The Roadmap to Successful Ventures in the Middle East Series – No 3
By Hugh Fraser, managing partner
Welcome to my weekly note with some personal views on what does/does not work when structuring business ventures in the Middle East region.
My third theme is senior “Personnel Contracts”. Senior personnel may be deployed and transferred across a number of jurisdictions as their career evolves and sometimes the legal documentation can trail in their wake with unintended problems and consequences. Unfortunately the shortcomings may only come into focus in the context of a contentious exit and the mistakes may prove to be expensive ones.
Here are my Top 5 golden rules on this theme:-
- Getting the Infrastructure to Employ
Typically, a business will need to have a locally registered and licensed local entity to employ personnel in-country. Transitional arrangements involving deployment of personnel to local partners for local employment and sponsorship of visas is not uncommon and this is legal and acceptable if proper secondment and employment contracts are put into place for a limited early phase number of employees. It will of course mean that the relevant employees carry visas in the name of the local partner and care is needed to ensure that business does not inadvertently cross the line of having a “permanent establishment” in country for legal and tax consequences. Once the business has evolved to own entity status the employment “infrastructure” needed is typically at four levels: entity licence/registration, labour ministry registration, tax authority registration for payroll taxes and in some cases wages protection registration via a local bank. In certain jurisdictions localisation compliance plans are now necessary in relation to employment of local nationals.
- New Pages for a New Chapter
A new deployment to a new territory should also mean a new employment contract is put into place. All intended “carry over” of rights and obligations from the previous role should be clearly documented but then all prior contracts should be clearly stated to be superseded and terminated by the new arrangements. Key elements for carry over may include pension rights, share options and protective covenants.
- The Local Law Can Override Contracts
The contract is rarely the length and breadth of the legal position and normally local labour laws will inject rights and obligations into the employment relationship which may overrule any contradictory contractual terms and which may incapable of being contracted out of by the employee. A solid understanding of the local laws and regulations is therefore essential and the contract should be drafted to be consistent and compliant. Financial rights on termination are a key example of unalienable statutory employment rights in certain Middle East jurisdictions and allocation of salary and allowances/benefits, fixed term or notice periods and length of service can have a major financial impact.
- Getting it Right with Official and Private Contracts
The practice of using official registered contracts and private contracts in tandem is common place. However, any attempt to weaken employment rights by stating lower levels of remuneration and other benefits and allowances in the official contract to reduce statutory rights and/or avoid taxation and/or social security liabilities is liable to come unstuck if the private arrangements are different and come to light.
- Does the Arabic match the English?
If contracts are being drafted in Arabic/English formats then the drafting work must be done professionally as the Arabic language version will most often rule in a legal forum. It is not uncommon for employers to accept the English version of their documentation without realising that the Arabic version may have material differences which are adverse to their interests.