Understanding Business Regulations and Bonuses Under UAE Labor Law Business Regulations, Applicable Law, and Jurisdiction in the UAE

The relationship between employers and employees in the UAE is governed by a variety of laws and regulatory authorities, which differ based on the employer's jurisdiction and the employee's classification. Key legal frameworks include Federal Decree Law No. 33/2021 (UAE Labor Law), Dubai International Financial Centre (DIFC) Employment Law No. 2/2019, and Abu Dhabi Global Market (ADGM) Employment Law.

Certain free zones, such as Dubai Healthcare City (DHCC) and Dubai Multi Commodities Centre (DMCC), have their own dispute resolution centers but largely adhere to the UAE Labor Law. Additionally, distinct regulations apply to specific categories, including UAE nationals, domestic workers, military personnel, and government employees.

This article focuses on employment relationships governed by the UAE Labor Law, particularly those involving foreign employees in the private sector. While some free zones with independent labor regulations may provide enhanced employee benefits or impose additional employer obligations, the UAE Labor Law serves as the foundational regulation for employment matters across most private sector organizations.

Bonuses Under the UAE Labor Law

The Legal Nature of Bonuses

A bonus is an additional financial benefit to the basic salary, often awarded in recognition for exceptional performance, seniority or achieving specific targets. Unlike basic wages, which are clearly defined under Article 1 of the UAE Labor Law, bonuses and allowances fall under discretionary arrangements and typically need to be specified in the employment contract to be enforceable.

Basic Wage vs. Allowances and Bonuses

The basic wage refers to the fixed remuneration specified in the employment contract, excluding allowances or non-monetary benefits. Allowances, which cover housing, transportation, and other benefits, are supplementary to the basic wage. Bonuses are considered additional payments, often linked to performance, profit-sharing, or other employerdefined criteria.

In practice, bonuses are not automatically considered part of the basic wage and are typically contingent to contractual terms. If a bonus is not explicitly stated in the employment contract, employees generally cannot claim bonuses as an enforceable right.

Performance-Based Bonuses: Entitlement and Challenges Entitlement and Internal Regulations

The UAE Labor Law allows employers to define bonus arrangements in internal policies, including criteria for performance evaluations, payment methods, and disbursement methods. However, the law provides limited guidance in resolving disputes related to performance-based bonuses or the methodology of performance evaluation. Disputes often arise in connection with broader claims, such as those related to equality or anti-discrimination.

To mitigate disputes, employers are encouraged to establish clear internal policies addressing performance evaluation processes, bonus eligibility criteria, and dispute resolution mechanisms.

Discretionary Authority

Employers in the UAE often retain significant discretion over bonus payments, particularly when outlined as such in the employment contract. Courts generally uphold the contractual terms and assess disputes based on the parties' intentions, as reflected in the contract and in accordance with civil law principles. Employers can strengthen their legal position by ensuring that employment contracts include unambiguous terms regarding bonuses, such as the conditions for eligibility and the treatment of bonuses in cases of employment termination.

Impact of Bonuses on Severance Pay

Bonuses do not affect the calculation of end-of-service gratuity under the UAE Labor Law, which is based solely on the basic wage. Allowances, bonuses, and other fringe benefits are excluded from gratuity calculation.

In cases where employment is terminated during a performance period, bonus entitlement depends on the terms outlined in the employment contract. Courts may award proportional bonuses if an employee has partially met performance criteria unless the contract explicitly states otherwise. To avoid ambiguity, employers should include specific terms that address conditions for bonus eligibility, such as the requirement for continued employment at the time of evaluation or payment.

Conclusion and Recommendations

While bonuses are a common feature of modern employment practices, the absence of detailed regulations regarding bonuses in the UAE Labor Law can lead to disputes. Employers can mitigate legal risks by:

• Clearly defining bonus eligibility criteria and payment terms in employment contracts.

• Aligning internal policies with contractual terms and ensuring consistency in performance evaluation.

• Addressing potential scenarios, such as partial performance or termination, in their bonus frameworks.

By proactively establishing clear contractual terms, clear policies, and structured evaluation processes, employers can enhance legal clarity, reduce the likelihood of disputes, and promote trust and fairness in the workplace.