To reduce risk, it’s critical to choose the correct form of contract at the start of any employment engagement. Do you understand the various contract kinds and their primary differences?
There are two types of employment contracts that employers can give to employees under the UAE Labor Law No. 8 of 1980 (as amended) (the “UAE Labor Law”), which applies to all employers in the UAE (excluding those situated in the Dubai International Financial Centre (“DIFC”)).
The treatment of mandatory end-of-service gratuity entitlement and termination implications are among the differences between the two types of contracts.
Contracts with a limited duration (Limited Contract)
1. What is the concept of a limited-term contract?
A limited term contract is a fixed-term contract that is usually tied to the length of time that the UAE resident visa is valid (i.e. two or three years, depending on the location of the employer). Unless either party terminates it earlier or both parties renew it, it will automatically terminate at the end of the term.
2. When is a limited-term contract suitable to use?
Limited-term contracts are effective when a business has to hire personnel for certain projects whose duration is known ahead of time.
3. What are the options for terminating a limited-term contract?
Limited-term contracts typically do not include a notice provision and simply expire at the end of the term or on the date specified in the contract (unless either party terminates the contract sooner – see questions 5 and 6 below).
Articles 88 and 120 of the UAE Labor Law provide for summary dismissal by the employer on one of the 11 exhaustive grounds. Under the requirements of Article 121 of the law, an employee may legitimately resign before the contract expires.
4. What are the options for renewing a limited-term contract?
A limited-term contract can be renewed with both parties’ consent, or the parties can agree to convert the contract to an unlimited-term contract at the conclusion of the period.
5. What happens if the employer decides to end the contract early?
If an employer seeks to terminate a contract before the end of the limited term, an employee is entitled to “early termination compensation” of at least three months’ remuneration, including salary and allowances (or the remainder of the contract term if the period remaining is less than three months).
6. What happens if an employee wants to end their employment contract early?
If an employee wishes to terminate a limited term contract before the end of the term, he must pay the employer “early termination compensation” of half of three months’ remuneration, including salary and allowances, or half of the remuneration for the residual period if the contract has less than three months to run, unless the employment contract provides otherwise.
7. What happens if a notice period is included in the limited-term contract?
In the case of a limited-term contract, notice must be given to the other party in addition to any early termination compensation that may be payable.
8. How do you even calculate end of service gratuity under limited contract and when employer terminates
Employees who have worked for one year or longer are entitled to an end-of-service gratuity computed as follows:
For each of the first five years of service, you will be paid for 21 calendar days of basic pay.
For each additional year, you will be paid for 30 calendar days of basic pay.
As long as the overall remuneration does not exceed two years’ worth of wages.
According to UAE Labor Law, an employee who has been terminated summarily for egregious misconduct is not entitled to an end-of-service gratuity.
9. When an employee resigns from a limited-term contract, how is the end-of-service gratuity calculated?
If an employee resigns with less than 5 years of service, he is not entitled to an end-of-service gratuity. He is entitled to the same end-of-service gratuity as if he had resigned on an unlimited contract if he has more than 5 years of service (see the answer to question 16 below).
10. Checklist for a contract with a restricted duration
A short term employment contract in the UAE must at the very least state:
- the date on which it will be completed
- the date on which construction will begin
- the type of the labor
- the work environment
- the monetary compensation
- and the duration
Contracts with no end date(Unlimited Contract)
1. What is a contract with an indefinite term?
Under UAE labor law, an unlimited term contract is open-ended and may be terminated for a variety of reasons (see the answer to questions 13 and 14 below).
2. When is it appropriate to use a contract with an indefinite term?
Unlimited term contracts are more flexible and user-friendly than limited term contracts. As a result, in the UAE, an unlimited term contract is more common than a limited period contract. It can be used for staff that are hired on a long-term basis and are not working on a project (where the length of the project is known in advance).
3. How may an employer terminate an unlimited-term contract?
There are two basic ways for an employer to properly terminate an indefinite term contract under UAE labor law:
For a ‘legitimate’ (i.e. performance-related) reason on notice (the UAE Labor Law stipulates a 30-day minimum notice period). However, the parties might agree in the contract to lengthier notice periods); or summarily (with no notice and no end-of-service gratuity) for one of the 11 exhaustive gross misconduct reasons listed in Articles 88 and 120 of the UAE Labor Law.
4. How may an employee terminate an unlimited-term contract?
An employee can resign if he or she gives the employer the required notice time (which must be a minimum of 30 calendar days, or longer, as per the contract of employment).
Alternatively, the employee may exercise his or her right to resign without cause under Article 121 of the statute.
5. How the end of the service be calculated under unlimited type of contract, when their a time for an employer to terminate the contract?
When an employee has covered up to one year time period, then he is entitled to gratuity but under following terms:
For each of the first five years of service, you will receive 21 calendar days of basic pay.
For each extra year, you will receive 30 days of basic pay.
As long as the overall remuneration does not exceed two years’ salary.
Note that an employee who has been terminated summarily for gross misconduct under the UAE Labor Law is not entitled to an end of service gratuity.
6. When an employee Resigns from an unlimited-term contract, how is the end-of-service gratuity calculated?
Employees who quit from an unlimited-term contract are entitled to an end-of-service gratuity based on the following sliding scale:
2/3 reduction for service between one and three years; 1/3 reduction for service between three and five years. There is no reduction if the service time exceeds five years.
7.Things to include in unlimited Term Contract
An unlimited-term employment contract in the UAE must at the very least state:
- The date on which it will be completed
- The date on which construction will begin
- The nature of the employment
- The working environment
- The monetary compensation
The New Labor Law’s critical points and the main actions employers need to take are summarized Article . This Article covers all aspects of labor laws to help you better understand key features of the new UAE labor law: what you must know?