Introduction
The Dubai Court of Cassation recently issued a significant ruling (Cases No. 1/2025 & 4/2025) that clarifies several contentious aspects of UAE employment law. The judgment addresses critical questions regarding end-of-service benefits, annual leave compensation, and the proper calculation of gratuity payments. This case provides valuable insights into how UAE courts interpret employment legislation, particularly Federal Decree-Law No. 33 of 2021 (the UAE Labor Law). By examining this judgment while maintaining the anonymity of the parties involved, we can extract important legal principles that affect both employers and employees operating in the UAE.
Case Background and Procedural History
The case involved an employment dispute between a limited liability company (the employer) and a former employee who had worked for the company from March 2018 until November 2023. The employment relationship ended when the employer terminated the employee’s services. Following the termination, the employee filed a labor claim (Case No. 15142/2023) seeking various entitlements, including:
- Unpaid salary for 21 days in November 2023
- Compensation for unused annual leave accumulated throughout the employment period
- Three months’ salary as notice period compensation
- Compensation for arbitrary dismissal
- End-of-service gratuity
- Unpaid commissions and profit shares
- Cash equivalent for six annual flight tickets
The employer contested these claims and filed a counterclaim. The counterclaim alleged that the employee had received unearned salaries, caused financial losses to the company, and obtained confidential information belonging to the employer.
The case progressed through the UAE court system, with both parties appealing the initial judgment (Appeal Cases No. 1150/2024 and 1173/2024) before reaching the Dubai Court of Cassation (Cases No. 1/2025 and 4/2025).
Key Legal Issues Addressed
The Court of Cassation addressed several important legal questions that have broader implications for employment relationships in the UAE:
End of Service Benefits UAE: Calculation Methods
One of the central issues was how end-of-service benefits should be calculated, particularly when an employee receives variable compensation in addition to a fixed salary. The employee claimed that their end-of-service benefits should include both their basic salary and the variable component (2.5% of company revenues).
The employer argued that the parties had agreed in the employment contract that the employee would be entitled to 2.5% of the company’s annual revenues instead of end-of-service gratuity. However, the Court rejected this argument, citing Article 51/2 of Federal Decree-Law No. 33 of 2021, which establishes that foreign workers employed full-time who complete at least one year of continuous service are entitled to end-of-service gratuity upon termination.
The Court emphasized that Article 65/3 of the same law invalidates any contractual provision that contradicts the law unless it provides greater benefits to the employee. Therefore, any contractual term suggesting that the salary received by the employee during employment includes end-of-service gratuity is invalid.
Gratuity Calculation UAE: Variable Pay Components
The Court also addressed how variable pay components should be factored into gratuity calculations. The employee’s basic monthly salary was AED 100,000, but they also received variable compensation based on a percentage of company revenues.
The Court upheld the lower court’s approach to calculating the average monthly variable pay based on the last six months of employment. This resulted in an average variable component of AED 27,818 per month, which was added to the basic salary for calculating end-of-service benefits.
This aspect of the ruling provides important guidance on gratuity calculation UAE practices, particularly for employees who receive performance-based or commission-based compensation.
Annual Leave Compensation UAE: Time Limitations
Another significant issue was the employee’s claim for compensation for unused annual leave accumulated throughout the entire employment period. The employer argued that claims for annual leave compensation should be limited to the last two years of employment, citing the statute of limitations under Article 54/7 of the Labor Law.
The Court clarified that the statute of limitations for labor claims begins from the date of termination or when the employee leaves service. Since the employee filed the claim within one year of termination, the Court rejected the employer’s argument regarding the statute of limitations.
However, the Court limited the annual leave compensation to the last two years of employment, awarding AED 200,000 based on the employee’s basic salary. This establishes an important principle regarding annual leave compensation in UAE practices, confirming that while claims must be filed within one year of termination, the compensation itself is generally limited to the last two years unless proven otherwise.
Termination Rights UAE: Notice Period Requirements
The employee claimed compensation for the month’s notice period, arguing that the termination was arbitrary. The Court examined whether the employer had followed proper procedures for termination without notice.
The Court found that the employer had attempted to conduct a disciplinary investigation, but the employee refused to attend the investigation meeting. The Court considered this refusal as a waiver of the employee’s right to present a defense, which justified the employer’s decision to terminate without notice.
This aspect of the ruling clarifies important principles regarding termination rights UAE, particularly the circumstances under which an employer may terminate employment without providing a notice period.
Legal Principles Established
The judgment establishes or reinforces several important legal principles that have broader implications for employment relationships in the UAE:
1. Invalidity of Contractual Waivers of Statutory Rights
The Court reaffirmed that contractual provisions attempting to waive or reduce statutory entitlements are invalid unless they provide greater benefits to the employee. This principle applies particularly to end-of-service gratuity, which cannot be contractually included in the regular salary.
2. Calculation of Variable Compensation
The Court endorsed the approach of calculating variable compensation based on the average of the last six months of employment. This provides a clear methodology for determining end-of-service benefits for employees who receive performance-based or commission-based compensation.
3. Burden of Proof in Leave Compensation Claims
The Court placed the burden of proof on the employer to demonstrate that an employee has taken annual leave or received compensation for it. In the absence of such evidence, the Court will presume that the employee is entitled to compensation for unused leave, subject to the two-year limitation.
4. Justification for Immediate Termination
The judgment clarifies that an employee’s refusal to participate in a disciplinary investigation can justify immediate termination without notice. This reinforces the importance of cooperation in workplace investigations.
Practical Implications for Employers and Employees
For Employers:
Review Employment Contracts: Ensure that employment contracts do not contain provisions that attempt to waive or reduce statutory entitlements, as such provisions will be deemed invalid.
Maintain Proper Records: Keep detailed records of annual leave taken by employees and any compensation paid for unused leave. The burden of proof lies with the employer to demonstrate that employees have taken their entitled leave.
Document Disciplinary Procedures: Ensure that all disciplinary procedures are properly documented, including invitations to investigation meetings and the employee’s response. This documentation can be crucial if termination without notice becomes necessary.
Calculate End-of-Service Benefits Correctly: When calculating end-of-service benefits for employees who receive variable compensation, use the average of the last six months as a basis for the variable component.
For Employees:
Understand Your Statutory Rights: Be aware that your statutory rights, including end-of-service gratuity, cannot be contractually waived or reduced.
Monitor Your Leave Balance: Keep track of your annual leave balance and ensure that you either use your entitled leave or receive compensation for it.
Participate in Workplace Investigations: Refusing to participate in a disciplinary investigation may justify immediate termination without notice or compensation.
File Claims Promptly: Remember that labor claims must be filed within one year of termination or leaving service to avoid being time-barred.
Conclusion
This Dubai Court of Cassation judgment (Cases No. 1/2025 & 4/2025) provides valuable clarification on several important aspects of UAE employment law, particularly regarding end-of-service benefits, annual leave compensation, and termination procedures. The ruling reinforces the protective nature of UAE labor legislation while also recognizing employers’ rights in certain circumstances.
Both employers and employees operating in the UAE should take note of these legal principles to ensure compliance with the law and to avoid costly disputes. As the UAE continues to develop its labor law framework, court judgments like this one play a crucial role in interpreting and applying the legislation in practical contexts.
By understanding these legal principles and their practical implications, stakeholders in the UAE employment market can better navigate the complexities of employment relationships and protect their respective rights and interests.
Having said that, contact Khairallah Advocates & Legal Consultants and benefit from our free 30-min legal consultation.
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