Can UAE employees reclaim their gratuity if their company goes bankrupt?

Some organisations only record the liability on their books but do not set aside funds for end-of-service dues

Under UAE law, end-of-service entitlements must be paid within 14 days of the end of employment. Antonie Robertson / The National

When an international company goes into administration and employees in the UAE are concerned about their end-of-service entitlements, it is important to be aware of several legal points, experts say.

International oilfield services company Petrofac laid off 180 people in the UAE earlier this month, after a multibillion-dollar Dutch offshore wind contract was cancelled, as the firm struggles with mounting debts. Reports claim total unpaid gratuities could exceed Dh27 million.

On October 27, Petrofac said its board had applied to the High Court of England and Wales to appoint administrators for its holding company after Dutch grid operator Tennet cancelled a major offshore wind contract in the Netherlands.

Preferred creditors

“If an employer enters formal restructuring or bankruptcy and cannot pay gratuity, employees [including expatriates] become creditors in the court‑supervised process,” says Michael Kortbawi, partner at BSA Law.

“Unpaid end‑of‑service benefits [UAE gratuity], and wages and salaries that are paid periodically rank as ‘preferred’ debts ahead of ordinary unsecured creditors. However, this preferred category is capped so that the total paid under this preference does not exceed the equivalent of three months’ wages/salary per employee.”

Any balance above that cap should be treated as an ordinary unsecured claim and may be paid only pro rata, along with other unsecured creditors, if funds remain, Mr Kortbawi says.

Ludmila Yamalova, managing partner at law firm HPL Yamalova and Plewka, says a company entering administration in another country does not necessarily mean that its UAE operations will immediately be affected.

“Much depends on the corporate structure of the group, how the overseas parent is linked to the UAE entity, and whether liabilities are shared or ring-fenced. Each jurisdiction treats corporate separateness differently, so the effect is not automatic,” she says.

In the UAE, employees are classified as preferred creditors. This means their claims, including salary, end-of-service gratuity, notice pay and accrued leave, must be paid ahead of many other creditors during liquidation or financial distress, she adds.

Non-Emirati employees have their end-of-service entitlements covered by the UAE’s gratuity programme. Gratuities are lump-sum payments that all employed residents are entitled to after completing at least one year of service. They are covered by UAE labour law and the sum depends on an employee’s length of service and basic salary.

For example, if an employee has worked for a company for less than five years, their end-of-service gratuity is based on 21 days of basic salary for each year of work. After five years, this increases to 30 days of basic salary for each year thereafter.

Reserves to pay employee dues

“Legally and practically, companies should maintain adequate reserves to cover end-of-service benefits. In theory, administration should not impact these entitlements,” Ms Yamalova says.

“In practice, however, many companies only record the liability on their books but do not actually set aside the funds, leaving employees exposed if the company faces financial difficulties.”

Even in cases of financial distress, companies often possess assets of value, such as cash, receivables, inventory, equipment, or even real estate. These assets can be liquidated and used to satisfy employee claims, which again take priority under UAE law, Ms Yamalova says.

Labour lawsuits

Mr Kortbawi points out that the general “claims moratorium” in the law does not block labour lawsuits. Employees can continue to bring labour claims to establish their entitlements, but collection still occurs through the insolvency distribution rules, he says.

Ludmila Yamalova, managing partner at HPL Yamalova and Plewka, says a company entering administration in another country does not necessarily mean that its UAE operations will immediately be affected. Antonie Robertson / The National

Employees should file and substantiate their claims promptly with the court‑appointed trustee to secure recognition and priority for wages and gratuity. They may also pursue or continue labour proceedings to recover the amounts owed, he adds.

Ms Yamalova suggests employees file complaints promptly with the Ministry of Human Resources and Emiratisation or the competent free zone authority to maximise chances of recovery.

“Under UAE law, end-of-service entitlements must be paid within 14 days from the end of employment,” she says.

“Employees may choose to wait until the 14-day period expires, or they may file pre-emptively if they have reason to believe the employer will not pay. Acting quickly helps ensure their claims are formally registered and recognised.”

Labour cases in the UAE are “fast, efficient and low cost” for employees. Filing a case helps secure their rights through a court judgment, which then becomes a powerful tool in negotiating payment or enforcing the judgment against the company’s assets, says Ms Yamalova.

Under the bankruptcy law, there is no government guarantee or fund to pay unpaid gratuity or wages, if the employer cannot

Michael Kortbawi,
partner at BSA Law

If a company fails to satisfy a final judgment, UAE law allows employees to pursue strong enforcement mechanisms, including attachment of company bank accounts and assets, court-ordered collections and travel bans on managers or shareholders in certain circumstances, she adds. These measures create strong incentives for companies to settle employee claims.

Government intervention

Under the bankruptcy law, there is no government guarantee or fund to compensate for private companies' unpaid gratuities or wages. Payments usually come from the company’s assets through the court process and priority rules, Mr Kortbawi says.

Ms Yamalova agrees and says employers in the UAE private sector do not contribute to a government-managed fund for end-of-service benefits. Therefore, the government does not step in to pay employees if a company cannot settle its obligations. Its role is regulatory, ensuring the legal process is followed, but not financial, she adds.