Hiring your first employee in a UAE free zone is exciting — and legally complex. Free zone employment sits at the intersection of federal labour law, zone-specific regulations, and visa sponsorship rules. Getting it wrong exposes you to fines, disputes, and even criminal liability.
This guide covers everything a free zone employer needs to know in 2026: contracts, probation, gratuity, termination, working hours, and the practical steps to hire compliantly.
Which Law Applies to Free Zone Companies?
The answer depends on your free zone:
Federal Labour Law Zones
Most UAE free zones fall under Federal Decree-Law No. 33 of 2021 (the UAE Labour Law), which took effect in February 2022 with subsequent amendments through 2025. This includes:
Independent Employment Law Zones
Two financial free zones have their own employment regulations:
- DIFC: DIFC Employment Law No. 2 of 2019 (amended 2024)
- ADGM: ADGM Employment Regulations 2019 (amended 2025)
DIFC and ADGM employment laws differ from federal law in several important ways, including termination procedures, gratuity calculations, and dispute resolution mechanisms.
Employment Contracts
Contract Types
Since 2022, all UAE employment contracts must be fixed-term (unlimited contracts were abolished). Key requirements:
| Requirement | Federal Law | DIFC | ADGM |
|---|---|---|---|
| Contract type | Fixed-term only | Fixed-term or indefinite | Fixed-term or indefinite |
| Maximum term | 3 years (renewable) | No maximum | No maximum |
| Language | Arabic + English | English | English |
| Registration | Must be registered with MOHRE/free zone | Registered with DIFC | Registered with ADGM |
| Probation allowed | Yes (6 months max) | Yes (6 months max) | Yes (6 months max) |
Mandatory Contract Clauses
Every free zone employment contract must include:
- Job title and description
- Start date and contract duration
- Workplace location
- Working hours
- Basic salary (in AED)
- Allowances (housing, transport, etc.)
- Leave entitlements
- Notice period
- Probation period (if applicable)
- Non-compete clause (if applicable)
Common Mistakes
- Not registering the contract: The free zone authority must approve and register every employment contract. Unregistered contracts create visa and legal issues.
- Using old unlimited contract templates: These are no longer valid under federal law.
- Omitting gratuity terms: While gratuity is mandated by law, explicitly including it prevents disputes.
Probation Period
Federal Law Rules (Most Free Zones)
- Maximum duration: 6 months
- Extension: Not permitted (unlike some other jurisdictions)
- Notice during probation: 14 days written notice by either party
- Gratuity during probation: No gratuity entitlement if terminated during probation
- Written confirmation: The employer must confirm in writing whether the employee has passed probation
Termination During Probation
If you dismiss an employee during probation:
- Provide 14 days' written notice
- Pay all outstanding salary and benefits up to the last working day
- No gratuity obligation
- No severance payment required
If an employee resigns during probation:
- Must give 14 days' notice (or 1 month if moving to another UAE employer)
- Immigration ban may apply if moving to a new employer within the probation period (check current rules — this has been relaxed in recent amendments)
Salary and Wages
Wage Protection System (WPS)
All UAE employers, including free zone companies, must pay salaries through the Wage Protection System — an electronic salary transfer system monitored by the Ministry of Human Resources (MOHRE).
| WPS Requirement | Detail |
|---|---|
| Payment method | Bank transfer through approved agent/bank |
| Payment deadline | Within 10 days of due date (previously 15) |
| Late payment | Triggers automatic MOHRE investigation |
| Penalty for non-compliance | Fines + potential licence suspension |
Salary Structure
A typical UAE salary package includes:
| Component | Taxable? | Included in Gratuity Calculation? |
|---|---|---|
| Basic salary | No tax | Yes |
| Housing allowance | No tax | No |
| Transport allowance | No tax | No |
| Other allowances | No tax | No |
| Bonus | No tax | No |
Important: Only the basic salary is used to calculate end-of-service gratuity. Many employers structure packages with a low basic salary and high allowances to reduce gratuity liability.
Minimum Wage
The UAE does not have a federal minimum wage. However:
- Visa sponsorship: To sponsor a residence visa, you must pay at least AED 4,000/month (or AED 3,000 with company accommodation)
- Family sponsorship: To sponsor dependents, the employee must earn AED 4,000/month + accommodation
- Employment pass (DIFC/ADGM): No specific minimum, but must be reasonable for the role
Working Hours and Leave
Working Hours
| Aspect | Federal Law | DIFC | ADGM |
|---|---|---|---|
| Standard hours | 8 hours/day, 48 hours/week | 8 hours/day (normal) | 8 hours/day (normal) |
| Ramadan hours | 6 hours/day (reduced) | At employer's discretion | At employer's discretion |
| Overtime rate | 125% of hourly rate (150% for night/holidays) | 125% minimum | As agreed in contract |
| Maximum overtime | 2 hours/day | Reasonable | Reasonable |
| Rest day | 1 day/week (minimum) | 1 day/week | 1 day/week |
Leave Entitlements
| Leave Type | Federal Law Entitlement |
|---|---|
| Annual leave | 30 calendar days/year (after 1 year); 2 days/month during first year |
| Sick leave | 90 days/year (15 full pay, 30 half pay, 45 unpaid) |
| Maternity leave | 60 days (45 full pay, 15 half pay) + 45 days unpaid (optional) |
| Paternity leave | 5 working days (within 6 months of birth) |
| Bereavement leave | 5 days (spouse/parent/child); 3 days (other relatives) |
| Hajj leave | 30 days unpaid (once during employment) |
| Public holidays | ~10-13 paid days per year |
| Study leave | 10 working days/year (after 2 years of service) |
End-of-Service Gratuity
Gratuity is a mandatory lump-sum payment made when an employee's contract ends, provided they have completed at least one year of continuous service.
Calculation (Federal Law)
| Service Duration | Daily Rate | Calculation |
|---|---|---|
| First 5 years | 21 days' basic salary per year | Basic salary ÷ 30 × 21 × years |
| After 5 years | 30 days' basic salary per year | Basic salary ÷ 30 × 30 × additional years |
| Maximum cap | 2 years' total basic salary | Cannot exceed 24 months' basic salary |
Gratuity Examples
Employee A: Basic salary AED 10,000, worked 3 years
- 21 × 3 = 63 days
- AED 10,000 ÷ 30 × 63 = AED 21,000
Employee B: Basic salary AED 15,000, worked 7 years
- First 5 years: 21 × 5 = 105 days → AED 15,000 ÷ 30 × 105 = AED 52,500
- Next 2 years: 30 × 2 = 60 days → AED 15,000 ÷ 30 × 60 = AED 30,000
- Total: AED 82,500
Gratuity Payment Timeline
The employer must settle gratuity within 14 days of the employee's last working day. Late payment can result in:
- Interest charges
- MOHRE complaints
- Legal action and additional penalties
DIFC and ADGM Differences
DIFC introduced a Defined Contribution scheme (DEWS) in 2020:
- Employer contributes 5.83% of basic salary monthly (for first 5 years)
- Increases to 8.33% after 5 years
- Funds are invested and managed by a qualifying scheme
ADGM offers either gratuity or a qualifying scheme at the employer's choice.
Termination
Lawful Termination Grounds (Federal Law)
An employer may terminate an employee for:
- Poor performance (after documented warnings and improvement plan)
- Misconduct (as defined in Article 44 of the Labour Law)
- Redundancy (genuine business restructuring)
- Contract expiry (fixed-term contract ending naturally)
- Mutual agreement
Notice Period
| Scenario | Minimum Notice |
|---|---|
| During probation | 14 days |
| After probation | 30 days (or as per contract, minimum 30 days) |
| Summary dismissal | 30 days minimum (2025 amendment) |
| Contract expiry | No notice required |
What Employers Owe at Termination
| Component | Obligation |
|---|---|
| Outstanding salary | Full payment up to last day |
| Unused annual leave | Cash equivalent |
| End-of-service gratuity | Per calculation above |
| Return airfare | One-way ticket to home country |
| Notice period pay | If notice is waived by employer |
| Visa cancellation | Employer must cancel within 30 days |
Wrongful Termination
If an employee is terminated without cause or proper process, they can file a complaint with:
- The free zone's employment dispute resolution centre
- MOHRE (for federal law zones)
- DIFC Courts or ADGM Courts (for financial free zones)
Compensation for wrongful dismissal: up to 3 months' gross remuneration plus all outstanding entitlements.
Hiring Process: Step by Step
Step 1: Employment Offer
Issue a written offer letter including:
- Job title, description, and reporting line
- Total compensation package (basic + allowances)
- Start date and contract duration
- Benefits and leave entitlements
Step 2: Contract Registration
Submit the employment contract to your free zone authority for approval and registration. Processing time: 1–5 business days.
Step 3: Visa Processing
Apply for the employee's residence visa through your free zone (see our visa cost guide for fees).
Step 4: WPS Setup
Register the employee on the Wage Protection System through your bank. Ensure salary is paid via bank transfer from the first month.
Step 5: Health Insurance
Obtain mandatory health insurance coverage (Dubai and Abu Dhabi). Coverage must be in place before or concurrent with visa issuance.
Key Compliance Risks
1. Late Salary Payment
WPS monitoring is automated. Salaries paid more than 10 days late trigger MOHRE investigation and can result in fines and licence suspension.
2. Undocumented Workers
Employing anyone without a valid work permit/visa is a criminal offence. Penalties include fines of AED 50,000+ per worker and potential imprisonment.
3. Discriminatory Practices
The UAE Labour Law prohibits discrimination based on race, colour, sex, religion, nationality, social origin, or disability. Violations result in fines and potential licence revocation.
4. Non-Compete Over-Reach
Non-compete clauses must be:
- Maximum 2 years in duration
- Limited in geographic scope
- Necessary to protect legitimate business interests
- Potentially compensated during the restriction period
Overly broad non-competes are unenforceable.
5. End-of-Service Miscalculation
Using total salary instead of basic salary for gratuity calculation is a common — and costly — error. Always calculate based on basic salary only.
Employment Costs: What to Budget
Beyond salary, hiring an employee in a UAE free zone costs:
| Cost | Annual Amount (AED) |
|---|---|
| Visa allocation fee | 2,000–4,000 |
| Government visa fees | 2,500–3,500 |
| Health insurance | 1,200–5,000 |
| WPS bank charges | 300–600 |
| Gratuity accrual (21 days/year) | ~7% of basic salary |
| Annual leave (30 days) | ~8% of total salary |
| End-of-contract flight | 500–3,000 |
| Total overhead beyond salary | 15–25% of total package |
As a rule of thumb, budget 15-25% above the gross salary for employment overhead costs.
Bottom Line
UAE employment law is employee-protective by design. As a free zone employer, your key obligations are: fixed-term contracts, WPS salary payments, health insurance, gratuity accrual, and proper termination procedures.
Get these right and employment disputes are rare. Get them wrong and the consequences are swift — MOHRE investigations, labour complaints, and potential licence suspension.
When in doubt, consult a UAE employment lawyer before your first hire. The AED 3,000–5,000 consultation fee is a fraction of the cost of a wrongful termination claim.
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