Wednesday, October 9, 2013

Labor and employment in the Gulf Cooperation Council - a strategic overview

The Gulf Cooperation Council (GCC) comprises the states of Bahrain, Kuwait, Oman, Qatar, Kingdom of Saudi Arabia (KSA) and the United Arab Emirates (UAE). It was formed on 11 November 1981 and launched a common market on 1 January 2008 which remains in a state of development. All six economies are characterised by being rentier (meaning they are largely state run and oil based). The GCC labour force has been characterised by high rates of public sector employment for GCC nationals and a private sector workforce dominated by expatriate labour. In the coming years, as attempts are made to develop and diversify the national economy and workforce, employment legislation is increasingly on the government agenda.

The GCC legal system is a civil law system modelled on the laws of Egypt which in turn are modelled on the Napoleonic Codes of France; the exception is Saudi Arabia which although it has a number of codified laws, has a legal system based on Sharia law. Each GCC country has a Labour Code providing a framework for minimum employee entitlements and a consistent approach to labour matters.

Local Law and Expatriates

Local law will have mandatory application on any individual working within a GCC country and an integral part of obtaining work and residency authorisation for non-nationals is the registration of a local employment contract. Both the contract and the authorisations must be obtained by a locally based entity, meaning that many expatriate employees on international secondment or assignment have dual employment contracts. Senior employees, even when locally recruited and employed, may often also have dual contracts (one with the local entity and the other with the holding company or main operating company outside the region) due to corporate governance reasons (for example a need to have a contractual agreement with the listed entity at which level regulatory duties will apply).

It is also worth noting the special function of an entity's General Manager whose name appears on the local entity's trade licence and to whom statutory duties apply, such as in relation to ensuring the company submits audited accounts and complies with regulatory requirements. The General Manager can face personal civil and criminal liability for corporate actions. A key consideration is putting in place adequate powers of attorney to a General Manager and other key senior staff, with regard to signatory authorisations and issues such as the power to enter into client contracts.

Payment of remuneration and benefits to international assignees can also be problematic, with local labour codes stipulating payment of employees in local currency in country. As a result of the economic crises and a desire to regulate the labour market, Kuwait, KSA and UAE have also introduced a monitoring system to ensure employees are paid by direct electronic transfer in country leading many employers to split payroll for seconded employees.

Minimum Employee Entitlements

The labour codes set out requirements in relation to notice, holiday, work hours, probationary periods, sick leave, maternity and Hajj.

The labour codes also stipulate minimum rest breaks and statutory overtime for work in excess of the 8 hour day, work on a week-end and on a public holiday. Another key restriction is an employer's ability to terminate employment for gross misconduct which is strictly regulated and permitted only for stipulated reasons.
The greatest employment related liability is a terminable benefit known as End of Service Gratuity (Gratuity) payable on termination (whether due to employee resignation or dismissal) other than if termination is for gross misconduct. Gratuity is conceptually akin to a pension entitlement and is payable to non-national employees and to nationals only in so far as their earnings are above the maximum earnings limit for compulsory state pension contributions. The formula for calculating Gratuity differs within the GCC as follows (note that in certain GCC countries Gratuity is reduced if the employee resigns):

• Conditional on 12 months' service;
• 21 days' basic salary (plus commission if applicable) for each complete year
• 30 days' basic salary (plus commission if applicable) for each complete year over 5 years
• Cap of 2 years' basic salary (plus commission if applicable)
• Pro-rata entitlement for part years
• Reduced if employee resigns in first 5 years
• ½ month's remuneration for each year
• 1 month's remuneration for each year over 5 years
• Pro rata entitlement for part years worked
• Conditional on 12 months' service
• 3 weeks' basic salary for each complete year of service
• 15 days' remuneration for each complete year of service
• 1 month's remuneration for each complete year over 5 years' service
• Cap of 1.5 years
• 15 days' remuneration for first 3 years of service
• 1 month' s remuneration for each year over 3 years
• Conditional on 12 months' service
• 15 days' basic wage for each year
• 1 month's basic wage for each service year over 3 years

Common Law Jurisdictions : QFC and DIFC

In an effort to establish global financial centres, Qatar and the Emirate of Dubai have established free zone areas which operate separately to the wider national civil law system. Both the Qatar Financial Centre (QFC) and the Dubai International Financial Centre (DIFC) are common law jurisdictions with separate civil and commercial laws, as well as independent courts modeled on common law and in which the default position for the purposes of legal construction and interpretation is English law. Both the QFC and the DIFC have separate employment laws applicable to entities and employees established and based within their jurisdictions. Both laws provide for minimum employee entitlements but notably do not provide for any entitlement to claim unfair dismissal. The QFC employment law also does not provide for Gratuity (although there are proposals to amend the law to provide for this benefit).

Workforce Nationalisation

With the oil boom in the 70's and increased economic prosperity, the GCC has experienced a demographic boom (75% of GCC populations are under 25, with youth unemployment ranging from 20 to 30%). Between 2010 and 2015, 4.5 million GCC nationals will enter the workforce and will have to look to the private sector for employment. With this imperative in mind, workforce nationalization is increasingly being put onto a statutory footing with sector based quotas imposed, an obligation on employers to train nationals to take on more roles and restrictions on employers being able to obtain work and residency authorizations for non nationals. There is a general labour market test set out in each labour code, however, the GCC governments (with the exception of KSA) have not to date strictly enforced these through requirements such as minimum advertising requirements or strict recruitment processes.

The range of measures in this area varies across the GCC with the following quotas applying (the quotas do not apply within free zones and wouldn't apply in the QFC or DIFC):

Kuwait: banking (60%); financial services and investment (40%); petroleum and refinery (30%). Private sector employers failing to meet quotas are unable to contract with Government entities;

Bahrain: the quotas are sector dependant (each sector having an applicable quota) and range from 5% to 80%, most industries being subject to a quota of 20-50%;

Oman: the Ministry of Manpower sets quotas for every sector which then apply for four years. Quotas are usually high, above 50% and many sectors are subject to a quota of up to 90%;

UAE: banking (4%), insurance (5%), retail (2%); certain roles are reserved for nationals (largely administrative roles); and

KSA: every employer is subject to a quota depending on its size and industry under the Nitiquat system which awards points for each criterion complied with and categorizes employers into grades according to their employment of nationals; the higher the grade the more visas the employer is granted to employ foreign nationals and the more administrative benefits it receives. Typical quotas are at least 30 to 35% and 40 roles (mainly administrative) are reserved for KSA nationals. Employers with a ratio of less than 1:1 of nationals to non-nationals must pay a levy of SAR 2400 for each foreign employee, payable at the time the work and residency authorizations are applied for or renewed.

Legislative Reform

Most GCC countries acceded to the WTO in the mid 1990s (Bahrain and Kuwait in 1995, Qatar and UAE in 1996, Oman in 2000) and KSA joined in 2005. As part of the accession agreements and integration process, each GCC member state has embarked on a programme of legislative reform, including revising restrictions on foreign ownership, updating the company law, foreign investment laws and following the economic crisis introducing insolvency laws for the first time. Part and parcel of these reforms is labour legislative reform with Kuwait issuing a new labour code in 2010, Bahrain in 2012 and KSA and UAE introducing reforms by way of amending ministerial resolutions and royal decrees. Much of this reform is aimed at closing the gap between the private and public sectors in terms of benefits and pay so as to encourage the employment of nationals in the private sector, introducing minimum wages, and liberalizing the employee sponsorship system so that foreign employees are able to readily change jobs without employer consent. Other reforms have also included bringing domestic workers within the remit of labour codes (already a reality in KSA and Bahrain) and regulating labour supply from labour exporting countries such as India, Philippines and Indonesia. Introducing discrimination legislation is also another area of recent attention, Bahrain's new labour code providing for non discrimination provisions with regard to recruitment, terms and conditions of employment and termination. Kuwait's revised labour code also prohibits termination based on discrimination due to sex, race, and religion. It remains to be seen whether and how other GCC countries follow suit.

Sara Khoja, Clyde & Co, Dubai