2015 continues to be a strong year for mergers and acquisitions in the Middle East and the region is poised to witness a further acceleration in M&A activity. In this article experts from Clyde & Co. highlight some of the key employment aspects arising from business transfers in the GCC.
In order to work lawfully in a GCC country an individual who is not a national of that GCC country (or a national of another GCC member state) must hold a residence visa and work permit, for which they must be sponsored by a locally-registered entity (the Sponsor). GCC nationals will merely need to be registered with the applicable labour authority. As part of the sponsorship process, the individual is required to enter into, and register with the authorities, a prescribed form employment contract with the Sponsor. The Sponsor will therefore be considered the individual’s employer and will be liable for any entitlements which the individual accrues under the applicable labour law.
An individual is normally only able to work for their Sponsor at the Sponsor’s premises and carry out the type of activities listed in the Sponsor’s commercial trade licence.
Types of business transfers
There are two principal ways of acquiring a business – share acquisition or asset acquisition. In a share acquisition, the purchaser acquires all of the shares in a company (or companies). In an asset acquisition, the purchaser acquires the assets, liabilities and goodwill of a business, but not the company itself.
A key feature of share acquisitions (as distinguished from asset acquisitions) is that, save to the extent that some form of pre-sale restructuring is carried out, all of the assets and liabilities (including liabilities relating to any employees) of the target company will be acquired by the purchaser upon completion of the acquisition of the shares. From an employment perspective, there will be no change to the identity of the employing entity of any employees as a result of a share acquisition and so no transfer of employment will be necessary.
In an asset acquisition, the parties will agree which assets and liabilities are to be acquired by the purchaser. Upon completion of the transaction, ownership of those assets and liabilities will transfer from the seller to the purchaser. From an employment perspective, employees who are assigned to the assets being transferred will often need to be transferred from the seller to the purchaser (or another entity). The identity of the affected employees’ employer will therefore change upon transfer.
Transfer of employment
There are no laws in the UAE or Kuwait providing for the automatic transfer of employment from one company to another. Therefore, the “transfer” of employment between entities in these countries can only be achieved by terminating an employee’s employment with their existing employer (i.e. the seller) and the employee being “hired” by the new employer (i.e. the purchaser).
The respective labour laws of Oman, KSA, Qatar and Bahrain contain ambiguous provisions providing for the automatic transfer of employment although, in practice, most companies tend to adopt the termination and rehire approach referred to above. However, the relevant provisions could potentially limit the new employer’s ability to change terms and conditions of employment post-transfer and, arguably, require a transferring employee’s continuity of service to be maintained.
Residence visa and work permit
Regardless of whether an employee is transferred by way of termination and rehire, or under the automatic transfer provisions referred to above, the employee’s existing residence visa and work permit will need to be cancelled and a new residence visa, work permit and, if applicable, ID card, will need to be issued in the name of the employee’s new Sponsor. It is unlikely that the transferring employees (and their dependents) will be able to travel abroad during the visa renewal process.
The new Sponsor must ensure that they have a sufficient quota of visas and office space available for the transferring employees. For example, employers in the DIFC must have 80 sq. ft. of office space per employee or any visa application will be rejected. There will also likely be a limit on the number of visas which can be obtained at any one time. Applications for large numbers of visas will therefore often have to be made in tranches, which could affect the timeline of the whole transfer process.
Special consideration should be given to any transferring employees of nationalities which, for a variety of public policy and security reasons, are currently experiencing difficulties in obtaining new residence visas. For example, in the UAE, individuals from countries including Syria, Iran and Yemen are currently experiencing difficulties in obtaining UAE residence visas.
In some GCC countries, such as Bahrain, KSA, Oman and Kuwait, the seller and the purchaser will also be required to submit a joint application to the applicable labour authority for approval of the transfer.
If an employee is transferred to their new Sponsor by way of termination and rehire, upon termination of their employment with their old Sponsor notice pay, holiday pay, end of service gratuity and any other contractual entitlements (the Accrued Entitlements) will crystallise and will become payable to the employee in accordance with the applicable labour law. It is open to an employee to insist that the Accrued Entitlements are paid to them upon termination (i.e. prior to their transfer to the new employer). However, most employees agree to roll over the Accrued Entitlements into their new employment with the new Sponsor. This type of agreement should be clearly documented.
The respective labour laws of UAE, Oman, KSA and Qatar state that following a business transfer both the previous employer and the new employer are jointly (and, in KSA, severally) liable for the Accrued Entitlements and any other obligations relating to the transferring employees. However, in practice it is common for the parties to a business transfer to apportion these liabilities by way of indemnification in the relevant purchase documentation.
Although there is no statutory requirement to consult with employees in relation to a potential business transfer, it is advisable to start discussing the transfer with all affected employees at an early stage. It will be important that the transferring employees cooperate in the process and giving them as much information as possible from the outset should help to ensure this. Any transferring employees who sponsor dependents are likely to be anxious as to how the process will impact on their dependents’ residence visas.
In the UAE, it may be possible for transferring employees to utilise the bond system. Broadly speaking, a “bond”(approximately AED5,000) plus an administration fee is paid to the UAE Immigration Authority which will hold the bond and the transferring employee’s dependants’ passports during the transition period between the cancellation of the transferring employee’s visa with their old Sponsor and their new visa being issued in the name of their new Sponsor. When the transferring employee’s new visa is issued, the Immigration Authority will release the bond and the transferring employee’s dependants’ passports.
As the transfer process involves terminating the employee’s employment, the requisite notice of termination of employment should be issued to the employee. In practice, the requirement to give notice is often built into the transfer arrangements agreed with the employee although employers should be aware that there are restrictions in some GCC countries on giving notice to employees on statutory leave (e.g. sick leave and annual leave).
Wages protection system
Some GCC countries operate a wages protection system (WPS) which is a centralised system designed to encourage transparency in the payment of wages process and to ensure that workers are paid on time. An employer that delays payment under the applicable WPS will be subject to a freeze on all sponsorship applications or renewals until all wages are paid in full. It is therefore crucial that, if a purchaser is required to pay its workers through a WPS, it is prepared to do so.
Across the GCC, legislation has been introduced to encourage or compel the employment of nationals in the private sector. To support these policies, there are strict rules governing the dismissal of GCC nationals. If any of the transferring employees are GCC nationals, it may therefore be necessary for the employer to obtain approval for the proposed termination of the GCC national, from the relevant authority. This will need to be factored into the transfer timetable.
It will be necessary to notify the relevant pension authority or General Organisation of Social Insurance (GOSI) of the termination of any GCC nationals and these employees will need to be re-registered with the applicable labour authority under their new Sponsor’s registration.
Employers should also consider whether the proposed employee transfers will affect their on-going compliance with nationalisation quotas.
- Will any of the transferring employees potentially be subject to a labour ban?
- Some transferring employees may require a letter confirming the details of the change of their employer to submit to their bank in support of any continued loan facility.
- Will the purchaser try and cherry-pick employees from the seller or will the seller try and off-load underperforming employees onto the purchaser?
- What will happen to those employees who do not transfer? Employers should be aware that redundancy is nota widely recognised concept in the MENA region.
- Where will the transferring employees fit within the structure of the purchaser?
- Will the transferring employees be required to relocate from their current workplace?
- Will the purchaser recognise the transferring employees’ continuity of service for the purposes of calculating end of service benefits?
If you would like further information on any issue raised in this update please contact:
Clyde & Co LLP
PO Box 7001
Level 15, Rolex Tower
Sheikh Zayed Road
Dubai, United Arab Emirates
T: +971 4 384 4000
F: +971 4 384 4004
Clyde & Co accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary.
Rushika Bhatia Editor
Rushika Bhatia is one of the region’s leading commentators on business and current affairs issues. She is the Editor of SME Advisor magazine - the flagship title of CPI Business. She is passionate about infographics – with special emphasis on data, research and statistics. Rushika has a Bachelor’s Degree from Indiana University, USA and is also CIMA qualified.