Difference between limited and unlimited contracts UAE
Various factors such as career progression, higher salaries, quality of life, and tax-free environment contribute to the influx of expats in the UAE. It is home to the highest number of expats in the GCC region, comprising 91 per cent of the total population.
However, living in a foreign land also comes with underlying responsibilities. The UAE is recognised for having strict rules. As an expat, you are expected to know the laws and abide by it. Since most foreigners in the UAE come in as job seekers and aspiring entrepreneurs, it is vital to know the key differences between limited and unlimited contracts.
Types of Employment Contracts in the UAE
There are two types of employment contracts in the UAE as stated under the UAE Labour Law No. 8 of 1980––Limited and Unlimited contracts.
1. Limited Contract
A limited contract is a fixed-term contract. It has a specified start date and end date with a duration to a maximum of four years. The employer and the employee can mutually agree to renew the contract at the end of the fixed-term. However, if the contract is not renewed, it automatically cancels on the specified end date.
2. Unlimited Contract
An unlimited contract is an open-ended type of contract with a start date but no defined end date. This type of contract is generally viewed to be more friendly. It offers a degree of flexibility for employers and employees.
Key differences between Limited and Unlimited Contracts
Termination of Contract
In the UAE, termination of contract happens frequently in various cases. Without knowing the rules, terminating a contract may lead to some consequences. Here’s to give you an idea:
When the employer terminates a limited contract before the end date and for reasons that are not stated in Article 120 of the UAE Labour Law, the employer is required to compensate the employee with three months salary, or for the remaining period of the contract––whichever is less.
Similarly, when an employee decides for early termination of a limited contract for reasons that are not stated in Article 121 of the UAE Labour Law, the employee is liable to pay the employer with six weeks salary, or the remaining period of the contract––whichever is less.
An unlimited contract may be terminated at any time by either the employer or employee following a 30-day notice period condition. A notice period extension of no longer than three months is also possible under a mutual agreement of both parties.
Termination of Contract without notice
There are various grounds for termination of a contract without notice under the UAE Labour Law:
- The employer may terminate the contract without notice when the employee commits any of the mentioned violations in Article 120 of the UAE Labour Law.
- The employee may terminate the contract without notice if the employer fails to fill his obligation, as stated in Article 121 of the UAE Labour Law.
End of Service Gratuity Calculation
End of service gratuity is calculated based on the most recent basic salary paid to the employee. Basic salary does not include allowances or bonuses that usually come with a salary package offered by employers.
It’s important to note that an employee who has not completed a one year of continuous service is not eligible for a gratuity pay. This rule applies whether the employee is under a limited or unlimited contract. Here’s how both contracts differ in gratuity calculation:
- If an employee has served for more than one (1) year, but less than five (5) years, he is entitled to full gratuity pay based on 21 days’ salary for each year of work.
- If an employee has served more than five (5) years, he is entitled to the full gratuity of 30 days’ salary for each year of work following the first five (5) years.
- The entire gratuity pay should not exceed a total of two years salary.
(when an employee resigns under an unlimited contract)
- If an employee has served between one (1) and three (3) years, he is entitled to one third (1/3) of 21 days’ basic salary as gratuity pay.
- If an employee has served between three (3) and five (5) years, he is entitled to two-thirds (2/3) of 21 days’ basic salary as gratuity pay.
- If an employee has served more than five (5) years, he is entitled to full 21 days’ basic salary as gratuity pay.
(when an employer terminates an unlimited contract)
- If an employee has served more than one (1) year, but less than five (5) years, he is entitled to 21 calendar days’ basic salary for each year of the first five years of work.
- If an employee has served more than five (5) years, he is entitled to 30 calendar days’ basic salary for each additional year, provided the entire compensation does not exceed two (2) years’ pay.
The Labour Law exists to protect both employers and employees’ employment rights in the UAE. It is important that you know the difference between limited and unlimited contracts. An employment contract is what legally binds them to each other. As a future employer, you will be accountable not only to your workers but also to your labour duties.
Without knowing the law and your inability to fulfil your obligations, you are jeopardising the integrity of your business setup in Dubai and UAE. Read about 6 life-changing tips for entrepreneurs.