Iran: Structuring Employment Arrangements In Iran

Following the lifting of certain sanctions against Iran, global companies in a variety of sectors are looking to identify opportunities for foreign direct investment into an exciting but challenging market. One of the key considerations for any company looking to do business in Iran is how to appropriately resource their operations on the ground. In this bulletin we highlight some the key issues to consider when recruiting (or assigning) employees to work in Iran.

Legislative framework

Employment relationships in the public and private sectors in Iran are governed by the Labour Code of 20 November 1990 (the Labour Law) which has been supplemented over the years by by-laws and various regulations.  

The Labour Law does not apply to employees working in Iran's free trade zones, which are governed by the Regulations on Employment of Workforce, Insurance and Social Security 1994. For the purposes of this bulletin we have focussed on an employer's obligations under the Labour Law.

Employment relationships in the public and private sectors in Iran are governed by the Labour Code of 20 November 1990 (the Labour Law) which has been supplemented over the years by by-laws and various regulations.  

The Labour Law does not apply to employees working in Iran's free trade zones, which are governed by the Regulations on Employment of Workforce, Insurance and Social Security 1994. For the purposes of this bulletin we have focussed on an employer's obligations under the Labour Law.

Immigration

All expatriate employees working in Iran must be sponsored for entry visa and work permit purposes by an entity or person that has its own right to remain in Iran. An individual's entry visa must be obtained from the General Directorate for the Employment of Foreign Nationals before the individual arrives in the country.

The individual must normally obtain a work permit within seven days of arriving in Iran. To do so, they (and their sponsor in Iran) will be required to show that:

  1. there is a lack of relevant expertise for their particular role among Iranian nationals;
  2. they are suitably qualified to fulfil their role; and
  3. they will use their expertise to train an Iranian national to eventually assume their role.

These conditions are applied strictly, reflecting the Iranian government's desire to reduce unemployment rates among Iranian nationals.

In practice, the process of applying for a work permit is undertaken at the same time as applying for the entry visa. Work permits are normally issued to expatriates for one year only and the conditions referred to above will need to be satisfied in order to renew a work permit.

Employment contracts

Employment contracts may be for fixed or unlimited terms. Copies of written employment contracts must be retained by the employer and the employee and given to the Ministry of Cooperatives, Labour and Social Welfare (the Ministry of Labour) and the relevant Islamic Labour Council (or the employee's representative).

Employment contracts must be in Farsi (or Farsi and English) and must contain the following information:

  • Name of employer and employee
  • Date of the contract
  • Job title
  • Remuneration
  • Working hours and annual leave
  • Place of work
  • Duration of the contract (if fixed)
  • Other matters required by custom and practice in relation to the specific job and/or area of employment

Specific terms of employment

  • Probationary period – probationary periods must not exceed three months. Either party may terminate employment without notice during the probationary period. If the employer terminates the employee's employment during the probationary period, the employee will be entitled to receive their remuneration for the whole period of the probationary period.
  • Minimum wage - the minimum daily wage in Iran is set by the Supreme Labour Council and is currently approximately 237,475 Rials (US$ 7.56). Employees may also be entitled to additional minimum allowances if they are married and have children.
  • Working hours - employees in Tehran typically work Saturday to Wednesday, with Thursday and Friday off for the weekend. In more rural areas, it is common for employees to work Saturday to Wednesday (eight hours per day) and a half day on Thursday (four hours). Total normal working hours must not exceed 44 hours in a week.
  • Overtime - Employees are entitled to overtime pay of up to 140% of their hourly wage provided that any overtime must not exceed four hours per day.
  • Annual leave – employees are entitled to a minimum of one calendar month's paid annual leave and can carry over nine days' annual leave from one year to the next.
  • Maternity leave – female employees in Iran are entitled to 270 calendar days' maternity leave.
  • Haj – employees are entitled to take one month's unpaid leave to perform the Haj pilgrimage once during the course of their employment. 

Social Security and income Tax

Iranian national employees and their employers are required to make contributions to the Social Security Organisation which operates a state pension scheme and provides unemployment, sickness, maternity and disability benefits. Currently, private sector employers must contribute 20% of an Iranian national employee's salary, with the Iranian national employee themselves contributing a further 7%.  Expatriate employees can, by written agreement with their employer, opt out of making social security contributions.

Employers in Iran are also required to deduct employment income tax at source for all employees (subject to certain limited exceptions) at the following rates:

Annual Salary (Rials)

Tax rate

Less than 156,000,000 (approximately US$5,000)

Exempt

Between 156,00,000 Rials and 966,000,000 Rials (approximately US$30,100)

10%

More than 1,380,000,000 Rials (approximately US$ 44,000)

20%

Suspension of employment

Employees have the right to suspend their employment contract in a number of circumstances, including during any period:

  1. of military service;
  2. of academic study (for up to a maximum of four years);
  3. of detention which does not lead to a conviction; and
  4. during which the employer's workplace is closed due to force majeure.

Employers must reinstate the relevant employee at the end of any period of suspension referred to above and the employee's continuity of service during this period must be recognised for the purposes of calculating the employee's entitlement to end of service benefits.

Unless an employer can justify the non-reinstatement of the employee, the dismissal of an employee during an period of suspension referred to above will be considered unlawful. If the reinstatement can be justified by the employer and the employee's employment is terminated, the employee will be entitled to 45 days' salary for each year of service (inclusive of the period of suspension).

Termination of employment

One of the key issues for international companies to consider when recruiting in Iran is the difficulties faced by employers when terminating an employee's (and particularly an Iranian national's) employment.

The Labour Law permits termination of employment in the following circumstances:

  1. upon the employee's death, total disability or retirement;
  2. upon expiry of the employee's fixed term contract;
  3. where the employment contract relates to a specific project and the project comes to an end;
  4. upon the employee's resignation;
  5. where there is reduced production and structural changes imposed by economic, social and cultural developments requiring significant technological changes.

The Labour Law does not permit an employee to dismiss an employee summarily (i.e. without notice) for gross misconduct.

If an employer wishes terminate an employee's employment for misconduct and/or performance related reasons, they must first obtain approval from the relevant Islamic Labour Council or Guild Society by submitting supporting evidence of the employee's misconduct and/or poor performance (e.g. written warnings, minutes of disciplinary hearings etc). Similarly, if an employer wishes to terminate employees for redundancy (i.e. reason (e) above) they will likely be required to liaise with, and obtain approval from, a number of different authorities before proceeding with the dismissals.

However, given the Iranian government's desire to keep unemployment rates down, international companies are likely to find it different to obtain the requisite approvals to dismiss an Iranian national.

If an employer proceeds with dismissing an employee without first obtaining the necessary approvals it exposes itself to (i) penalties including fines and imprisonment; and (ii) the employee being awarded compensation and/or being reinstated to their role.

Employers must notify the Ministry of Labour of the dismissal of any foreign national within 15 days. In all cases, a foreign national must obtain an exit visa (with their employer's consent) before they will be allowed to exit Iran.

End of service entitlements

On the termination of their employment (for any reason whatsoever), employees are entitled to receive:

  • a payment in respect of their accrued untaken annual leave entitlement;
  • an end of service benefit equivalent to at least one month's salary for each year of service (employees who are made redundant may be entitled to up to two month's salary for each year of service); and
  • any otheraccrued contractual entitlements.

Dual employment arrangements

Many international companies who send expatriate employees to work in Iran will do so under a dual employment arrangement (i.e. during the employee's assignment in Iran they will continue to be employed under an employment contract in the company's host country). Companies should be aware of the implications of dual employment arrangements and should ensure that such arrangements are documented carefully to reduce the risk of an employee inadvertently double-recovering contractual and statutory entitlements in multiple jurisdictions.

Structuring Employment Arrangements In Iran

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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