UAE M&A Deals: Why Employment Due Diligence is Critical to Identifying Hidden Liabilities and Managing Risks

Employment matters remain one of the most frequently underestimated sources of transactional risk in UAE mergers and acquisitions. They can present significant hidden liabilities in UAE acquisitions, with the treatment differing substantially between share and asset purchases, although the exposure is real under either structure.

Because the UAE labour framework does not provide a clear statutory mechanism for the automatic transfer of employees following a change of ownership, buyers, sellers and their advisers must approach the workforce component of a transaction with particular care. This article outlines four key pillars of employment due diligence in UAE deals: employee transfers, contract review, end-of-service liabilities and compliance risks.

 

Employee Transfers: Share Deals vs Asset Deals

 

The structure of a transaction has a decisive effect on how the workforce moves. Under UAE law, employees cannot simply be “transferred” as such; in an asset sale, they must instead be terminated by the transferor and re-hired by the transferee, with end-of-service benefits accruing upon termination. Federal Decree-Law No. 33 of 2021 contains a single reference to employment contracts remaining in place where there is a “change in the form or legal status” of an establishment, obliging the new employer to assume liability for employees. However, this provision is unlikely to apply to a straightforward asset sale given the termination-and-rehire requirement.

 

In a share purchase, by contrast, the employing entity itself does not change, so employment contracts, seniority and accrued liabilities continue uninterrupted. Accrued gratuity liability therefore transfers to the buyer automatically, meaning every dirham of under-provisioning directly affects the buyer's return. This distinction should shape both the deal structure and pricing mechanism from the outset.

 

Where employees are re-hired following an asset transfer, due diligence should establish whether any UAE or GCC nationals are among the transferring employees, the applicable notice periods, and whether affected staff wish to be paid their accrued gratuity on transfer or have it rolled over to the new employer. Advisers should also confirm whether employment contracts impose any notification or consultation obligations towards affected employees that must be observed as part of the process.

 

Reviewing Employment Contracts

A representative sample of employment contracts — not merely template agreements — should be obtained and reviewed against actual practice. The objective is to confirm compliance with UAE labour law and identify potential employee-related liabilities. Contracts should be checked to ensure they are compliant rather than simply assumed to be. Particular attention should be paid to remuneration structures, including basic remuneration, allowances, bonuses and other incentives, together with holiday entitlements and outstanding liabilities owed to staff, since basic salary, rather than gross salary, is the base figure for gratuity calculations.

 

Due diligence teams should also review documentation issued to employees whose service may have been transferred from a previous entity. Employers must take care when drafting contracts and related documents for transferred employees to avoid inadvertently acknowledging a prior period of service with another employer. UAE labour courts may treat such documents as binding acknowledgements, potentially resulting in a double payment of end-of-service gratuity if the employee has already received their entitlement from the previous employer. This is a narrow but recurring drafting trap in group reorganisations and asset carve-outs.

 

End-of-Service Liabilities

 

Gratuity exposure is consistently flagged as one of the largest hidden employment liabilities in UAE deals. Targets may under-provision for gratuity, commonly by calculating liability on total salary rather than basic salary, thereby understating the true exposure. The buyer should require a calculation of the total accrued end-of-service liability across the workforce, as this represents a debt that may be inherited on completion.

 

The statutory formula is well established: a full-time worker who has completed one year or more of continuous service is entitled to end-of-service benefits calculated on basic wage, at 21 days' pay for each of the first five years of service and 30 days' pay for each subsequent year. Due diligence should verify this calculation methodology line-by-line against payroll records, rather than relying on management-prepared summaries. It should also separately quantify accrued but untaken annual leave for the two-year period preceding any visa cancellation, as this is commonly bundled with — and sometimes omitted from — gratuity provisioning.

 

Compliance Risks During Acquisitions

 

Beyond gratuity, a broader compliance sweep should form part of the workstream. Key areas include:

 

• Disputes and claims: Buyers should request disclosure of employment disputes, MOHRE complaints, and claims involving unpaid wages or wrongful termination. Past disputes may point to systemic HR issues, while pending claims represent quantifiable liabilities. The review should also flag recently terminated employees and any pending employment-related litigation.
• Wage compliance at scale: Non-compliance with wage protection obligations creates exposure that multiplies with headcount. A large workforce with systemic WPS issues therefore carries a materially different risk profile from a small one.
• Visa and sponsorship status: Employee contracts, gratuity obligations, visa sponsorships and pending labour disputes should all be scrutinised, since unaccounted-for end-of-service benefits alone can represent a substantial unforeseen liability.
• Data protection: With the UAE's personal data protection law in force, the target's data-handling practices and privacy policies should be audited to confirm compliance with legal standards and minimise exposure to breaches.
• Regulatory currency: The Labour Law framework has been amended repeatedly since 2021, including changes to individual dispute procedures and penalties effective from 31 August 2024. Due diligence should therefore confirm that the target's policies and contracts reflect the current law rather than outdated templates.

 

Practical Recommendations

 

Buyers should treat the employment workstream as a valuation input rather than a compliance afterthought. Gratuity liabilities should be independently recalculated rather than accepted at face value; contracts should be checked against current legislation rather than assumed to be compliant; and, in asset deals, termination-and-rehire mechanics should be mapped against a realistic timeline well before signing. Appropriate representations, warranties and indemnities addressing undisclosed employment liabilities remain the primary contractual safeguards where residual risk cannot be eliminated through diligence alone.