The Middle East, with its booming and increasingly diversified economy and rapid population growth, is a popular region for expansion by many foreign multinational companies.
But multinationals targeting the Middle East for business expansion need to understand the unique challenges it poses from an employment viewpoint.
The most significant challenge at present is the impact of the nationalization programs various Middle Eastern jurisdictions are implementing. Other concerns include setting up employee documentation, workforce policies and practices in the Middle East to allow for regional or global mobility, and managing risks relating to benefits and protection of confidential information and customer connections.
Nationalization is an intense focus at present in the Gulf Corporation Council countries, which intend to cut down on employing expatriates with the aim of recruiting more local nationals to combat youth unemployment. A number of recent legislative developments in the employment sphere aim to promote the employment of local nationals across the Gulf, most notably in Saudi Arabia, Oman and Kuwait, where government authorities are cracking down on illegal workers and making it increasingly difficult for companies to employ expatriate employees unless they also employ a sufficient number of local national employees.
Saudi Arabia. Saudi Arabia faces a significant challenge: half of its 11.3 million workforce are expatriates. Of the Saudi population itself, 48 percent is under the age of 25; and unemployment across the whole of Saudi Arabia stands at 12 percent.
We are continuing to see developments with the Nitiqat system in Saudi in response to these extremes. The Nitiqat system was originally introduced in 2011 to augment previous attempts to reduce the number of expatriate workers in the private sector. The Ministry of Labor through the Nitiqat system places companies in Saudi Arabia into one of six bands, ranging from red (non-compliant) to platinum depending on the percentage of Saudi locals employed for their sector and size of business. The higher the percentage, the better the categorization.
This has created a market for what is known as Saudization, in which companies are judged against their peers and are effectively challenged to lead the market on employing Saudi nationals or suffer disadvantages as a business if they fail to recruit the required number of local nationals assigned to their business by the Ministry of Labor. Banks and financial institutions are generally required to have higher numbers of Saudi nationals to be compliant with Nitiqat. There are varying degrees of compliance. The more compliant you are, the easier it will be for your company to obtain new work visas (Iqamas) for expatriates. Non-compliant companies and companies that have only a low level of compliance will find it extremely difficult to apply for new Iqamas or to transfer Iqamas from other companies and will be unable to renew current Iqamas for expatriates. Non-compliance also allows competitors with a higher level of compliance to freely poach your best expatriate employees from your company.
In recent months, a new system - the Ajeer system – has been put in place to help companies with poor compliance levels that need to recruit more expatriates. Ajeer enables such companies to circumvent Nitiqat in certain circumstances by paying additional fees to an Ajeer company – one of the 16 Ministry of Labor-authorized local manpower companies who are charging companies for their services in obtaining Iqamas for expatriates. When an Ajeer company helps your business find an lqama, that person would remain the employee of the Ajeer, not of your business – but an agreement would be put in place governing the relationship between the Ajeer company and your company.
However, this is really only a temporary (and potentially expensive) solution for companies with poor compliance records, to buy them more time to address their Saudization figures. Companies in Saudi Arabia really need to find a longer term solution to recruit and train more Saudi nationals - not an easy task in the short term for technical roles where Saudi nationals may not have the requisite skills. Possible solutions may lie in the youth training schemes able to supply Saudi labor and other Saudi schemes for job shadowing in technical roles.
Oman. In Oman, we are also seeing a renewed focus on nationalization. The Ministry of Manpower recently declared that no new visas will be issued to expatriates working in the construction and cleaning industries for a six-month period. Further, from 1 July 2014, a two-year ban (previously in operation pre-2006) has been placed on expatriate employees who leave their employment in Oman. This ban effectively prevents employees from joining a competitor firm or any other company in Oman for two years from their departure from Oman, unless their previous company provides them with a non-objection certificate (which they would be unlikely to do if they are worried about competition).
It is hoped that the ban will help regulate the labor market in Oman by controlling the number of expatriates able to live and work there for significant periods - but it will undoubtedly create issues for companies trying to attract expatriates to work in Oman.
Kuwait. Mass protests took place in Kuwait in 2013 over youth unemployment for Kuwaiti nationals, prompting new legislation which will require the private sector to reserve 30 percent of available jobs for Kuwaitis.
As with most of the region, pay in the public sector is significantly higher than in the private sector, prompting the majority of younger members of the workforce to opt for the security of a lifetime role working for the government. However, Kuwait, like the rest of the Gulf countries, wants to ensure mobility from the public sector to the private sector and wants to foster a desire among Kuwaiti nationals to join private sector companies. To this end, incentives (such as the government covering Kuwaiti national salaries for a period of time) are being considered, and we are seeing reports that the Kuwaiti government hopes to decrease the number of expatriate workers by 100,000 each year going forward.
UAE. In the UAE, it is already the case that additional fees are charged by the Ministry of Labor to companies that do not adequately employ UAE nationals or with a workforce that is insufficiently diverse. It may only be a matter of time before there is further scrutiny of expatriate numbers in both the UAE and across the rest of the Gulf. Fewer than 15 percent of the UAE's population of 9 million are local nationals and, of those in the work force, about 70 percent are employed in the public and not the private sector. This is clearly not acceptable and will no doubt be the focus of change in the near future.
Employee documentation, workforce policies and practices
In addition to these new challenges around nationalization, we are continuing to see companies grappling with other common issues which arise when setting up and maintaining an international workforce in the Middle East. Such issues can range from ensuring that policies and employee documentation are kept as uniform as possible across international borders to local immigration requirements and attempts to successfully contract out of local benefits, particularly for employees undertaking long-term secondments to the region while retaining their employment status with their home country entity.
Employment agreements. To live and work in the Middle East (predominantly for immigration purposes), employees are required to enter into an employment contract with a local entity in the location where they will be working. This is a requirement whether or not the employee is a local national or an expatriate, because even local nationals must have a work permit to be able to legally work in the region. This means that a foreign company without local corporate presence is typically unable to employ in the Middle East.
It is often the case, therefore, that some employees will acquire the right to bring claims against both their home country entity and the entity they work for in the Middle East, thus providing them with two potential avenues of attack against their employer. To ensure that employees are not able to double recover on statutory benefits in both countries, the contractual documentation in place should make it clear that, for the period of any international secondment, so far as legally possible, benefits in the home country should cease or are offset against the employee's statutory rights in the Middle East. For example, rights such as annual leave can be stipulated to run concurrently in both the home country and the host country in the Middle East. Employers can also consider either suspending or specifically offsetting benefits such as pension payments against the right to an end-of-service gratuity payment in the Middle East to prevent the employee from taking advantage of both entitlements.
Mobility. We also frequently see issues where employees are given regional roles and are required to work across the Middle East but often struggle to obtain visa and immigration permissions to work on a temporary basis in more than one Middle East jurisdiction. This will increasingly be the case, since it is no longer possible to hold dual residency with more than one Gulf jurisdiction.
At least for some jurisdictions, this issue can be alleviated to a large extent by ensuring that the employee's visa designation is at least a managerial position - without this, it would be difficult, for instance, to obtain a business visit visa for a UAE-sponsored employee to attend meetings in Saudi Arabia. Even within the UAE itself, it can be difficult for employees to work both onshore in Dubai and in one of Dubai's free zones as, from a strict legal perspective, employees must only work for their employer at their employer's premises. This means that, if their employer is based in a free zone (a specially designated tax free zone that permits 100 percent foreign ownership and has no taxes, such as the Dubai Internet City), the employee should technically only work from that free zone location. If through an inspection they are found working elsewhere in the UAE, the company and the individual employee could face fines. If the situation is not rectified, there can be severe implications for the employee, up to and including imprisonment and deportation.
Employers engaging or relocating employees to the Middle East should also know that restrictive covenants are predominantly only used for deterrent purposes. Injunctive relief is seldom available as a remedy to employers in the Middle East (in the UAE, for example, injunctive relief is only available in the Dubai International Financial Centre and not elsewhere). There is also a lack of enforcement treaties for court awards between Western and Gulf jurisdictions, meaning that restrictions linked to share option agreements overseas (e.g., in US or UK companies) cannot be adequately enforced. For the most part, employers can only rely on damages as a remedy and, even then, it is unlikely that any damages awarded would adequately compensate the company for losses suffered from the breach unless a liquidated damages clause has been included in the employee's contract. A way around this could be to have longer contractual notice periods and garden leave clauses for employees who deal with a lot of confidential and commercially sensitive information.
Before you relocate your employees to the Middle East
Overall, immigration and mobility issues should be carefully considered prior to relocating any employees to the Middle East to ensure that employees are placed on the most appropriate visa to enable them to work as freely as possible around the Gulf. Employers should also take care when drafting contractual documentation for employees relocating to the region to avoid affording employees dual rights. Careful thought at the outset on how to structure documentation and manage risks should help to alleviate these region-specific risks and challenges.
An earlier version of this article appeared in Society for Human Resource Management Journal, July 2014.