Employment Issues in UAE M&A: What Happens to Employees When a Business Is Sold

Employee issues are often treated as a secondary workstream in UAE M&A transactions. In practice, they can affect valuation, closing mechanics, business continuity and post-completion integration. A buyer acquiring a UAE business will want to know whether employees transfer automatically, whether existing employment contracts continue, who is responsible for accrued end-of-service benefits, how visa sponsorship will be handled and whether key managers can be retained after completion.

These questions are particularly important in the UAE because employment, immigration and licensing are closely connected. A transaction that is commercially straightforward may still require careful coordination with the Ministry of Human Resources and Emiratisation, immigration authorities, free zone authorities or, where relevant, the DIFC or ADGM.

The Starting Point: What Is Being Sold?

The employment analysis depends first on the structure of the transaction. In a share sale, the buyer acquires shares in the employing company. The employer usually remains the same legal entity, and employment contracts generally continue without a transfer to a new employer. The employee relationship remains with the company, although there may be changes in management, reporting lines, policies or group structure after completion.

An asset sale is different. The buyer acquires selected assets, business lines, contracts, goodwill or operations, but not necessarily the employing legal entity. Employees do not automatically move to the buyer with those assets. Where the buyer will employ them through a different legal entity, the transfer requires the employees’ cooperation and the relevant employment, work permit and immigration steps. The parties also need to determine how accrued entitlements and prior service will be treated, including whether entitlements will be settled by the seller or rolled over to the buyer under an agreed arrangement.

The position is also different where a merger, conversion or change in legal status takes place. Under the UAE Labour Law, where there is a change in the form or legal status of the establishment, employment contracts remain valid, and the new employer becomes responsible for implementing them from the date on which the establishment data is amended with the competent authorities. This is a useful statutory continuity principle, but it does not remove the need to check the precise transaction structure, licensing position and employee records before completion.

Continuity of Employment and Liability Allocation

Continuity of employment is often one of the most important practical issues in a UAE transaction. From the employee’s perspective, continuity may affect accrued leave, service period, end-of-service gratuity and eligibility for contractual benefits. From the buyer’s perspective, the issue is whether it is assuming liabilities that arose before completion.

In a share sale, accrued employment liabilities usually remain with the target company. This makes employment due diligence important. The buyer should review employee lists, contracts, salary components, leave balances, gratuity accruals, bonus arrangements, commission plans, pending claims, disciplinary issues and any informal benefits or side agreements. It should also confirm whether all employees are properly documented and whether their work permits and visas match the actual employing entity and work location.

In an asset sale or business transfer, accrued service and employee entitlements should be addressed expressly. Under a clean-break structure, employment with the seller ends and the seller settles the applicable statutory and contractual termination entitlements. Under the federal Labour Law, wages and other entitlements due at the end of the employment contract must be paid within 14 days. In other transactions, the seller, buyer and affected employee may agree to roll over accrued service and entitlements to the buyer. Any rollover should be documented carefully and should preserve the employee’s statutory rights.

Whatever approach is chosen, the transaction documents should be clear. The sale and purchase agreement should allocate responsibility for pre-completion salaries, leave, gratuity, claims, penalties and employee disputes. If employees are expected to join the buyer, completion conditions may include signed offer letters, visa cancellation or transfer steps, work permit approvals and evidence that agreed settlements have been made.

Work Permits and Residence Status

Employment in the UAE is closely linked to work authorization and, for many expatriate employees, residence status. Under the federal labor framework, an employer may not employ a worker without the appropriate work permit. The parties therefore need to identify the work permit and residence position of each affected employee. Depending on the employee’s status and the relevant authority, this may involve cancellation and issuance of a new work permit, a transfer work permit, employer-sponsored residence steps or a work permit for an employee whose UAE residence is not sponsored by the employer, such as a person under family sponsorship or holding a Golden Visa.

The relevant process depends on the employer’s jurisdiction. Mainland employers generally interact with MoHRE and immigration authorities. Free zone companies follow the procedures of the relevant free zone authority. DIFC and ADGM entities are subject to their own employment regimes and administrative procedures. For cross-border groups, it is also common to find employees who are formally sponsored by one entity but operationally support another. This should be identified during due diligence, as it may create employment, immigration and corporate governance concerns.

Timing is important. If visa or permit steps are left until the end of the transaction, the buyer may own a business but lack a properly sponsored workforce on day one. This can affect operations, access to premises, client delivery and payroll administration. For employees in regulated roles, the issue may be more sensitive if approvals, licenses or fit-and-proper requirements are involved.

End-of-Service Benefits

For employers subject to the federal Labour Law, end-of-service benefits are a significant employment liability. A full-time foreign worker who completes at least one year of continuous service is generally entitled to gratuity calculated by reference to basic wage: 21 days’ basic wage for each year of the first five years of service and 30 days’ basic wage for each year thereafter, subject to the statutory rules and overall cap. Employers may, however, enrol selected employees in the voluntary alternative end-of-service benefits Savings Scheme under Cabinet Resolution No. 96 of 2023. For employees enrolled in the scheme, the traditional gratuity stops accruing from the date of participation; the pre-scheme gratuity is calculated at that point and remains payable by the employer at the end of employment. UAE national employees should be reviewed separately for applicable pension and social-security obligations.

In M&A due diligence, buyers should not rely only on a headline payroll figure. They should request a gratuity schedule showing employee start dates, basic salary, total salary, accrued leave and any other relevant entitlements. Where the employer participates in an alternative end-of-service savings scheme, due diligence should also cover which employees are enrolled, pre-scheme accruals, contribution records and any contribution arrears. Particular care is needed where salary structures include high allowances and low basic salary, where employees have been moved between group entities, or where legacy contracts differ from current templates.

The commercial treatment of gratuity should be reflected in the purchase price mechanism. In some transactions, accrued gratuity is treated as debt-like or deducted from the purchase price. In others, the seller gives an indemnity for pre-completion employment liabilities. Where the buyer agrees to preserve continuity of service, it should understand the financial consequence of doing so.

Restrictive Covenants and Confidentiality

Restrictive covenants require careful treatment in UAE M&A. Under Article 10 of the UAE Labour Law, an employee non-compete may be used where the employee’s work gives access to the employer’s clients or business secrets. The restriction must be limited by time, place and type of work to the extent necessary to protect legitimate business interests, and the non-compete period may not exceed two years from the end of the employment contract. If a dispute arises, the employer bears the burden of proving the damage.

For buyers, this matters because the value of the business may depend on customer relationships, supplier relationships, know-how and continuity of management. If the seller, founder or senior manager can immediately compete after completion, the buyer’s commercial expectations may not be protected. However, this issue should not be addressed only through standard employee non-compete wording.

For founders and senior managers, restrictive covenants are often better addressed in the transaction documents, management agreements, confidentiality undertakings, non-solicitation clauses and carefully drafted post-completion service arrangements. These provisions should be proportionate and linked to the legitimate interests being protected. The drafting should also distinguish between employees, shareholders, consultants and sellers, because the legal and commercial context may differ.

Management Retention and Integration

Many UAE business acquisitions depend on the continued involvement of key individuals. This is especially true for professional services firms, family businesses, founder-led companies, trading businesses and companies with relationship-driven revenue. A buyer may acquire the legal entity, but the value of the transaction can be affected if senior managers, client-facing employees or technical staff leave shortly after completion.

Retention should be considered before signing, not after closing. The buyer should identify key employees, review their current contracts and assess whether revised employment terms, retention bonuses, earn-out participation, consultancy arrangements or transition obligations are required. Any retention arrangement should be aligned with UAE employment law and clearly documented.

Care should also be taken with communication. Employees may become concerned about job security, visa status, reporting lines and compensation. Poor communication can create avoidable disruption. At the same time, premature communication may create confidentiality issues or uncertainty before completion. The communication plan should therefore be coordinated with legal, HR and transaction teams.

DIFC, ADGM and Free Zone Considerations

The UAE does not have a single employment process for every transaction. Outside DIFC and ADGM, Federal Decree-Law No. 33 of 2021, as amended, is generally the principal private-sector employment law, although mainland and non-financial free zone employers may deal with different authorities and administrative procedures for work permits and immigration. DIFC and ADGM have separate employment regimes. DIFC employment is governed principally by DIFC Employment Law No. 2 of 2019, as amended, and eligible employees are generally subject to a Qualifying Scheme such as DEWS for end-of-service benefits. ADGM registered entities are governed by the ADGM Employment Regulations 2024, which took effect on 1 April 2025.

This distinction should be checked early where the target has employees in more than one jurisdiction. A group may have a mainland operating company, a free zone holding or service company and employees working across different locations. In such cases, the legal employer, work location, permit authority and governing employment regime may not be the same for every individual.

Conclusion

Employment issues in UAE M&A require more than a standard employee list. Buyers and sellers should understand the transaction structure, identify the legal employer, verify permit and visa arrangements, quantify accrued liabilities and agree how employees will be treated at completion.

The legal position is manageable, but it should be addressed early. A well-structured employment workstream can reduce disruption, protect transaction value and support a smoother post-completion transition. The correct approach will depend on the deal structure, the applicable employment regime, the licensing position and the commercial importance of the workforce being transferred or retained.