Differentiation Between Limited and Unlimited Employment contract under UAE Labour Law

 

Dubai (and wider GCC) has been a hub of development, culture and globalization over the past decades. Over a course of time, this has generated a substantial demand for a diverse workforce. Gradually, the region became home to the millions of expatriate workforce of different age groups, ethnicities, educational qualifications and nationalities. Therefore, this led to the need of a dynamic and robust legislation that could govern all employment related matters. In this article, our Employment Practice (UAE) has brushed through the major differences between the two (2) types of employment contracts that an employer and employee can enter into in the United Arab Emirates (UAE). Ignorance of law is no excuse; and therefore, we (the employers and employees in the UAE) should have the basic understanding on the implications of the contracts that we sign. 

 

Federal Law Number 8 of 1980 (the Labour Law) provides for two (2) main types of employment contracts that are primarily differentiated on the basis of their time period: 

(i) limited term employment contracts; and 

(ii) unlimited term employment contracts. 

 

Fotis’ Employment Practice has drafted this article to ensure that our readers have an overview on these provisions of the Labour Law, as we stand amidst the challenging times today due to the financial distress caused as a result of the global pandemic. A vast majority of UAE’s work population consists of expatriates from across the globe who seek lucrative job opportunities in the ‘City of Gold’. As our readers are well aware, the Labour Law governs all the rights related to the employees and employers, but exempts certain categories of employees as amended by Federal Law Number 24 of 1981 and Federal Law Number 12 of 1986. Companies operating in certain zones (such as the Dubai International Financial Center), are governed by their own legislations – which shall be discussed by our team in another article. 

 

Limited Term Employment Contracts

Oxford Dictionary defines the word ‘limited’ as ‘restricted to a particular limit of time, numbers, etc.’ Therefore, it is clear that limited term employment contracts (which shall be referred to as limited contracts in this article) are contracts that stipulate a particular time frame. Article 38 of the Labour Law states that a fixed-term contract that includes both the date of commencement and date of conclusion of the employment contract. Duration of the contract: The term of a limited contract cannot exceed more than four years. As the name suggests ‘, these contracts stipulate a fixed term and can be renewed at the mutual consent of both the employer and employee.

This kind of contract is opted by the employer when the work assigned to the employee is only for a certain period of time, to be specific any kind of projects which can be completed within the span of two years.

 

Termination of the Contract: 

The contract tends to expire on its own on the date of conclusion as specified in the contract, which puts an automatic end to the services done by the employee to the employer. However, there is always an option to renew this contract upon mutual agreement to continue on equal or similar terms, between the employee and the employer. Which is why, the service of notice of termination is excluded as the date of conclusion is already specified in the contract, except for under certain circumstances as stated below:

• On the mutual agreement between the employee and the employer.
• If the employee has committed any violations amounting to gross misconduct, as per article 120 and 88 of the Labour Law (termination without notice period in this case).
• If the employer has a valid reason to terminate the employee according to article 117, with a notice of either minimum thirty (30) days’ or a maximum of three (3) months.

 

As a per the Labour Law, an employee is not allowed to resign/terminate the contract before the end date; however, the Law has set out the below exemptions to this generic rule:

• With prior notice of a minimum of 30 days’ or a maximum of 3 months to the employer; or
• Terminate the contract without serving notice period if the employer fails to comply with the obligations as stated in the employment contract, according to article 121 of the Labour Law.
• Compensation: It is a certain kind of penalty imposed on either the employer or employee on termination of the contract before the end date. When the employer terminates the contract before the end date, he is subject to a compensation of a maximum of three months’ full salary or the remainder of the term of the contract, whichever is shorter, except the termination is proceeded for the reasons specified in articles 88 and 120 of the Labour Law. When the employee terminates the contract before the end date, he is subject to a compensation of three months’ half salary or the remainder of the term of contract, whichever is shorter, except the termination is proceeded for the reasons specified in article 121 of the Labour Law. In any case, either party fails to serve notice as per the Employment Contract or as per the Labor Law, or has waived/reduced the period of notice, the other party is entitled to compensation, a payment as an alternative of notice equivalent to the entire or reduced notice period. The compensation is calculated based on an employee’s last salary.
• Service Gratuity on the end of the Limited Contract: At the end of the service, a sum of money is paid as a reward to the employee. The employee will be entitled to such payments of service gratuity only upon the end of the contract upon the completion of at least 12 months in continuous employment with an employer. The employer is not obligated to any kind of end of service gratuity if he is terminated as per article 120 of the Labour Law. The end of service gratuity is calculated as follows:
  • 21 days wages for every year of employment completed and for each year of the first five years of employment (calculated pro-rata for any additional days served)
  • 30 days wages of each additional year of employment after five years, (calculated pro-rata for any additional days served).

 

Unlimited Term Employment Contracts:

Article 39 of the Labour Law provides that Unlimited Term Employment Contracts (referred to as Unlimited Contracts in this article) as an open-ended contract which includes the date of commencement of work but not the date of conclusion. Duration of the contract: The term of an unlimited contract is not specified or fixed to a certain period of time. The terms of the contract will continue in force till such time that 

(i) either (or both) parties terminate the contract; or 

(ii) parties enter into an addendum to the initial agreement.

 

Termination of the contract:

Unlike limited contracts, this contract can be terminated by either party via a mutual agreement, after a thirty (30) days’ notice period. During the notice period, all contractual duties and obligations are required to be honored by both parties. According to article 117 of the Labor Law, both the employee or employer may terminate the contract with a mandatory prior notice of a minimum of 30 days’ during which the employee is entitled to their full pay and benefits and are still obliged to comply with the provisions of the employment contract. An employer may terminate the contract without any prior notice if the employee is liable under article 120 and 88 of the Labor Law. The employee may resign without notice as set out under Article 121 of the Labour Law (explained above under limited contracts). The employee may claim for the thirty (30) days’ pay during the notice period even if the employer does not provide the employee with the opportunity to serve such notice period for reasons outside the scope of the conditions mentioned under article 120 of the Labor Law.

• End of service gratuity: when an employer terminates the contract, the employee is entitled to the benefits as specified in Article 132 of the Labor Law. When an employee completes one year or more of continuous service, is entitled to service gratuity which is calculated as follows:
• 21 calendar days’ basic pay for each year of the first five years of service.
• 30 calendar days’ basic pay for each additional year, provided that the entire total remuneration does not exceed two years’ pay.

Where the employee resigns from an unlimited term contract according to article 137 of the Labour Law, he/she will be entitled to an end of service gratuity on the following sliding scale which is calculated based on the period of service done:

• Period of service of between one and three years: 2/3 reduction
• Period of service of between three and five years: 1/3 reduction
• If the period of service is over five years: there is no reduction.

The employee is not entitled to gratuity when terminated under article 120 of law. 

 

CONCLUSION

The significant differences between these two kinds of employment contracts could be inferred when compared in terms of the clauses(duration), termination and compensation, and end of service gratuity. The UAE Labor Law provides various rules and regulations on employment relationships. The following article is just a part that covers the differences between a limited contract and an unlimited contract giving a general overview on their contractual implications to our readers.