Here’s an update to the employment Law in JAFZA

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Here's an update to the employment Law in JAFZA 1

In September 2019, the Jebel Ali Free Zone Authority (JAFZA) announced updates regarding the replacement of bank guarantees and introduced unlimited employment contracts for JAFZA-sponsored employees. This legal briefing looks at the recent changes introduced by JAFZA and their practical implications.

1. Replacement of Bank Guarantees

As the first free zone in the United Arab Emirates (UAE), JAFZA announced on May 20, 2019, that it will replace the bank guarantee scheme for employees with a new insurance system starting in September 2019.

As of September 1, 2019, neither cash nor bank guarantees are accepted any longer by JAFZA when applying for new residence visas. Instead, JAFZA-registered companies have to apply for a Workforce Protection Insurance with Dubai Insurance Company; premiums depend on the basic salary and range between AED 160 (basic salary of less than AED 4,000) and AED 610 (basic salary of more than AED 20,000).

Existing employees will be gradually transferred to the new insurance scheme, however, so far, JAFZA has not disclosed how such transfers will be implemented. It can be assumed that transfers are to happen when the residence visas will be renewed or cancelled. In the latter case, the bank guarantee will be refunded to the employer’s account with JAFZA, automatically.

The bank guarantee amounts that will be refunded to the companies will be credited to the companies’ online portal account with JAFZA. This means that no cash refunds will be available and companies can use the refunded amounts for services that they avail on the portal.

2. Employment Contracts

a) Situation in JAFZA until September 10, 2019

Until recently, when applying for a new work permit and residence visa with JAFZA, the online system automatically generated a limited term employment contract with a contract duration of 3 years (renewable). Neither an unlimited contract nor a limited contract with a shorter period than 3 years could be agreed on. This administrative practice created situations, where employees have been officially employed for a limited period although the intention of the parties in many instances was to enter into an employment contract for an unlimited duration.

b) Unlimited Employment in JAFZA

As of September 10, 2019, JAFZA now also offers an unlimited employment contract thereby aligning its employment procedures with the UAE federal laws as well as the other free zones in the UAE.

Companies can now opt to use the newly available form contract for unlimited employment when applying for a new residence visa. However, companies also have the opportunity to transfer their existing employees from limited to unlimited employment contracts. This has to be done manually by submitting a request letter stating the employees to be transferred to JAFZA’s Administration Department of. JAFZA will then review the application and the company’s status with JAFZA (e.g. whether fines have been issued and/or the company is compliant with the Wages Protection System).

The introduction of unlimited employment contracts brings JAFZA’s employment procedures in line with the regulations in UAE mainland, where the employer can choose between unlimited and limited employment contracts.

c) Consequences

The main distinction between unlimited and limited employment contracts – besides the limitation in time – is the compensation in case of a termination.

When terminating an unlimited employment contract with a justified reason, no compensation as per Article 123 of the UAE Labor Law (up to three monthly salaries) is due to the employee . However, termination of a limited-term employment contract triggers compensation claims under Article 115 of the UAE Labor Law; the employer has to pay the employee a compensation for the premature termination (three months’ salaries or salaries for the remaining contract duration, whichever is shorter).

Likewise, in case the employee terminates a limited-term employment contract prematurely, he/she is liable to pay compensation in the amount of half a month’s salary for each month of the remaining contract period (capped at 1.5 months’ salary).

Against this background, limited employment contracts should only be used in specific cases and where the situation requires it (e.g. short-term projects or maternity leave coverage).

3. Summary

JAFZA’s replacement of cash bank guarantees with the Workforce Protection Insurance scheme reduces the cost in connection with new hires.

The introduction of an unlimited employment contract is a long-awaited move. JAFZA companies should review existing (official) JAFZA employment contracts as well as any additional terms and conditions / additional employment contracts. Where appropriate, the official JAFZA employment contract should be amended and aligned accordingly.