The decision to end an employment relationship for both an employee and employer is often one that is difficult to make, and stressful for all those involved. This is heightened by the requirement to ensure that the termination of the employment contract is handled correctly and in line with the applicable law. To assist, we address the key provisions of Federal Law No.8 of 1980 otherwise known as the UAE Labour Law, on the termination of both limited and unlimited term contracts.
Limited vs Unlimited Term Contract
- Limited – Generally a start and end date are provided for in the body of the contract up to a maximum of 2 years.
- Unlimited term contract – An open-ended contract with no specified end date.
How is a Limited Term Contract Terminated?
Unless both parties agree by mutual consent prior to the end date to either; i) renew the contract or ii) convert the contract in to an unlimited term contract, the contract is cancelled automatically. It is therefore unusual for a limited term contract to include notice provisions.
i) Termination by Employer
An employer may terminate a limited term contract before the end date if it can be proved the employee breached one of the grounds provided for in Articles 120 and 88 (as detailed below).
ii) Termination by Employee
Under Article 121, where an employer fails to honour his obligations to an employee under the terms of the employment contract or, if an employee is assaulted by the employer or the employer’s legal representative, an employee may lawfully resign without notice.
Early Termination of a Limited Term Contract by Employer
Where an employer seeks to terminate a limited term contract prior to the end date, for reasons other than those specified in Articles 120 or 88, they will become liable to pay the employee compensation of a maximum of 3 months’ full salary or the remainder of the term of the contract, whichever is shorter.
Early Termination of a Limited Term Contract by Employee
Where an employee seeks to terminate a limited term contract prior to the end date, for reasons other than those specified in Article 121, they will become liable to pay the employer compensation of a maximum of 3 months’ half salary or the remainder of the term of the contract, whichever is shorter.
How is an Unlimited Term Contract Terminated?
i) Termination by Employee
An employee may terminate their employment contract by providing the employer with notice as per their contract (minimum of 30 days’ and maximum 3 months’).
In addition, an employee may lawfully terminate their contract of employment, without notice, for either of the reasons stipulated under Article 121 as aforesaid.
ii) Termination by Employer
The UAE Labour Law provides for two ways in which an employer can lawfully terminate an employee.
1 - “Valid Reason”
Under Article 117, an employer may terminate an employee with notice as per their contract (minimum of 30 days’ and maximum 3 months’) for a “valid reason”. While the term “valid reason” is not defined under the law, any reason must be work related for example, poor performance or misconduct.
2 - Gross misconduct as defined in Articles 88 and 120 of the UAE Labour Law
The UAE Labour Law provides that an employer may terminate an employee without notice for specific acts that amount to gross misconduct as provided for under Articles 88 and 120:
- Assumes a false identity or nationality or submits forged certificates or documents;
- Engaged on probation and is dismissed during or at the end of probationary period;
- Commits a fault resulting in substantial material loss to the employer, provided that the latter notifies the labour department of the incident within 48 hours of him becoming award of its occurrence;
- Disobeys instructions on the safety of work or workplace, provided that such instructions are in writing and posted as a conspicuous place and are communicated verbally to the worker, in case he is illiterate;
- Defaults on his basic duties under the employment contract and fails to redress such default despite a written interrogation and a warning that he will be dismissed if such default is repeated;
- Reveals any confidential information of the firm for which he works;
- Is convicted by a competent court of a crime against honour, honestly or public morals;
- Is found in a state of drunkenness or under the influence of a narcotic drug during working hours;
- Assaults the employer, the manager in charge or any of his workmates during working hours;
- He is absent from work without a valid reason for more than 20 non-successive days in one single year, or for more than 7 successive days.
- If found to be working for another employer while on annual or sick leave [Article 88].
Where an employee is validly found to be terminated under any of the aforementioned grounds, they will forfeit their entitlement to end of service gratuity.
What will happen if the notice period is not complied with?
In the event that either party fails to serve notice in accordance with the law and/or employment contract provisions, or has waived/reduced the period of notice, the other party is entitled to payment in lieu of notice equivalent to the entire or reduced notice period. Compensation is calculated based on an employee’s last salary.
End of Service Gratuity Provisions when Employer Terminates Contract (Limited and Unlimited Term Contracts)
If an employee has completed at least twelve months in continuous employment with an employer, then they are entitled to payment of end of service gratuity upon the termination of their employment. 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 for each additional year of employment after five years, (calculated pro rata for any additional days served).
End of Service Gratuity Provisions when Employee Terminates Contract
i) Limited Term Contract
An employee is not entitled to end of service gratuity unless they have been in continuous employment for over 5 years. In these circumstances, end of service is calculated as if the employee terminated the employment relationship under an unlimited term contract.
ii) Unlimited Term Contract
Provided an employee has completed at least twelve months in continuous employment with an employer, then they are entitled to payment of end of service gratuity upon the termination of their employment on a reduced rate as follows:
- 1 - 3 years’ employment, one third of 21 days' basic wage for each year of service.
- 3 - 5 years’ employment, two-thirds of 21 days' basic wage for each year of service.
- 5 years’ employment, full 21 days' basic wage for each year of service.
- 5+ years employment, 30 days’ basic wage for each additional year.
In all circumstances, the amount of gratuity shall not exceed 2 years wage.
For further information on how we can assist you in your enquiries regarding Labour Laws, or to discuss in more detail any of the general principles raised above, please contact us on 04 343 8897 where one of our team will be delighted to assist you.
Please note that the DIFC has a separate legal framework for Employment matters.