The energy 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% of its business.
Types of business transfers
A key feature of share acquisitions (as distinguished from asset acquisitions) is that all of the assets and liabilities (including those relating to 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 as a result of a share acquisition, so no transfer of employment will be necessary. If there is a change of name, employment visas and registrations can be updated when they expire.
In an asset acquisition, the parties agree which assets and liabilities are to be acquired by the purchaser. Upon completion of the transaction, ownership of these 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. The identity of their employer will, therefore, change. A key point in these transactions is that the purchasers will often agree to take on all employees from the sold business unit, on equally favourable terms, 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, as they seek to offload underperforming or expensive assets. If oil and gas companies in the GCC are to follow suit, the following employment considerations will be important.
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 in these countries can only be achieved by terminating an employee’s employment with their existing employer and the employee being hired by the new employer.
The labour laws of Oman, KSA, Qatar and Bahrain contain ambiguous provisions for the automatic transfer of employment although, in practice, most companies tend to adopt the termination and re-hire approach.
Residence visa and work permit
Where a termination and re-hire process is followed, the employee’s residence visa and work permit will need to be cancelled and updated ones issued in the name of the new sponsor. Transferring employees and their dependents may not 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 usually be a limit on the number of visas that can be obtained by a company at any one time, so applications for large numbers of visas will often have to be made in tranches, which could affect the timeline of the whole transfer process.
In some GCC countries, the seller and purchaser may apply to transfer employees’ sponsorship, and will need to submit a joint application to the labour authority. This means the visa would not be cancelled, but would transfer across until its expiration date, when the new employer would have to renew it. An agreement would also need to be reached about when responsibility for payroll is handed over, as each GCC country operates a form of the Wages Protection System, which requires the operation of a local payroll. Failure to comply with this could result in the employer no longer being able to deal with the Ministry of Labour.
Accrued entitlements
If an employee is transferred to their new sponsor by way of termination and re-hire, upon termination of their employment any notice pay, holiday pay, end-of-service gratuity, and other contractual entitlements will become payable to the employee, in accordance with the applicable labour law. Employees can insist that the entitlements are paid to them upon termination. However, most employees agree to roll over the accrued entitlements into their new employment. This type of agreement should be clearly documented.
The labour laws of the 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. In practice, however, it is common for the parties 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.
As the transfer process involves terminating the employee’s employment, the requisite notice of termination should be issued to the employee. In practice, the requirement to give notice is often built into the transfer arrangements agreed with the employee.
Other considerations
It is also necessary to bear the following important considerations in mind when transferring – or terminating and re-hiring – mployees:
– Transferring employees may need a letter confirming the details of the change of their employer to submit to their bank.
– Will the purchaser try to cherry-pick employees from the seller, or will the seller try to off-load underperforming employees onto the purchaser?
– Where will the transferring employees fit within the purchaser’s organisation?
– Will transferring employees be required to relocate?
– Will the purchaser recognise the transferring employees’ continuity of service for the purposes of calculating any end-of-service benefits?
