Types of UAE Employment Contracts
According to the UAE Federal Law No. 8 of 1980 (the Labour Law), there are two principal categories of employment contracts that an employer can give to their employees—limited and unlimited term contracts.
The contracts differ mainly on the basis of entitlements and legal rights. Below is an explanation of both contracts:
1: Limited Contracts
A limited-term contract is a fixed-term contract with a specific start and end date. The contract is usually linked to the time period of the concerned individual’s UAE residency visa, and therefore, the maximum period is four years.
In this kind of contract, both the employee and employer negotiate a fixed work duration, automatically getting terminated the moment the agreement expires. In case of the expiration of this contract, there is an option for the renewal or termination on mutual consent from the employer to the employee.
The prime characteristics of such a contract are
- Duration: A definite start date and expiry date are listed in the working contract. For a fixed-period duration, an extension cannot happen beyond four years.
- Salary: The employee’s salary is set for the contract period and cannot be altered unless both parties agree to it mutually. The remuneration amount and benefits are also specified prior to signing the agreement.
- Benefits: Limited contracts are typically preceded by benefits like health insurance, leave per year, and end-of-service gratuity.
- Termination: An automatic cancellation of the contract at the end of its duration. But the contract can be cancelled prior to its expiry date if there is a legitimate reason. Moreover, both parties need to provide a notice period as stated in the contract.
- The nature of work and the workplace cannot be altered without mutual agreement.
- Restricted to a particular employer, i.e., an employee cannot change companies until the term of the contract expires or with mutual consent from both parties.
This kind of contract is usually appropriate when employers require employees to work on a particular project or when the duration of the project is predetermined.
2: Unlimited Contracts
As the name itself indicates, an unlimited-term contract is open-ended in character. In simple terms, it will have a fixed beginning date but no set terminating date, making it more adaptable for both employer and employee.
In this contract, the conditions and terms will continue to apply until one or both parties opt to cancel the contract or both parties sign an addendum.
The most important characteristics of an unlimited-term contract in the UAE are as follows:
- Duration: No end date specified, hence an open-ended. The terms and conditions remain valid until the contract is ended by one or both parties.
- Benefits: The unlimited contract typically has benefits like excellent job security, annual leave allowance, overtime compensation, sick leave, and end-of-service benefits, like gratuity pay.
- Variations in employment terms: The worker has greater autonomy to switch jobs without awaiting the expiry of the contract period (subject to giving notice and mutual consent with their existing employer) since their residence visa is not sponsored by the contract. The employer also has the freedom to modify the terms of employment, including wages and benefits, after consulting with the worker. The changes need to be made in compliance with the UAE Labour Law, however.
This contract is suited for individuals in search of an unstructured, adaptable work format.
Limited and Unlimited Contracts Differences
Now that I have told you the essential characteristics of limited and unlimited contracts, let’s examine the distinction between the two in more detail. Below is an outline:
1. Duration of Contract
Limited Contract: As indicated above, a limited contract involves a definite commencement and termination date, typically not more than four years. There is mutual agreement on the contract terms by the two parties involved, which may not be varied without consent from both parties. The contract applies primarily to project or temporary posts.
Unlimited Contract: In contrast to a limited contract, an unlimited contract does not have a time limit. It is a continuing employment relationship that can go on indefinitely until it is ended by one or both parties or new addendum terms are agreed on. This form of contract best fits employees wanting long-term security of employment and career development possibilities.
2. Contract Renewal
Limited Contract: When the contract period lapses, it automatically terminates unless mutually agreed to be extended by both parties. The extension may be for a similar period or with changes mutually agreed upon. But if the employer does not intend to extend the contract, he has to provide a notice period according to the UAE Labour Law.
Unlimited Contract: As an unlimited contract does not have a specific term, there is no automatic renewal requirement. But if both parties want to extend the employment relationship, they can enter into an addendum with new terms and conditions.
3. Contract Termination
Limited Contract: In the case of limited-term contracts, the contract terminates automatically on its expiration date. The contract can also be terminated prior to the end date if it is justified, according to Article 120 of the UAE Labour Law, where it is provided that an employer can terminate an employee with no notice or end-of-service gratuity in the event of:
(i) Any of the said violations to the extent of gross misconduct in Articles 120 and 88 of the UAE Labour Law
(ii) Discharge for failing to perform their duty, according to Article 121 of the UAE Labour Law.
(iii) A justified reason for dismissal under Article 117 of the UAE Labour Law with a period of at least 30 days or up to three months’ notice.
Similarly, an employee cannot quit or cancel the contract before its expiration unless, in special circumstances, referred to in Article 121 of the UAE Labour Law. For example, you can relinquish your services without undergoing a notice period if:
(i) You have been attacked by the employer or any of their legally representative persons
(ii) Your employer has failed to fulfil their obligations as stated in the contract or by law.
It is important to note that non-compliance with the conditions and terms of a limited contract can lead to an automatic labour ban by the UAE for six months.
You are also at liberty to have yourself banned from working with other companies for six months for similar reasons.
Limited contracts are non-transferable; you cannot pass them to a new employer in case you leave before the termination of the contract.
Unlimited Contract: An unlimited contract can be ended by either party through a mutual agreement with at least a one-month notice period as stipulated under Article 177 of the Labour Law or as stated in the employment contract.
The employee is allowed their full pay and benefits throughout the notice period, and both parties are required to fulfil their contractual obligations and duties.
But this does not happen where the worker is held to be liable under Articles 120 and 88 of the UAE Labour Law, where the employer may terminate with immediate effect without notice or end-of-service indemnity.
Similarly, the worker, too, can terminate the contract with immediate effect by giving no notice, as under Article 121 of the UAE Labour Law (explained above under limited contracts).
Even if the employer does not provide the employee with an opportunity to work out the notice period because the circumstances are outside the limits set in Article 120 of the UAE Labour Law, the employee is also entitled to receive 30 days’ full pay.
In contrast to limited contracts, employees with an unlimited contract can move from one employer to another without a labour ban or restriction.
4. Remuneration
Limited Contract: Both parties are to be compensated in case of termination or resignation of a limited contract. In case the employer terminates the employee for no reason stated in Article 120 of the UAE Labour Law or notice period, they should pay three months’ remuneration or the balance of the contract period, whichever is less.
In the same vein, if an employee leaves on their own accord or without notice as per Article 121 of UAE Labour Law, the employee will have to pay their employer 45 days of salary or the remaining duration, whichever is less.
In either event, if either party is in default of serving the notice period under the employment contract or has waived or shortened it, the other party is automatically entitled to receive a compensation payment based on the whole or shortened notice period, computed by reference to the employee’s last pay.
Unlimited Contract: In an unlimited contract, if either of the parties wants to end the employment relationship without any valid reason or notice period, they have to give compensation equivalent to 30 days’ salary.
This provision is applicable even if the termination is by mutual consent and a 30-day notice period is served in advance. If an employee is terminated without any reason, they are entitled to be paid compensation amounting to three months’ salary.
It must be pointed out that receiving compensation for damages in unreasonable termination cases does not preclude an employee from being entitled to end-of-service gratuity or payment in lieu of notice.
5. Final Settlement Benefits (Gratuity)
Limited and unlimited contract workers are both entitled to end-of-service benefits, computed on the basis of their service duration and the latest basic salary. Be aware that basic salary excludes allowances, bonuses, or any other benefits that could be attached to a job.
It should also be noted that an employee who has not served continuously for one year is not entitled to end-of-service gratuity, irrespective of the type of contract. Both limited and unlimited contracts are subject to this provision. Yet the two types of contracts have a different method of calculation for the gratuity:
Limited Contract: Under a limited contract, an employee is due an end-of-service gratuity for every year of service.
For the initial five years of service, you will be paid 21 days’ pay annually. And for each subsequent year beyond that, you will be paid 30 days’ worth of salary annually (both pro rata calculated for any extra days worked).
Employees who resign or terminate the contract with fewer than five years of service will not get any gratuity payment.
Unlimited Contract: Similar to a limited contract, an employee can expect a gratuity payment if he has worked one year continuously on an unlimited contract. But the calculation varies based on how much gratuity is given. For instance:
(resignation/termination by the employee)
- If the employee has served for 1-3 years, they receive one-third (1/3) of 21 days’ basic pay as gratuity pay.
- Guidelines state that workers who dedicate their time between three and five years receive two-thirds (2/3) of their 21 days base salary as gratuity payment.
- The employee receives their entire 21 days of basic salary gratuity payment after fulfilling at least five years of employment.
(termination by the employer)
- Workers employed between one and five years at the company will receive 21 days of basic pay at the rate of one day per year worked as a gratuity benefit.
- After serving more than five years ,the employee will get 30 calendar days of basic salary per year as additional compensation up to a maximum of two years’ worth of pay.
6. Practical Applications
Limited contracts constitute the primary labour agreement in UAE businesses to handle short-term or seasonal task-based work situations. Production firms recruit temporary employees through limited contracts during times of high demand, but these employees receive termination when demand drops.
Organisations use unlimited contracts primarily for permanent jobs and extended posts because this type of agreement gives workers enhanced flexibility and security alongside growth prospects. The terms benefit both employers and workers since they allow businesses to maintain valuable skilled personnel even though restricted contracts would otherwise release them.
7. Impact on Employees
Limited Contract: The primary implication of this kind of contract is employment security. That is, in case the employer chooses not to extend the contract upon expiry, the employee must seek a new job.
Additionally, if the employee chooses to end the contract prior to its expiry, they are liable for penalties and can even lose their gratuity upon expiry of service.
Unlimited Contract: The greatest benefit of an unlimited contract is security in employment. Employees are given a degree of security against being dismissed without reason when working under an unlimited contract.
It also provides the employee with the ability to remain employed, provided they meet the terms of the contract and the employer is happy with their work.
8. How It Affects Employers
For both limited and unlimited contracts, there are some implications that UAE employers must be conscious of. Some of the most important factors that employers must take into account before employing an employee under either contract are outlined below:
Notice Period: The termination of either direct employment relationship by either party under limited or unlimited contracts demands compliance with their designated notice periods.
The duration of notice requirements for limited contracts usually falls below the notice requirements designated for unlimited contracts. Employers should carry out notice periods with strict adherence to the requirements of UAE labour law.
The nonacceptance of correct notice procedures may trigger fines or generate legal challenges.
The duration of a limited contract has a defined end date, which enables the employer to opt for either renewal or extension of the agreement.
The duration of unlimited contracts continues indefinitely until both parties agree to their termination. Limited-term contracts have defined expiration dates, and employers need to take the correct steps at these periods.
Under both types of employment contracts, employers must provide terminal payment to their staff members. Each type of contract requires different methods for calculating benefits according to the explanation provided earlier. All employees who meet the one-year service mark need their employers to fulfil this requirement.
Visa Cancellation follows employment contract rules in the United Arab Emirates through employee visa dependence on their work status. An employer has to execute visa cancellation within a predetermined time frame whenever an employment contract ends or terminates.
Employers must follow established procedures for employment visa cancellations since these procedures differ between limited and unlimited contracts to prevent legal difficulties.
The termination of employment contracts requires employers to follow exact procedures defined by the UAE Labour Law legislation. The failure to comply with correct procedures could trigger litigation from employees against employers.
