Restrictive covenants, also known as non-compete clauses, in employment contracts are becoming a frequent topic of discussion as the UAE experiences significant job market activity and changes to its employment laws. Intended to protect the ‘legitimate business interests’ of the employer, their enforceability hinges on satisfying the courts that the restraints are 'reasonable'. For both employers and employees, an understanding of the key elements of enforceability is essential to navigating this complex and highly litigious area.
The Legal Framework
Non-compete clauses aim to prevent former employees and their future competing employers from engaging in activities which threaten their previous employer's business interests after the employee's departure. Within the UAE, the enforceability of such clauses depends on the legal framework which applies to the business and employee. There are significant differences in the judicial treatment (and enforceability) of such covenants between: (i) the federal courts, where the Civil Code and Labour Law apply; and (ii) the courts of the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM), where Common Law principles of enforceability apply.
Federal Law
Under the UAE Labour Law (Federal Decree Law No. 33 of 2021) (Labour Law) non-compete clauses can be included in an employment contract if the employee has access to sensitive business information or client details. The Civil Transactions Law (Civil Code) also addresses this aspect subject to the restraint satisfying certain conditions, such as limitations on time, location, and type of work, to be enforceable.
The Labour Law states that pure non-compete clauses cannot exceed two years in duration (although that is still subject to an assessment of 'reasonableness'). Employers must demonstrate that the restriction on the former employee's activities is necessary to protect the emploter's 'legitimate business interests' and show actual harm caused by any breach. However, the protection under the Labour Law is not supported by an effective mechanism to 'prevent' economic harm (i.e. an injunction). This contrasts with the position in the DIFC and ADGM.
Under the Labour Law Implementing Regulations the parties may reach mutual agreement to waive the clause, or if the new employer compensates the initial employer with up to three months' salary. That may be a less than attractive position for employers who perceive a significant risk of financial harm from the ex-employee's future activities.
Routinely, employers will include contractual provisions to prevent solicitation or dealing with their client base but the approach to this type of provision is not necessarily the same as in the DIFC or ADGM
DIFC and ADGM Employment Laws
The legal landscape is different in the UAE’s financial free zones, the DIFC and ADGM.
The courts of both the DIFC and ADGM assess the 'reasonableness' of non-compete clauses using well-established case law precedent. Employers seeking to rely upon actual 'non-compete' clauses should always consider whether a non-solicitation or non-dealing clause might provide sufficient protection.
The Reasonableness Test
Across all legal frameworks, a key consideration is the reasonableness of the restrictions. The onus is always on the employer to demonstrate why the restriction is needed; specifically, that the clause is fair and "goes no further than reasonably necessary to protect a legitimate business interest". Examples of questions considered are:
Applicability: Does the clause properly reflect the employee's role and level of influence in respect of clients? A ‘one-size fits all’ aproach to covenants carries inevitable risks.
Scope: Is it clear in defining what constitutes "competitive"?
Geographical Area: Is the restriction appropriately limited to relevant territories?
Timeframe: Does it stay within the two-year maximum stipulated by federal law? Even this may be too excessive a period. Within both DIFC and ADGM jurisdictions, the test of 'reasonableness' is not subject to a statutory 'maximum' period; it is subject simply to an assessment of reasonableness.
If any of these factors appear excessive, the clause may be deemed unenforceable. Careful drafting is essential to ensure that if a covenant fails it does not affect the remaining restraints in the contract.
Challenges in Enforcing Restrictive Covenants
Enforcing non-compete clauses in the UAE can be challenging for several reasons. First, employers must typically provide clear evidence of actual or potential harm caused by an employee's breach of the clause. Without this, courts are unlikely to honour the restrictive covenant.
Second, ambiguity in contract language often hinders enforcement. For example, vague phrasing such as “engaging in competing activities” will result in disputes over interpretation.
Finally, the UAE legal system's general preference leans towards protecting employees over businesses. This is particularly evident when clauses are seen as excessively limiting an employee's career prospects or ability to earn a living.
Insights for Employers and Employees
Discussions between employers and employees regarding non-compete provisions require a careful balance. Achieving a fair and enforceable agreement hinges on protecting the employer's legitimate business interests while respecting the employee's right to earn a living. Here are some practical tips to consider:
For Employers
Clearly define non-compete clauses to avoid ambiguity. Any uncertainty will be construed against the party relying upon the covenant.
Ensure that duration, geographical area, and type of work restrictions are proportionate to your business needs.
Conduct regular legal reviews of employment contracts with counsel experienced in UAE labour laws.
Consider the value of the restricted employee's role and the potential damage caused by post-employment competition before drafting restrictive covenants.
For Employees
Carefully review restrictive covenants before signing your contract. Seek clarity on scope, duration, and area.
If a clause appears vague or overly restrictive, discuss it with the HR team or seek advice from a legal professional.
Keep your former employer informed if transitioning to a competitor, and explore whether compensation waivers can be negotiated for smoother transitions.
Final Thoughts
Whether you're an employer looking to protect your business interests or an employee safeguarding your career, non-compete clauses in the UAE demand careful attention. The region’s legal frameworks ensure that provisions strike a fair balance between enabling business protections and guarding employee rights.
If you're navigating the intricate world of post-termination restrictive covenants, do reach out for guidance tailored to UAE-specific labour laws. A keen understanding of these rules can protect your business venture or ensure your next career step is legally sound.
Have questions about your employment terms? For more insights and personalised advice, reach out to John Stamper and Jamie Tredgold.
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This material is provided for general information only. It should not be relied upon for the provision of or as a substitute for legal or other professional advice.
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