignment Example

Name: Tutor: Title: Business Commercial Law Course: Date: Table of Contents Table of Contents 2 Introduction 3 Business Formation Laws in United Arabs Emirates (UAE) 3 Discussion of the various labor Laws that are Available in the United Arabs Emirates 6 Initial Employment Duration 6 Contract Termination 7 Written Employment Contracts 8 Legal Issues that are Linked with Hiring Foreign Workers in the U.A.E. 10 Employment Visas 10 Priority to UAE Nationals 10 Employee and Employer Dispute Resolution process (UAE) 12 Arbitration by the Ministry 12 Discussion of Contract Clauses of Employment in UAE 13 Conclusion 15 References 16 Government of Dubai. (2012). Employment Regulations and Dispute Resolution. Dubai: Government of Dubai. 16 UAE Government (2012). UAE Labor Law. Retrieved on January 6, 2013 from < http://www.abudhabi.ae/egovPoolPortal_WAR/appmanager/ADeGP/Citizen?_nfpb=true&_pageLabel=p20160&lang=en > 17 Introduction The UAE is made up of seven Emirates, namely; Abu Dhabi, Ajman, Dubai, Fejairah, Ras Al Khaimah, Sharjah, along with Umm Al Quwain. The UAE federal constitution provides the legal structure for the federation and forms the basis of all laws promulgated at both federal and Emirate level. The Labor Law and the Ministry regulates all employment issues in UAE1. This paper will analyze the Laws the govern business formation in the UAE, the labor law in UAE, how disputes are settled between the employers and employees in UAE, various clause inserted in employment contracts to protect the interests of the employer as well as the potential legal issues associated with hiring foreign employers. Business Formation Laws in United Arabs Emirates (UAE) According to Peter (2008), for foreign investors to carry out a business within UAE, it is a requirement for them to establish a formal legal presence in UAE through the following ways: Incorporating a local entity, registration of a branch or representative of a foreign firm, establishing a free zone entity or through getting into a commercial agency relationship. Unlike in numerous other jurisdictions worldwide, buying of shelf-companies within the UAE is impossible. It is a requirement for all locally incorporated entities to obtain a trade licence from the Department of Economic Development and where pertinent to get an authorization from the pertinent Ministry regarding the kind of business activities the business will be conducting. Commercial Companies Law in the UAE stipulates that a locally incorporated entity can be established under the UAE Civil Code or incorporated under Federal Law No.8 of the Companies Law. According to Hellyer (2001), a Joint Venture Company in UAE is normally formed by a foreign party and an UAE national where the UAE national is supposed to own at least 51 percent although sharing of profits and losses is done as prescribed. Basically the foreign partner handles the third parties suing the name of the UAE national, who bears all liability of the business unless the agreement is publicized. Practically, joint ventures provide an appropriate framework for company working together on particular projects. For a Public and Private Shareholding Company, the minimum capital for a public is Dh. 10 million and Dh.2 million for a private shareholding company. The requirement for this form of a business is that the chairpersons as well as majority of directors are supposed to be UAE national (Hellyer, 2001). Entities established under the UAE Civil Code are prohibited to carry out “commercial” activities. This means that such entities are only restricted to carry out business dealing with activities involving skills’ promotion and expertise of people carrying out the businesses, for example medicine or law activities. Normally, UAE Civil Code entities are in form of; the professional services company, the speculative venture partnership. All locally incorporated companies should be established according to the Companies Law (PWC, 2010). A Limited Liability Company in UAE can be established by at least two and maximum of fifty people where the liability is limited to their shares within the firm’s capital. This form of business is deemed to offer an appropriate structure for companies that aim at developing a long term relationship in UAE. Foreign equity should not be more than 49 percent but profits and loss sharing can be prescribed. Additionally, the management of a Limited Liability Company in UAE can be bestowed on either foreign partner, UAE national partner or a third party. In order to set up a Limited Liability Company within UAE, the company is required to choose a business name and get an approval from the Licensing Department of the Economic Department. The parties should come up with the Memorandum of Association and have it notarized by a Notary Public. In addition, an endorsement from the Economic Department should be sought and application for entry made within the Commercial Register. After the company is approved, it is entered with the Commercial Register and the Ministry of Economy and Commerce publishes the company’s Memorandum of Association within its Bulletin. The Economic Department issues the licence and the company is the registered with the Emirates Chamber of Commerce and Industry (Ministry of Labor and Social Affairs. (2010). For a Sole Proprietorship, a 100 percent ownership is allowed. The company should appoint a UAE national as the local service agent although the agent is not directly involved in the business but is paid a lump sum or gets a certain percentage of the profits. The local service agent has the responsibility of helping in obtaining licences, visas, labor cards and such (Ministry of Labor and Social Affairs. (2010). The Commercial Companies Law also covers the establishment and regulation of branches and representative offices of foreign companies within the UAE. The law provides that foreign ownership can be 100% as long as there is appointment of a local agent. Local agents do not take part in the activities of the business rather they help in obtaining visas, licences, labor cards and such. Normally the local agents are paid a lump sum or get a given percentage of the profits. According to the Commercial Companies Law in the UAE branches and offices of foreign commercial companies are not allowed to carry out any importing undertaking apart from re-exporting or in an event where the products being imported are highly technical (UAE Government, 2012). In UAE, entities incorporated under the Companies Law have a key limitation in that 51% of the company’s capital should be owned by UAE national. Generally, most foreign businesses prefer Limited Liability Company because with this form it is possible for the foreigners to have considerable control of the companies and the required minimum capital to set up A Limited Liability Company is comparatively small. The company’s shareholders determine the share capital of their limited liability companies as long as such companies have adequate capital to accomplish its objects. Nonetheless, limited liability companies can be unsuitable in achieving some business objectives. For instance, businesses engaging in banking, investment activities, insurance or insurance can only be operated through a public joint stock company (Foley, 2008). Discussion of the various labor Laws that are Available in the United Arabs Emirates Initial Employment Duration According to the Labor Law, the initial employment duration is the probation period which is supposed to be a maximum of 6 months and within this duration an employer can end the employment instantly and without a notice. When the probation period ends, the Labor Law stipulates that an employer should give the employee a minimum of 30-day notice as long as the employer has a valid reason to terminate the contract (Ministry of Labor and Social Affairs, 2010). Federal Law No. 8 governs labor activities and issues within UAE. Article 3 of the Law stipulates that the law is applicable to all employees within UAE and this includes locals as well as the expatriates. It is noteworthy that business partners are not considered as employees but are considered as investors within their business. Nonetheless, if the partner has an employee position, he is taken as an employee of the company. The responsibility of employee recruitment and dispute settlement between employees and employers lies on the Ministry of Labor and Social Affairs. All UAE Emirates follow the Federal Law and the Ministry of Labor and Social Affairs enforces the law. Any dispute resulting from labor issues is supposed to be referred to the Ministry first and then the Ministry delegates the issue to court for legal action. Disputes allied to labor are arbitrated by the Ministry and the local courts of the UAE. Contract Termination Contract termination in UAE is allowed in circumstances such as when the employee agrees to have the contract nullified with the employer, when the contract term ends and there is no provision for extension as per the implied and explicit law provisions, and in case of the employee or the employer notifies the other party timely as long as the parties follow the Law provisions and accepts reasons to have the contract terminated without unfairness. However, there are situations where an employer can terminate the contract immediately, without giving a timely notice to the employee. According to the Article 120 of the Law, an employer can discharge an employee in case the employee was recruited under probation and the contract was terminated prior to the end of the probation period, in case the employee does something that results to considerable losses to the employer as long as the employer notifies the Ministry within 48 hours, in case the worker does not perform his/her responsibilities, following a warning letter from the employer, in case an employee confides secrets of the company to potential competitors, if the employer is drunk or inebriated during work, when an employee assaults the employer or any other workmate during working hours, when an employee is absent from work without a valid reason, constantly for twenty days without informing the employer and lastly in case the employee breaches safety guidelines, as long as the guidelines were written and the employee was informed of the instructions verbally if he/she is uneducated. However, there are certain conditions set out when dismissing UAE nationals. According to Ministerial Decision No.176, dismissal of UAE nationals is prohibited unless; for a summary discharge reason stipulated within Article 120 of the Labor Law, in case a non-nation is carrying out the duties of the UAE who was sacked, in case the employer did not file a notice to the Ministry within at least thirty days before dismissal date of the employee, and if the employer fails to pay the employees all his retirement and end of service dues according to the Labor Law. Federal Law enforces specific minimum standards in the employment of juveniles, working hours, leaves, vacations and holidays, safety standards as well as contract termination. There is also a minimum wage limit for various classifications of employees. According to The Pensions and Social Securities Law, Federal Law No (7), the Ministry handles complaints from the employees and the employer should inform the Ministry in case a worker is subject to the disciplinary code. In addition, the Pensions & Social Securities Law governs Pensions and Social Security schemes within the UAE. Written Employment Contracts Employees in the UAE are supposed to have written employment contracts and written employment contracts are recommendable for any business within UAE since in UAE there is not employment at will. The Commercial Companies Law in the UAE stipulates that all companies registered under the Ministry are supposed to pay their employees through the Wages Protection System. This entails transferring monies using some chosen financial institutions with government authorization and regulation. However, the Wages Protection System is not applicable to certain free zones such as the DIFC. According to the UAE Federal Law, recruitment of UAE nationals is given preference and also there is a requirement to have UAE nationals in some administrative positions such as public relation officers whose role is to network with the government at big organizations, lawyers appearing within the UAE courts and such. If a company that is not within the free-zone has more than fifty workers, it is supposed to employ a minimum fraction of UAE nationals according to the “Emiratization” policy of the UAE Federal Government. The Emiratization policy is applicable to the public sector as well as private sector. In addition, the policy is applicable to the local companies as well as international companies in UAE. As mentioned before, all workers should have a written employment contract. The Ministry of Labor has a set form of employment contract, even though employers are allowed to use their own form of employment contracts as long as the employment contract has specific provisions. The Ministry of Labor registered the employment contracts (Audrey, 2008). The labor law envisions two kinds of employment contracts, namely; fixed-term and open-ended employment contract that can be terminated on notice. Normally, a fixed term employment contract is supposed to be for a period of four years or less, even though it is renewable through mutual consent. All contracts that lack a termination date are perceived to be open-ended contracts. According to the Labor Law, employment contracts should have this information; the remuneration, date of employment contract, date when the employment term started, form of the contract, work description, and the employment location (Audrey, 2008). Legal Issues that are Linked with Hiring Foreign Workers in the U.A.E. Employment Visas Before starting up any work within the UAE, all foreigners are required to obtain an employment visa failure which results to legal problems. Therefore, it is the responsibility of the employer to ensure that a foreign employee has a valid employment visas. In obtaining an employment visa, the worker is supposed to get a sponsorship from an agency licensed and registered with the Ministry of Labor. After successfully obtaining the employment visa, a copy is supposed to be sent to the worker and the original copy is lodged at the airport prior to the arrival of the employee within UAE. As an element of immigration procedure to obtain an employment visa, it is a requirement for the employee to undertake a medical text for HIV and TB as well. Normally, a residency visa is attached to the employment visa application and this gives the foreign worker the right to stay and work in the UAE for only the period of his/her employment. The work permit and residency visa are normally awarded for a period of three years which can be renewed. Basically, the employers as well as the employees risk facing substantial penalties in case the above immigration processes are not followed (David, 2010). Priority to UAE Nationals Additionally, there is an emratisation program in UAE that aims at reducing the UAE’s dependency on foreign employees. According to the Labor Law, an employer is supposed to give the UAE nationals priority over foreign workers. As a result, the Ministry of Labor does not allow foreigners to be hired where the records indicate that there are UAE who are not employed and can carry out that role. The Labor Law encompasses certain guidelines that the Ministry of labor should follow when taking into consideration the employment visa applications from foreigners. This consists the consideration of the number of UAE nationals that are working for the given firm and if there are UAE nationals who can carry out the job. An employer who replaces an UAE employee after his/her dismissal or resignation with a foreigner violates the UAE Labor Law. The UAE Labor Law gives out national quotas for all companies to be supported by penalties and fines for organizations that employ foreigners in cases where UAE national workers are available to work. In an event where the employer requires implementing redundancies, foreigners should be dismissed first and if an employer does not do this, he/she face fines and penalties (David, 2010). Furthermore, employers face limitations on employee that change job often. The UAE has regulations whereby the Ministry of Labor can ban a worker from working for a new employer for a given time duration. Obviously, this has practical implications for employers who are looking forward to employing new employees (Latham & Watkins, 2009). According to Latham and Watkins, (2009), employing foreign employees in UAE brings in some legal issues such as employing illegal immigrant or irregular employees. The reason for this is that there are many incidences of illegal entry in the UAE. As a result, UAE government can take a legal action against an employer who hires an illegal immigrant or an irregular employee. Normally, if it is established that an employer has employed an irregular employee, the employer is fined a penalty of AED 10,000 or a 6 month incarceration (David, 2010). Employee and Employer Dispute Resolution process (UAE) Arbitration by the Ministry Disputes between employers and employers are first arbitrated by the Ministry where the claimant party should make an application to the Ministry. The party submits the application in writing to the department of complaints within the Ministry and as a result the Ministry files the application after the payment of the required registration fee. Following the filing of the application by the Ministry, the party ether the employer of the employee is summoned by the Ministry in labor office to give their respective argument against the application. A recommendation ought to be made within 2 weeks after the application has been filed. In case the dispute is not successfully resolved according to the Ministry’s recommendation, the Ministry refers the issue to the court where normal court proceedings occur. Such court hearings are normally held in public although the public is not allowed to scrutinize the court files (Government of Dubai, 2012) Court proceeding normally begins with filing of the claim with the pertinent court office after the necessary court fee has been paid. The amount of fee to be paid depends on the value of the claim and basically every claim has a maximum cap. The court then summons the defendant with a copy of the claim as well as any supporting documents that the claimant files and notifies the defendant of the hearing date. The supporting documents of the claim are normally attached to the claim and an Arabic translation is required. The attorneys representing the parties are supposed to be authorized by a fully executed power of attorney. In an event where execution is within UAE, the power of attorney ought to be signed before the court notary and in case it is executed overseas, the power of attorney should be appropriately notarized and validated by the UAE embassy or consulate with the nation where the power of attorney is executed. In addition, if execution is in abroad the power of attorney should then be appropriately validated by the UAE Ministry of Foreign Affairs and translation into Arabic is required from a translator licensed by the Ministry of Justice (Government of Dubai, 2012). After the filing of the answer, there is an adjournment of the trial to allow the claimant to respond. More adjournments are provided to enable the parties to file the memoranda. After the court comes to a conclusion that the case has been adequately pleaded, the court reserves the issue for ruling. According to the government of Dubai, the whole proceeding is normally in written submissions having documentary support. Eventually, the court normally selects a professional to help it in and normally accepts the report from the professional. Discussion of Contract Clauses of Employment in UAE Contract clauses such as non-compete clause are some of the employment agreements that prevent a worker from working with a competitor after the end of the contract. Under non-competitive clause, the employee agrees not to engage within any activity that competes with the employee directly for a given duration, within a restricted geographical area and within specific fields of activity, after the contracts end, irrespective of how the contract ended. Specifically, a non-compete clause prevents the worker from working for competitors of him earlier employer, carrying out business undertaking with customers of his earlier employer, and soliciting workmates working for his earlier employer. Non-compete clauses become effective after the employment contract termination, following the notice period. If there is no notice period, the clause is applicable from the day the worker stops being an employee of the former employer (Habib, 2012). According to the Article 127 of the Federal Law, if work allotted to an employee gives him an opportunity to be acquainted with the customers of the employer or be able to access the employer’s secretes, the employer might necessitate such an employee not to compete with him or take part in a business competing with his own following the end of the contract. For such non-compete clause to be legitimate, the employee is supposed to be at least 21 years old during the conclusion of the agreement and the agreement should be confined, in regard to time, location and nature of the business, to the required extent to protect the valid interests of the employer. Further Article 900 of the Civil Code stipulates that in case an employee during the course of his work manages to access secrets if the job or accesses the company’s clients, the employer and the employee can agree that the employee not to involve himself in any competition with the employer or participate in work competitive to the employer’s work following the contract termination (PWC, 2010). In an event where a worker violates a non-compete clause, the employer can lodge a claim with the UAE courts seeking compensation for damages sustained, as long as the employer can provide evidence that he has sustained these damages as a direct result of the violation. If the non-compete clause has an already set financial penalty on the worker for violating their duties under the non-compete clause, the burden of proof lies on the worker. If the worker manages to show that the former employer did not sustain any loss, the employer cannot be compensated. it is advisable for employers seeking to insert limitative agreements within their employment contracts to carefully take into consideration the wording and scope of the clauses, in order to maximize the probability of them being upheld by courts in case a former worker violates the agreement (Habib, 2012). Basically, employers should make sure that non-compete clauses cover a relatively small geographic limitation, a short time period, in addition to a specified business activity. In addition, the employers in UAE can make their employees sign confidentiality clauses. A confidentiality clause is meant to prevent the employees from disclosing confidential information of the company and the trade secrets as well. According to Habib (2012), the nature of confidential information varies from one company to another and it covers things like industrial processes or customer databases, business processes, technology, company’s products, developments, finances and such. The most important is that all the company’s confidential information is protected (PWC, 2010). Conclusion It is evident that the Federal Law governs the labor to a greater extent UAE and the law is applicable to both the nationals as well as the foreigners. The Ministry of Labor and Social Affairs has is mandated to regulate the labor recruitment and the Ministry is also responsible for facilitating settlement of disputes between the employers and the employees. Normally, employer can install clauses in the employment contract and this includes non-compete clauses and confidentiality clauses which is aimed at protecting the interests of the employer. Lastly, there are potential legal issues associated with hiring of foreign employees such as the likelihood of hiring an illegal immigrant or irregular worker which is against the law in UAE. Still, if the employer happens to hire a foreign employee who has not followed the appropriate procedure in obtaining employment visa and residency visa can find him/herself in serious legal problems. The employers also are liable to penalties if they hire foreign workers when there is an unemployed UAE national who can perform the job. References Audrey, M. (2008). Employment Contracts in UAE. London: Mathew Thomson. PWC. (2010). Doing Business in the UAE. New York: The World’s Local Bank. Habib, M. (2012). Non-compete Clauses under UAE Laws. Abu Dhabi: Habib Al Mulla & Company. Government of Dubai. (2012). Employment Regulations and Dispute Resolution. Dubai: Government of Dubai. Latham & Watkins. (2009). Employment Issues in the UAE. Dubai: Latham & Watkins. David, M. (2010). The Legal Regulation of Migrant Workers in UAE. New York: Columbia University Press. Peter, C. (2008). UAE Labor Market. World Economic Forum. London: Trident Press Ltd., Empire House. Hellyer, P. (2001). United Arab Emirates: A new perspective. London: Trident Press Ltd., Empire House. Ministry of Labor and Social Affairs. (2010). UAE’s Labor Law: Federal Law No. 8 of the year 1980. Gulf News. UAE Government (2008). United Arab Emirates: Company Law and Regulations Handbook. Int'l Business Publications. UAE Government (2012). UAE Labor Law. Retrieved on January 6, 2013 from < http://www.abudhabi.ae/egovPoolPortal_WAR/appmanager/ADeGP/Citizen?_nfpb=true&_pageLabel=p20160&lang=en > Read More