The Difference Between Limited & Unlimited Contracts

Under UAE Labour Law No. 8 of 1980 (as amended) [the “UAE Labour Law”), which is applicable to all employers in the UAE (excluding those under the jurisdiction of the Dubai International Financial Centre (“DIFC”)], there are two types of employment contracts which employers can issue to employees; limited term or unlimited term contracts.
Below we have outlined the various differences between the two types of contract including statutory end of service gratuity entitlement and consequences of termination.

 

1. What are Limited Term Contracts?
A limited term contract is a fixed term contract which is usually linked to the duration of the employee’s UAE residency visa (i.e. two or three years, depending on the location of the employer). It will automatically terminate at the end of the term, unless it is renewed by either party, or conversely, terminated earlier.

 

2. When is it suitable to use a Limited Term Contract?
Limited term contracts are useful for project-based employees when the lengths of said projects are known in advance.

 

3. How could a limited term contract be terminated?
Limited term contracts normally have no provisions for notice and simply expire at the specified date for the end of the term (unless terminated earlier by either party).
Summary dismissal by the employer is allowed on the basis of one of the 11 exhaustive grounds under Articles 88 and 120 of the UAE Labour Law. An employee may validly resign prior to the expiry of the contract under the provisions of Article 121 of the law.

 

4. How can a Limited Term Contract be renewed?
A limited term contract may be renewed with the consent of both parties. Alternatively, both parties could agree to convert the agreement to an unlimited term contract at the end of the current contract,

 

5. What if an Employer wants to terminate the contract early?
As per UAE Labour Laws an employee is entitled to “early termination compensation” of a minimum of three months’ remuneration, including salary and allowances, (or the remainder of the term of the contract if the period remaining is less than three months), should an employer seeks to terminate the contract prior to the end of the limited term.

 

6. What if an Employee wants to terminate the contract early?
Unless the employment contract states otherwise, if an employee desires to terminate the limited term contract before the expiry of the term, they will be liable under the UAE Labour Law to pay their employer “early termination compensation” of 50% of three months’ remuneration, including salary and allowances, or 50% of the remuneration for the residual period if the contract has fewer than three months remaining.

 

7. What happens if the Limited Term Contract contains a Notice Period?
Should the contract contain provisions regarding a notice period, this provision will have to be provided to the other party in addition to any early termination compensation due.

 

8. How is ‘End of Service Gratuity’ calculated under a limited term contract, in the situation where an employer terminates the contract?
An employee who has completed one year or more of continuous service is entitled to end of service gratuity 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.
An employee is not entitled to end of service gratuity if they have been terminated summarily for gross misconduct pursuant to the provisions of UAE Labour Laws.

 

9. How is ‘End of Service Gratuity’ calculated under a Limited Term Contract, where the employee resigns?
An employee is not entitled to an end of service gratuity if they resign with less than 5 years of service. If they have over 5 years of service, they are entitled to the same end of service gratuity as they would if they resigned on an unlimited contract.

 

10. Specifications for a Limited Term Contract.
Under UAE Labour Laws, a Limited Term Employment Contract must, as a minimum, specify:
the date of its conclusion;
the date on which work begins;
the nature of the work;
the workplace;
the amount of the remuneration; and
the duration.

Unlimited Term Contracts

 

 

1. What are Unlimited Term Contracts?
An unlimited term contract is an open-ended contract with no end term, and may be terminated for various reasons under UAE Labour Laws.

 

2. When is it appropriate to use an Unlimited Term Contract?
Unlimited term contracts are usually viewed to be more flexible than limited term contracts. For this reason, an unlimited term contract is more commonly used in the UAE than a limited term contract. It should be used for employees who are intended to be permanent, not project based.

 

3. How may an Unlimited Term Contract be terminated by an employer?
Under the UAE Labour Law, there are two main ways for an employer to legitimately terminate an unlimited term contract:
For a ‘valid’ (i.e. performance related) reason on notice (the UAE Labour Law provides for a minimum notice period of 30 calendar days. However, the parties are entitled to agree on longer notice periods in the contract); or
Summarily (without notice and end of service gratuity) for one of the 11 exhaustive gross misconduct reasons set out in Articles 88 and 120 of the UAE Labour Law.

 

4. How may an Unlimited Term Contract be terminated by an employee?
An employee may resign by providing the employer with the contractual notice period (which must be a minimum of 30 calendar days, or longer, as per the contract of employment).
Alternatively, the employee may resign without notice as set under Article 121 of the law.

 

5. How is ‘End of Service Gratuity’ calculated under an Unlimited Term Contract, where the employer terminates the contract?
An employee who has completed one year or more of continuous service is entitled to end of service gratuity to be 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.
Similarly to Limited Contracts, note that an employee is not entitled to end of service gratuity where they have been terminated summarily for gross misconduct pursuant to the provisions of UAE Labour Laws.

 

6. How is ‘End of Service Gratuity’ calculated under an Unlimited Term Contract, where the employee resigns?
Where an employee resigns from an unlimited term contract, they will be entitled to an end of service gratuity on the following sliding scale:
Period of service of between one to three years: 2/3 reduction;
Period of service of between three to five years: 1/3 reduction If the period of service if over five years there is no reduction.

 

7. Checklist of items to include in an Unlimited Term Contract.
Under the UAE Labour Law, an unlimited term employment contract must, as a minimum specify:
the date of its conclusion;
the date on which work begins;
the nature of the work;
the workplace;
the amount of the remuneration.