Employment Contracts: the difference between limited and unlimited contracts

Employers and employees often find themselves confused between the two types of employment contracts that exist in the UAE. One is known as a limited contract or term and the other is an unlimited contract or term. Commonly, individuals and companies are unaware of the main distinctions between the two types of contracts until a situation arises and the employment contract is to be relied upon.

In this article, Naila Sarwar senior associate, will address the main differences between a limited contract and unlimited contract in accordance with the UAE Federal Law No. 8 of 1980 (as amended) (“Labour Law”).

What is a limited contract?

Under the Labour Law, a limited contract of employment is for a fixed term of up to a maximum of four years. However, this can be reduced to a term of two years under the rules of Ministerial Decree 765 of 2015.  The expiration of a limited contract would occur at the end of the fixed term, which means the employee’s service with their employer will automatically terminate. The parties may, however, mutually agree to renew the contract on equal or similar terms otherwise the contract will end at the relevant term.

Can a limited contract be renewed?

Both parties, by mutual consent, may agree to renew the contract on equal or lesser terms or allow the contract to reach the end of its natural term. Alternatively, the parties can consider transferring the employment contract to an unlimited term by mutual agreement at the end of the fixed term.

How may a limited term contract be terminated?

A limited contract does not usually contain notice provisions as the contract/term is for a fixed duration. Under the Labour Law, an employer has grounds to terminate for a violation under Article 120 where the employee is ‘at fault’, in which case the employee can be summarily dismissed on grounds specified in Article 120 of the Labour Law.

What would happen if the employer decides to terminate the contract early?

Should the employer decide to terminate the contract before the end of the limited term, the employee is entitled to receive compensation of up to three months’ gross salary, or for the remainder of the limited term, should the remainder be less than three months.

What would happen if the employee decides to terminate the contract early?

Similarly, should the employee decide to terminate the contract prior to the expiry of the limited term, then the employer can receive compensation from the employee in accordance with Article 116 of the Labour Law. The amount of compensation the employee is liable to pay the employer is six weeks’ gross pay for early termination. Where the employer has committed a violation under Article 121 of the Labour Law, compensation is not payable by the employee.

What is an unlimited contract?

An unlimited contract of employment is for an indefinite term and offers a degree of flexibility preferred by employers and employees, usually offered where the employee is hired on a permanent basis.

How may an unlimited term contract be terminated?

One of the key points of an unlimited contract, is that Article 117 of the Labour Law sets out the right to terminate the employment for a ‘valid reason’, for example, for a performance or work-related issue. An arbitrary dismissal would occur where the employer decides to terminate the contract based on a non-work-related issue. In any event, the employer still retains the right to summarily dismiss an employee, without notice, on grounds set out in Article 120 of the Labour Law.

An employee can resign from his or her position under an unlimited term contract on condition that the correct contractual notice period is given to the employer, as per contract or by law. Failure to do so will result in the employee paying compensation to the employer in lieu of notice.

Article 88 or Article 120 of the Labour law sets out the specific acts which amount to gross misconduct, for example, where an employee works for a third-party employer while on sick or annual leave, and it applies to both types of contracts i.e. limited or unlimited term.

In summary, limited term contracts are found to be less popular nowadays, as it lacks the freedom to enable the employee to be released from its contractual obligations and to find another job without the risk of facing penalties. Conversely, an unlimited term contract offers flexibility for both the employer and employee provided the relevant contractual period is served or payment in lieu of notice.

Naila Sarwar is a UK qualified solicitor working with TWS Legal Consultants in Dubai, who specialises in commercial and private client matters, including employment matters.

Please contact one of our experienced lawyers today for more details. Email us at info@twslegal.ae or call +971 4 448 4284.