UAE M&A: How Employment Due Diligence Can Help Buyers Identify Hidden Liabilities and Protect Deal Value

Employment issues are often treated as a secondary consideration in UAE mergers and acquisitions, despite their potential to create substantial financial and legal exposure. The risks can vary significantly depending on whether a transaction is structured as a share purchase or an asset acquisition, but neither structure eliminates the need for careful employment due diligence.

A particular challenge in the UAE is that the labour framework does not establish a straightforward mechanism for the automatic transfer of employees following a change in ownership. As a result, buyers, sellers and their advisers must assess the workforce carefully before a transaction is completed.

Four areas deserve particular attention in any UAE M&A employment review: the treatment of employees, employment contracts, end-of-service liabilities and wider labour-law compliance.

Employee Transfers: The Deal Structure Matters

How employees are dealt with following an acquisition depends largely on the structure of the transaction.

In an asset sale, employees cannot simply be transferred from one employer to another. Instead, the transferor generally terminates the relevant employment relationships and the transferee subsequently re-hires the employees. This can trigger end-of-service entitlements at the point of termination.

Federal Decree-Law No. 33 of 2021 refers to employment contracts continuing where there is a "change in the form or legal status" of an establishment, with the new employer assuming liability for employees. However, this provision is unlikely to cover a conventional asset sale where the employees' existing employment relationships are terminated and new ones established.

The position is materially different in a share purchase. Since the employing company remains the same legal entity, employment contracts, employee seniority and existing liabilities generally continue without interruption. The buyer therefore inherits the target company's accrued gratuity obligations. Any shortfall in the target's provisions can consequently have a direct impact on the buyer's financial position and transaction returns.

The distinction between the two structures should therefore be considered at an early stage, as it can influence not only the mechanics of the transaction but also valuation and the allocation of risk between the parties.

Where employees are expected to be re-hired following an asset acquisition, the due diligence exercise should establish whether any UAE or GCC nationals are affected, identify the relevant notice periods and determine how accrued gratuity will be treated. Advisers should also examine whether existing employment contracts contain notification or consultation requirements that need to be addressed before the transfer takes place.

Employment Contracts: Look Beyond the Templates

Reviewing standard employment contracts alone is unlikely to provide a complete picture of a target's employment liabilities. Buyers should obtain a representative sample of actual employee contracts and compare their terms with the way employment arrangements operate in practice.

The review should examine compliance with UAE labour legislation and identify contractual commitments that could create financial exposure. Particular attention should be paid to remuneration arrangements, including basic salary, allowances, bonuses, incentives and other benefits. Holiday entitlements and outstanding employee claims should also be assessed.

This is particularly important because basic salary, rather than total or gross remuneration, forms the basis for calculating statutory gratuity.

Historical employment documentation can also create unexpected risks. Due diligence teams should examine contracts and other documents issued to employees whose service has previously moved between related entities. Careless drafting may inadvertently acknowledge an employee's earlier service with another employer.

Such an acknowledgement could potentially be relied upon in employment proceedings and create an obligation to recognise previous service, including where gratuity relating to that period has already been paid. This issue can arise in group reorganisations, internal transfers and asset carve-outs, making careful review of historical employment documentation essential.

Gratuity: A Liability That Can Change the Deal Economics

End-of-service gratuity is among the most significant employment liabilities that buyers may inherit in a UAE acquisition.

Under-provisioning is a recurring issue. One common error is calculating the liability using total remuneration rather than basic salary, resulting in an inaccurate assessment of the target's obligations.

Buyers should therefore require an independent calculation of accrued end-of-service benefits across the workforce rather than relying solely on figures supplied by management. In a share acquisition, these liabilities remain with the employing entity and consequently become part of the buyer's inherited exposure.

The statutory calculation provides that a full-time employee who has completed at least one year of continuous service is entitled to end-of-service benefits based on basic wage. The entitlement is calculated at 21 days' pay for each of the first five years of service and 30 days' pay for each additional year.

The calculation should be tested against payroll and employment records on an employee-by-employee basis where appropriate. Due diligence should also identify accrued but unused annual leave, including leave accumulated during the relevant two-year period preceding visa cancellation. These amounts can represent a significant additional liability and may not always be reflected accurately in the target's gratuity provisions.

Beyond Gratuity: Wider Compliance Exposure

Employment due diligence should not be confined to contractual liabilities and gratuity. A comprehensive review should identify broader compliance issues that could generate penalties, disputes or additional costs after completion.

Disputes and claims: Buyers should obtain details of employment disputes, MOHRE complaints and claims relating to unpaid wages, wrongful termination or other employment issues. A history of disputes may indicate weaknesses in the target's HR practices, while unresolved claims can translate directly into financial exposure. Recently terminated employees and pending employment litigation should also be reviewed.

Wage compliance: Compliance with wage protection requirements should be assessed across the workforce. Systemic WPS failures can become increasingly significant as employee numbers rise, meaning the scale of the workforce is an important factor in evaluating the potential exposure.

Visa and sponsorship arrangements: The status of employee visas and sponsorships should be reviewed alongside employment contracts, gratuity obligations and labour disputes. Incomplete records or unrecognised liabilities can result in unexpected costs following completion.

Data protection: The target's handling of employee personal data should also be examined in light of the UAE's personal data protection regime. Privacy policies, data-handling procedures and internal controls should be reviewed to identify potential compliance gaps and exposure arising from data breaches.

Changes in labour regulation: UAE employment legislation has evolved considerably since the introduction of the current Labour Law framework in 2021. Changes have included amendments affecting individual labour dispute procedures and penalties, including measures effective from 31 August 2024. Due diligence should therefore establish whether employment policies, contracts and procedures have been updated to reflect the current legal framework.

Making Employment Due Diligence Part of Deal Strategy

Employment due diligence should be treated as an integral part of transaction planning rather than a routine compliance exercise undertaken shortly before completion.

For buyers, independently verifying gratuity and other employee liabilities can provide a more accurate picture of the target's financial position. Employment contracts should be tested against current legislation and actual working practices, while asset acquisitions require particular attention to the timing and mechanics of employee termination and re-hiring.

Where potential liabilities cannot be eliminated before completion, the transaction documents should provide appropriate protection. Representations and warranties can address the accuracy of information disclosed by the seller, while specific indemnities may be appropriate for identified or residual employment risks.

Ultimately, understanding the target's workforce liabilities before signing can help buyers make better-informed decisions on transaction structure, valuation and risk allocation. In UAE M&A transactions, employment due diligence is therefore not simply about compliance — it can be a critical component of determining the real value of the deal.