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Clyde & Co: Employment issues arising out of business transfers

Clyde & Co: Employment issues arising out of business transfers

Oct 04, 2016
9 min read
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Sara Khoja partner, Clyde & Co and Ben Brown, senior associate, Clyde & Co, discuss the issues facing employees in the Middle East's oil and gas sector.

As the low oil price continues and the global economy works out the implications of Brexit, the industry is predicted to experience a wave of consolidation as capital expenditure and cash flows weaken. Within the GCC, we have seen subsidies cut and employers embark on large scale restructures pending further M&A activity, and most notably the announcement that Saudi Aramco will publicly list 5 per cent of its business (potentially its downstream business only). In this article, we highlight some of the key employment aspects arising from business transfers in the GCC, which are a likely consequence of corporate restructurings and consolidations.

Types of business transfers

A key feature of share acquisitions (as distinguished from asset acquisitions) is that, save to the extent that some form of pre-sale restructuring is carried out, all of the assets and liabilities (including liabilities relating to any employees) of the target company will be acquired by the purchaser upon completion of the acquisition of the shares.  There will be no change to the identity of the employing entity of any employees as a result of a share acquisition and so no transfer of employment will be necessary.  If there is a change of name; employment visas and registrations can be updated on their expiry.

In an asset acquisition, the parties will agree which assets and liabilities are to be acquired by the purchaser. Upon completion of the transaction, ownership of those assets and liabilities will transfer from the seller to the purchaser. From an employment perspective, employees who are assigned to the assets being transferred will often need to be transferred from the seller to the purchaser (or another entity). The identity of the affected employees' employer will therefore change upon transfer.  A key point in these transactions is that the purchases will often agree to take on all employees employed in the business unit sold on no less favourable terms and conditions of employment for a lock in period of one year.

Globally, the trend for companies operating in the energy industry since the oil glut has been for asset sales, where companies have sought to offload underperforming or expensive assets. If oil and gas companies in the GCC are to follow suit, the employment considerations below will be an important part of these divestments.

Generally, due diligence enquiries will need to be made on any manpower suppliers and also sponsorship arrangements with agents which can also be common practice within the industry.

Transfer of employment

There are no laws in the UAE, Bahrain or Kuwait providing for the automatic transfer of employment from one company to another. Therefore, the "transfer" of employment between entities in these countries can only be achieved by terminating an employee's employment with their existing employer (i.e. the seller) and the employee being "hired" by the new employer (i.e. the purchaser). Consideration will need to be given to international assignees' contractual arrangements and benefits as their underlying employment will also need to be transferred. Global mobility continues to feature within the industry but there are increasing moves to localise employees as a cost saving measure.

The respective labour laws of Oman, KSA, Qatar and Bahrain contain ambiguous provisions providing for the automatic transfer of employment although, in practice, most companies tend to adopt the termination and rehire approach referred to above. However, the relevant provisions could potentially limit the new employer's ability to change terms and conditions of employment post-transfer and arguably require a transferring employee's continuity of service to be maintained.

Residence visa and work permit

Where a termination and rehire process is followed, the employee's existing residence visa and work permit will need to be cancelled and a new residence visa, work permit and, if applicable, ID card, will need to be issued in the name of the employee's new Sponsor. It is unlikely that the transferring employees (and their dependents) will be able to travel abroad during the visa renewal process.

The new Sponsor must ensure that they have a sufficient quota of visas and office space available for the transferring employees. There will also likely be a limit on the number of visas which can be obtained by a company at any one time. Applications for large numbers of visas will therefore often have to be made in tranches, which could affect the timeline of the whole transfer process.

Special consideration should be given to any transferring employees of nationalities which, for a variety of public policy and security reasons, are currently experiencing difficulties in obtaining new residence visas. For example, in the UAE individuals from countries including Syria, Iran and Yemen are currently experiencing difficulties in obtaining UAE residence visas.

In some GCC countries, such as Bahrain, KSA, Oman and Kuwait, the seller and the purchaser may apply to transfer employees' sponsorship for immigration purposes and will be required to submit a joint application to the applicable labour authority for approval of the transfer; meaning that any residency visa would not be cancelled but would transfer across until expiry when the new employer would need to renew it. In addition, arrangements will need to be put in place to agree when responsibility for payroll will pass as each GCC country operates a form of the Wages Protection System requiring operation of a local payroll. Failure to do so could result in the employer's ability to deal with the Ministry of Labour being suspended.  

Accrued entitlements

If an employee is transferred to their new Sponsor by way of termination and rehire, upon termination of their employment with their old Sponsor notice pay, holiday pay, end of service gratuity and any other contractual entitlements (the Accrued Entitlements) will crystallise and will become payable to the employee in accordance with the applicable labour law. It is open to an employee to insist that the Accrued Entitlements are paid to them upon termination (i.e. prior to their transfer to the new employer). However, most employees agree to roll over the Accrued Entitlements into their new employment with the new Sponsor. This type of agreement should be clearly documented.

The respective labour laws of UAE, Oman, KSA and Qatar state that following a business transfer both the previous employer and the new employer are jointly (and, in KSA, severally) liable for the Accrued Entitlements and any other obligations relating to the transferring employees.  However, in practice it is common for the parties to a business transfer to apportion these liabilities by way of indemnification in the relevant purchase documentation.

Consultation / notice

Although there is no statutory requirement to consult with employees in relation to a potential business transfer, it is advisable to start discussing the transfer with all affected employees at an early stage. It will be important that the transferring employees cooperate in the process and giving them as much information as possible from the outset should help to ensure this. Any transferring employees who sponsor dependents are likely to be anxious as to how the process will impact on their dependents' residency visas.

As the transfer process involves terminating the employee's employment, the requisite notice of termination of employment should be issued to the employee.  In practice, the requirement to give notice is often built into the transfer arrangements agreed with the employee although employers should be aware that there are restrictions in some GCC countries on giving notice to employees on statutory leave (e.g. sick leave and annual leave).

GCC Nationals

Across the GCC, legislation has been introduced to encourage or compel the employment of nationals in the private sector.

To support these policies, there are strict rules governing the dismissal of GCC nationals. If any of the employees in a business transfer are GCC nationals it may therefore be necessary for the employer to obtain approval for the proposed termination of the GCC national from the relevant authority. This will need to be factored into the transfer timetable.

It will be necessary to notify the relevant pension authority or General Organisation of Social Insurance (GOSI) of the termination of any GCC nationals and these employees will need to be re-registered with the applicable labour authority under their new Sponsor's registration.

Employers should also consider whether the proposed employee transfers will affect their on-going compliance with nationalisation quotas. Efforts to employ GCC nationals have been ramped up recently, even at public sector level, where redundancies and hiring freezes are being applied and only GCC nationals are considered for new positions.

Other considerations

  • Some transferring employees may require a letter confirming the details of the change of their employer to submit to their bank in support of any continued loan facility.

 

  • Will the purchaser try and cherry-pick employees from the seller or will the seller try and off-load underperforming employees onto the purchaser?

 

  • Where will the transferring employees fit within the structure of the purchaser?

 

  • Will the transferring employees be required to relocate from their current workplace?

 

  • Will the purchaser recognise the transferring employees' continuity of service for the purposes of calculating end of service benefits?

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