August 24, 2024
Dubai Court Embraces Crypto: Employment Salaries may now be Payable in Cryptocurrencies
Key Takeaways
- The 2024 ruling by the Dubai Court of First Instance affirms the legality of paying salaries in cryptocurrency under employment contracts, reflecting a shift in the UAE judiciary’s approach to cryptocurrency.
- While the Payment Token Services Regulations impose restrictions on the use of virtual assets for payments, these regulations are primarily aimed at merchants and businesses, leaving employment contexts relatively unaffected.
- The ruling does not address other complicating employment law-related matters, highlighting the need for clear valuation methods in employment contracts when compensating with cryptocurrency. The absence of such methods may complicate legal proceedings and favour disproportionately employee-friendly interpretations.
- The enforceability of token-based compensation plans, similar to ESOPs, outside the DIFC or ADGM common law framework remains uncertain, necessitating careful consideration in employment agreements.
- Despite the regulatory challenges, there is a growing trend in Dubai towards incorporating cryptocurrency into employee compensation, particularly within the tech and fintech industries, where bonuses or partial salaries in digital assets are becoming more common.
- Dubai’s legal and regulatory environment continues to balance innovation with oversight, supporting the growth of digital assets in employment while maintaining necessary regulatory safeguards.
Background
In a landmark 2024 ruling, the Dubai Court of First Instance has recognised the legality of paying salaries in cryptocurrency under employment contracts by companies operating in Dubai. This decision, from Labour Case number 1739 of 2024 (“Labour Case“), marks a shift in the UAE judiciary’s stance on cryptocurrency.
In the Labour Case, the employer failed to compensate the employee with 5,250 EcoWatt tokens (“Tokens“), a form of cryptocurrency, for six (6) months as stipulated in their employment contract (“Employment Contract“). Moreover, the employee pursued legal action against the employer, citing wrongful termination and seeking compensation for unpaid wages and other associated employment benefits. In the Employment Contract, the employee was entitled to receive an employment salary in fiat currency and the Tokens.
2023 Judgement vs. 2024 Judgement
In the 2023 case (Judgment No. 6947 of 2023), the court dealt with an employment dispute involving payment in the Tokens. Although the court recognised the inclusion of these Tokens in the employment contract, it ultimately denied awarding them. The denial was based on the employee’s inability to present a clear method for calculating the cryptocurrency’s value in fiat currency. This decision highlighted the court’s conventional approach, emphasising the need for precise and tangible evidence when addressing financial obligations, especially with unconventional payments like cryptocurrencies.
In the instant Labour Case, the court issued a judgement in favour of the employee, acknowledging the legitimacy of cryptocurrency payments and directing that the payment be made in Tokens instead of being converted into fiat currency. Further, the court also relied on Article 912 under the Civil Transactions Law, Article 22 of Federal Decree-Law No. (33) of 2021 on the Regulation of Labour Relations (“Labour Law“) and Article 16 of the Cabinet Resolution No. 1 of 2022 concerning the Executive Regulations of the Labour Law (“Labour Regulations“).
Particular complexities of crypto salaries not considered by the courts
The ruling confirms that cryptocurrency can be included in an employee’s salary. When calculating the basic salary and end-of-service benefits, employers must consider all forms of compensation, including housing, education benefits, and other allowances. However, if the cryptocurrency is unissued or vesting, assigning a dollar value becomes challenging unless the employment contract provides a clear valuation method. Without this, determining the value would require court-appointed experts, potentially prolonging proceedings due to the volatile nature of crypto assets.
The UAE labour courts typically favour employees in cases of ambiguity. Hence, if a clear valuation method for tokens is not specified in the employment contract, the courts might adopt the most employee-friendly interpretation. Therefore, if tokens are part of compensation, the employment contract should include a specific method for the valuation of these tokens before issuance and an express vesting schedule as part of an Employee Stock Ownership Programme (“ESOP“) or similar programme.
Additionally, any ESOP or token plan must be carefully vetted, as enforceability outside the DIFC or ADGM common law framework under UAE Civil Law is uncertain. The ruling does not address how such plans would be treated, making their enforceability highly questionable.
In addition to the above, it should be noted that court judgments do not form a binding precedent in civil law jurisdictions as they do in common law jurisdictions. Prior judgments are persuasive at best, but c courts are free to decide differently in future cases based on the specific facts of such future cases.
Does the payment of salary in cryptocurrencies align with the Payment Token Services Regulations?
As per the Payment Token Service Regulation (“Regulation“), all entities incorporated within or catering to the UAE are prohibited from conducting any service related to any virtual asset that may be designated as a means of payment by the Central Bank of UAE (“CBUAE“) without a licence or registration from the CBUAE.
Merchants and other businesses in the UAE are also restricted from accepting virtual assets as payment unless the asset is a dirham payment token issued by a licensed payment token issuer or a foreign payment token issued by a registered foreign payment token issuer and is being used to purchase a virtual asset or its derivative. The restrictive provisions indicate that these regulations apply exclusively to “merchants” and businesses who use cryptocurrencies as a means of payment.
By comparing these provisions with the Labour Regulations, it is clear that the definition of “worker” does not fall within the scope of the Regulation. This also suggests that the Regulation has been deliberately crafted with certain implied exclusions, reflecting Dubai’s commitment to fostering a supportive start-up ecosystem.
Token as Salary or Bonus Payment – Recent Trends in Dubai, UAE
In Dubai, paying employees in cryptocurrency is still emerging, and specific data on the number of employees receiving salaries or bonuses in crypto is not readily accessible. However, the trend of incorporating cryptocurrency into compensation is on the rise, particularly within the tech and fintech industries.
Although paying salaries directly in cryptocurrency is rare due to regulatory and tax issues, there is growing interest in providing bonuses, incentives, or partial salary payments in digital assets. This trend is especially notable among startups and firms engaged in blockchain and cryptocurrency sectors.
Conclusion
The recent 2024 ruling by the Dubai Court of First Instance represents a significant shift in the UAE’s legal stance on cryptocurrency payments, acknowledging the legality of including cryptocurrency in employment contracts.
Despite this legal advancement, the Regulation imposes strict limitations on using virtual assets for payments, primarily affecting merchants and businesses rather than employees. This regulatory framework underscores the UAE’s cautious yet supportive approach to cryptocurrency, particularly within the startup and tech sectors.
As the use of cryptocurrency in compensation continues to evolve, Dubai’s legal and regulatory landscape demonstrates a growing acceptance of digital assets in employment contexts, even as broader payment regulations remain restrictive. This trend highlights Dubai’s commitment to fostering innovation while maintaining regulatory oversight, particularly in emerging sectors like blockchain and fintech.
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