Choosing the right type of contract at the beginning of any employment relationship is crucial for minimising risks. Are you familiar with the available contract types and their key differences?
Under the UAE Labour Law No. 8 of 1980 (as amended) (“the UAE Labour Law”), which applies to all employers in the UAE except those based in the Dubai International Financial Centre (DIFC), employers can offer two types of employment contracts: limited term or unlimited term contracts.
Significant distinctions exist between these contract types, including differences in the handling of statutory end-of-service gratuity entitlements and the implications of contract termination.
Let us compare these two types of contracts in detail to help both employers and employees know their rights and obligations.
What constitutes an employment contract in the UAE?
In the UAE, an employment contract is a legally binding agreement between an employer and an employee that delineates the terms and conditions of employment. Every organisation in the UAE operates under such contracts. The specifics of the contract can vary according to the job nature and industry, but commonly included terms are:
- Details of both the employer and the employee
- Job description
- Start date
- Salary information
- Working hours
- Probation period
- Compensation and benefits
- Termination conditions
- Annual leave entitlement
- Non-compete clauses
These components ensure that both parties have a clear understanding of their obligations and expectations, thereby fostering a transparent working relationship.
Limited contracts (fixed-term contracts)
Limited contracts, commonly known as fixed-term contracts, are prevalent in the UAE, particularly for roles associated with specific projects or temporary needs. The duration of these contracts is predetermined and mutually agreed upon by both employer and employee.
Typically, these contracts last up to three years from the start of employment, although this can vary. Renewal of the contract is subject to the mutual consent of both parties. This type of contract is frequently used in industries with projects that have definitive timelines or require temporary staffing.
Job type
Limited contracts are employed by organisations that engage in project-based work or require roles to be filled for specific periods. These contracts are advantageous for employers seeking temporary employment solutions. Simultaneously, they allow employees to immerse themselves in the work environment and gain valuable experience. Employees may transition to other roles or continue in their current positions depending on the contract’s termination provisions.
Contract duration
A limited contract specifies a fixed start and end date, with the duration and terms mutually agreed upon by the employer and the employee. These conditions remain unchanged until the contract’s termination unless both parties agree to modify them.
Renewal process
A limited contract, defined by its set expiry date, terminates automatically upon reaching this endpoint. Renewal of the contract is contingent upon mutual agreement between the employer and the employee. The terms, conditions, and duration of the renewed contract may either remain consistent or be altered, based on the agreement reached by both parties. Typically, employers consider renewing such contracts based on the employee’s performance and the ongoing requirements of the role.
Termination procedure
In the case of a limited contract, termination occurs automatically upon the contract’s expiration date. However, early termination is permissible under specific conditions outlined in Article 120 of the UAE Labour Law, which allows for termination for just cause. The notice period for such terminations varies from 30 days to three months, depending on the severity of the reasons, which may include gross misconduct, failure to meet requirements, or other legitimate causes listed in Article 117.
Additionally, employees have the right to terminate the contract prematurely in certain circumstances, such as experiencing assault by the employer or the employer’s failure to fulfil their obligations, as detailed in Article 121. Non-adherence to the contractual provisions may lead to the UAE automatically imposing a six-month employment ban.
Calculation of end-of-service gratuity under a limited-term contract
Under a limited-term contract, if the employer terminates the agreement, an employee who has completed one year or more of continuous service is entitled to an end-of-service gratuity calculated as follows:
- 21 calendar days’ basic salary for each of the first five years of service.
- 30 calendar days’ basic salary for each subsequent year.
However, the total gratuity payment shall not exceed the equivalent of two years’ pay.
Calculation of end-of-service gratuity for resignations under a limited-term contract
When an employee resigns from a limited-term contract, the entitlement to end-of-service gratuity depends on the duration of their service. If the employee resigns with less than five years of service, they are not entitled to any end-of-service gratuity. However, if their service extends beyond five years, they are eligible for the same end-of-service gratuity as they would be under an unlimited contract.
Employer perspective
Employers benefit from the flexibility of limited contracts, which allow them to adapt to changing project demands or seasonal fluctuations. This type of contract enables the hiring of employees with specialised skills for specific durations, avoiding the need for long-term commitments.
Employee Perspective
Limited contracts often appeal to employees seeking temporary positions or project-based work. This type of contract provides flexibility for individuals who desire variety in their work life, allowing them to explore different projects and roles without long-term commitments.
Unlimited Contracts
Unlimited contracts, also known as open-ended contracts, are characterised by a specific start date but no defined end date, offering a greater sense of stability and continuity for both employees and employers. The terms and conditions set out in the contract remain effective until either party chooses to terminate the agreement.
These contracts are suited to long-term projects and permanent roles, making them vital for employees seeking sustained employment within an organisation. Recent amendments to the Labour Law in 2024 have led most organisations to phase out indefinite contracts, mandating that all employment agreements be of a fixed term.
Job type
Unlimited contracts are typically suited for organisations engaged in ongoing or continuous operations. This type of contract provides greater stability for both employees and employers, fostering long-term relationships and promoting sustained collaboration within the workplace.
Contract duration
Unlimited contracts do not have an expiration date, meaning there is no fixed duration for employment. The relationship between employer and employee can continue indefinitely until either party chooses to terminate the contract. This arrangement provides a sense of security for both parties, allowing for ongoing development and collaboration.
Renewal process
As you may be aware, unlimited contracts do not have an expiration date or a fixed duration, which generally eliminates the need for renewal. However, should either party wish to amend any terms of the contract, an addendum can be signed following mutual agreement between the employer and employee. This addendum would specify new terms and conditions, aiding in the maintenance of a healthy and productive relationship between both parties.
Termination procedure
According to Article 177 of the Labour Law, either party may terminate an unlimited contract by mutual consent, provided they give at least one month’s notice. During this notice period, the employee is entitled to full pay and benefits. While Articles 120 and 88 allow for terminations without notice, Article 121 affords the employee the option to resign without cause. Employees on unlimited contracts have the flexibility to switch companies without restrictions imposed by labour laws.
Calculation of end-of-service gratuity under an unlimited-term contract
When an employer terminates an unlimited-term contract, the end-of-service gratuity for an employee who has completed one year or more of continuous service is calculated as follows:
- 21 calendar days’ basic salary for each of the first five years of service.
- 30 calendar days’ basic salary for each subsequent year, provided that the total gratuity does not exceed the equivalent of two years’ pay.
It is important to note that an employee will not be entitled to end-of-service gratuity if they are terminated summarily for gross misconduct, under the provisions of the UAE Labour Law.
Calculation of end-of-service gratuity for resignations under an unlimited-term contract
When an employee resigns from an unlimited-term contract, their entitlement to end-of-service gratuity is calculated on a graduated scale based on the length of service:
- For a service period of one to three years: The gratuity is reduced by two-thirds.
- For a service period of three to five years: The gratuity is reduced by one-third.
- If the service period exceeds five years: There is no reduction in the gratuity.
Employer perspective
Unlimited contracts demonstrate an employer’s commitment to building and maintaining a stable workforce. This commitment provides employees with a sense of security and fosters loyalty. Organisations that aim to cultivate enduring relationships with their staff and are engaged in continuous operations often prefer these types of contracts.
Employee perspective
Unlimited contracts attract employees who value consistency, job security, and a long-term commitment from their employers. These open-ended employment arrangements offer a sense of security and belonging within the organisation, making them particularly appealing to workers seeking stable and enduring careers.
Final thoughts
In conclusion, understanding the nuances between limited and unlimited employment contracts in the UAE is essential for both employers and employees. Limited contracts provide flexibility for project-specific roles, whereas unlimited contracts offer long-term stability and security, enhancing loyalty within an organisation. A clear grasp of the terms, conditions, and entitlements of each contract type ensures that both parties can make informed decisions that align with their strategic goals and comply with UAE Labour Law.
Discover how Davidson & Co., a leading boutique law firm in the UAE, can expertly guide you through the intricacies of employment contracts and labour law. Contact us today to secure top-tier legal advice tailored to your needs.
