Non-Compete Clause Vs. Non-Solicitation of Clients Clause Under Labor Law 2022 in UAE.

Introduction

The Non-Compete Clause is the standard clause used by employers in UAE to prevent their employees from joining another competitor after resigning from their positions in the employer business, to prevent the resigned employee from luring current employer clients to the competitor as the employee is actively engaged with those clients and may have a strong relationship with the clients, the period of non-compete serve the purpose of cutting this active relationship.

Nour Attorneys’ observations from the hundreds of agreements we have reviewed for employers and employees are that the non-compete clause is invalid because the employers tried to have a broader scope for competition prevention to cover all UAE or specific industries in all UAE or missing specific requirements under the law, or the clause has been draft in general without detailing the legal requirements at all.

Moreover, The most critical fault is that even with the correct draft of the Non-Compete Clause, we advise the employees that they can breach it as long as they don’t cause damage to their employers, as the law does not grant any rights for the employer to terminate their employment contracts with the competitors nether to claim compensation unless there is actual financial damage that can be proven in the court of losses of clients or business due to the employee actions of breaching Non-Compete clause, as the pardon of proof is falling on the employer and not employee.

Nour Attorneys’ lawyers and legal consultants always secure the clients’ Non-Compete Clause with additional agreed financial penalties that work as agreed compensation in case of breaching the NonCompete Clause, and such penalty is repetitive with every single action of the breach, but with the current development of businesses in UAE and around the globe, the limitations given by non-compete does not serve its purpose, meetings with clients now do not require physical presence with online meetings, location limitation, for example, is no longer working with options to work from a distance and the option to open competing businesses in any emirate freezone and yet target client everywhere, new regulations that require the Non-Compete Clause to be limited to protect the employers’ interest without specific criteria to define that, this why we came with an additional and better solution which is Non-Solicitation Clause.

Non-Compete Clause: Legal Framework in the UAE

The Non-Compete Clause in the employment contracts is subject to Federal Law No. 31 of 2021 Concerning the Regulating Labour Relations and Cabinet Resolution No. (1) of 2022 Concerning the Executive Regulation of Federal Decree–Law No. (33) of 2021 Regulating Labour Relations, the articles of these regulations as mentioned below:

As per the articles of the Federal Law No. 31 of 2021 Concerning the Regulation Labour Relations, the following are the related article:

Article (10) Non-Competition Condition

1. If the work assigned to the Worker allows him to know the Employer’s clients or access his work secrets, the Employer may stipulate in the work contract that the Worker shall not, after the termination of the contract, compete with him or participate in any competing project in the same industry; provided that such condition is specific in terms of time, place and kind of work to the extent necessary to protect the legitimate business interests, and that the period of non-competition shall not exceed two years as of the expiry date of the contract. 2. Said condition shall be null if the employer terminates the employment contract in violation of the provisions of this Decree by law.
2. The lawsuit filed by the Employer for the Worker’s violation of the provisions of this Article shall not be heard after the lapse of one year from the date of discovering the violation.
3. The Executive Regulation of this Decree by law shall determine the provisions regulating this Article, and the skill levels or occupational professions that may be excluded from the provision of Clause (1) of this Article, in accordance with the conditions and controls specified by the Regulation.

As per the articles of the Executive Regulation of Federal Decree-Law No. (33) of 2021 Regulating Labour Relations, the following are the related article:

Article (12) Controls of the Non-Compete Clause

1. Subject to the provisions of Article (10) of the Decree-Law, in order to implement the non-compete clause stipulated in the contract, the following shall be determined:
   1. The geographical scope for the application of the clause.
   2. The clause period, provided that it does not two years from the contract’s expiry date.
   3. The work’s nature which causes gross damage to the employer’s legitimate interests.
2. In the event a dispute concerning the non-compete clause arises, and it has not been settled amicably, it shall be referred to the courts and the employer shall bear the burden of proving the damage.
3. The non-compete clause shall not be applicable if the cause of terminating the contract is due to the employer’s will or a breach of his legal or contractual obligations.
4. It may be agreed, in writing, that the non-compete clause shall not be applicable upon terminating the employment contract.
5. The worker shall be exempted from the non-compete clause stipulated in Article (10) of the Decree-Law in accordance with the following conditions:
   1. Payment of a compensation to the previous employer, that does not exceed three months of the worker’s wage as agreed upon in the last contract, by the worker or the new employer, provided that the previous employer’s approval to do so is in writing.
   2. If the contract is terminated during the probation period.
   3. Any professional categories, in accordance with the requirements of the labour market in the State, stipulated in a resolution issued by the Minister under the manpower classification approved by the Cabinet.

According to the above two articles, there are legal criteria to have a valid Non-Compte Clause, and there is another characteristic for the Non-Compete Clause under the same articles.

Legal Criteria for a Valid Non-Compete Clause under Labor Law.

The following criteria shall be met to have a valid Non-Compete Clause under the UAE Labor Law:

1. Written Agreement.

The law requires that the Non-Compete Clause be written, and the Employer cannot argue that there is a verbal non-compete agreement; this is one of the cases where the law requires the contract to be written, as the law does not require the contract to be written except when defined by the law. The non-compete agreement can be part of the labour contract or a separate document.

2. Termination After Probation Period.

The law requires that the employment contract be terminated after the probation period for the Non-Compete Clause to be active; if the employee has been terminated during probation, then the clause related to the non-compete shall not apply to the employee.

3. Nature of Work.

The Law requires that the nature of the work is critical for the employer to make the employee agree to the non-compete clause; the employee shall be able to access the client’s data and details as well as know the client’s business secrets; this is why this clause does not work for the unskilled employees, this is also why the employer shall be careful to list his skilled employees under unskilled visa without have a proof in writing that this visa is for the issuing of the visa purpose regardless of the actual employee role in the company. Also, it is advised that the employer include the employee’s job description in the contract and state that this role allows the employee to know the clients of the employer as well as his business data and secrets.

4. Period Limitation.

The Law requires that the Non-Compete Clause to be limited to certain period which shall not exceed two years.

5. Limited Geographical Location.

The law requires that the Non-compete has a limited geographical location; the law did not specify it by the emirate where the employer is established, which means it can be more than one, but always remember that there shall be a justification to extend the protection to other emirates, if the employer, for example, has a branch within other emirates and the employee is aware of the client base related to this branch, or the main office already has an extensive profile of clients within another specific emirate that justifies the extension of the geographic location to include other emirates; otherwise the reasonable protection shall be limited to the emirate where the employer is established to avoid the nullification of the non-compete clause.

6. Termination of the Employment Contract by the Employer Will or in Violation of the Law.

If the employer terminates the employment contract or the termination was against the law, then the Non-Compete Clause will be invalid, for example, terminating the contract without giving notice period, or due to the non-payment of salaries, or other violations of the labour law; all these is a ground for the nullification of the Non-Compete Clause. Also clause article 12 (c) above stated that if the contract is terminated according to the employer’s will without adding any limitation then the Non-Compete Clause will be invalid.

7. Justified Clause to Protect Legitimate Business Interest.

The law requires that the Non-Compete Clause be justified to protect the employer’s business interests. If the court finds that the clause is prejudicious against the employee, the court may nullify it; this will be subject to court evaluations.

Legal Characteristics of Non-Compete Clause under Labour Law.

There is legal characters for the Non-Compte Clause under Labour Law; you shall keep an eye on these while you are making an assessment for the Non-Compte Clause:

1. Lapsing Period

The Law has defined a lapsing period for any violations under the Non-Compete Clause, which is one year from the date the employer becomes aware of the employee’s violations; the employer has the pardon of proof concerning the date of knowing the violation, such as published news or a post on social media or receiving an email by mistake from the clients, etc.

2. The Exempt Occupational Professions

The Law allowed for issuing a list of exempt occupational professions, which is a risk for employers that their employees may fall on this exemption, and then the Non-Compte Clause will be invalid. No list of such occupational professions has been announced yet at the time of drafting this publication.

3. The Employer shall Bear the Burden of Proving the Damage Concerning the NonCompete Clause.

As advised before, breaching the Non-Compete Clause does not bring any right for compensation to the employer except if there is actual damage of losing clients or business due to the beach of the Non-Compete Clause. The losses have to be exact and not just an estimate of damages.

4. Jurisdiction is for Labour Courts

The law has defined that the jurisdiction for any dispute concerning the Non-Compete Clauses in UAE will be subject to the jurisdiction of the labour courts to issue its judgment concerning the clause validity or any claim under it.

5. Waiver of Non-Compete Clause

The law has allowed the employer and employee to waive the Non-Compete Clause either through a mutual agreement between the employer and the employee without consideration or with the payment of three months’ salary from the new employer to the old employer if he consented to such matter.

The Risk Associated with Non-Compte Clause

There is risks associated with stating the Non-Compte Clause in the employment contracts with the employees, which may lead to the invalidity of this clause; this is why we advise replacing it with the NonSolicitation of Clients Clause or including it in a separate article in the employment agreements, the risks are that the Non-Compete Clause can be invalidated due to the following reasons:

1. Termination during probation Period

If the employee was terminated during the probation period, then you cannot claim that the NonCompete Clause is valid. During his probation, the employee may have already accessed the client’s date and details and be aware of the employer’s business secrets.

2. Arguing that the Nature of Work or Geographic limitations are justified.

There could be a dispute between the employer and employee about whether the nature of work allows the employee to know the business secrets of the employer and client data and details; also, if the employer extended the geographic limitation beyond the emirate of employer business, there will be a debate if this extension is justified or not If the business of the employer in the extended emirate is sufficient for him to extend the Non-compete clause to cover this area.

3. Termination of the Employment Contract by the Employer Will or in Violation of the Law.

This clause invalidates the Non-Compete Clause if the employer terminates the contract by his will, which means if the contract is limited and the employer terminated the contract before its expiry date, then the Non-Compete Clause shall be invalid, also terminating the contract in violation of the law is a broad definition as not all employers can proof the violations where the law is setting the pardon of proof on the employer.

4. Justified Clause to Protect Legitimate Business Interest.

The law requires that the Non-Compete Clause be justified to protect the employer’s business interests, which is another wide definition with no criteria to define legitimate business interests.

5. The Exempt Occupational Professions

The employer’s employees may fall within one of the exempt occupational professions according to the decisions of in a resolution issued by the Minister under the manpower classification approved by the Cabinet.

6. The Employer shall Bear the Burden of Proving the Damage Concerning the NonCompete Clause.

Another burden related to having a non-compete clause is that the employer always bears the burden of probing the damage caused by the breach of the Non-Compete Clause.

This is because of the many risks associated with having a Non-Compete Clause in employment agreements; we always advise the client to replace it with a Non-Solicitation of Client clause or keep both clauses independent in the employment contract; we can see how the Non-Solicitation of Client Clause defines which is better.

The Non-Solicitation of Client Clause

The Non-Solicitation of Client Clause is an agreement between the employer and employee that the employee will not for two years approach the clients of the employer; the employee also confirms that this clause is better for him than the Non-Compete Clause as he will not be forced to change his residency from the emirate to another emirate with a new market that employee does not anything about it. Nour Attorneys always add a financial penalty for each client approach, equaling AED 50,000.00. Sometimes, as per client request and according to the business size, they may agree on more financial penalties.

Below is a comparison between the Non-Compete Clause Vs. Non-Solicitation of Client Clause:-

According to the above, it is better to rely on the Client’s Non-Solicitation to avoid all these risks related to the Non-Compete Clause.

Why the Non-Compete Clause Does Not Meet Business Practices Nowadays.

Remember that the Non-Compete Clause was added to the law in 1981; there is a change in the business environment and shapes. The competition now does not require the employee to work or have a visa in the exact emirate; clients can be approached through emails, meetings can be held online even if you are in other countries, and management of companies and businesses can be all executed online, invoicing, banking, accounting keeping and management, all in the cloud now, for this you need to ensure that the competition is not just opening a business in the same emirate. Still, it would help if you protected your clients from being approached by the employees.

Conclusion

The non-solicitation of the Client clause is the most suitable clause to protect you from unfair competition if it includes pre-agreed compensation for the employee’s breach of this obligation.

Nour Attorneys, more than eight (8) years back, has advised its clients always to have a Non-Solicitation of Client Clause associated with agreed penalties better than a Non-Compete Clause with no penalties because we see the future of the business and move quickly to adopt the changes in the business environment, Nour Attorneys business-oriented lawyers, and legal consultants have provided unique solutions for the problems that face business to protect there information and resources.