Understanding Limited & Unlimited Employment Contracts

In this issue, Atty. Barney Almazar will compare the two types of employment contract and highlight the important distinctions including the treatment of statutory end of service gratuity entitlement as well as the consequences of termination and resignation. 

The labor laws in the United Arab Emirates are primarily governed by the Federal Law No 8 (otherwise known as the Labor Code) and ministerial resolutions issued by the Minister of Labour and Social Affairs. According to Article 38 of the Labor Code, the employment contract maybe for a limited or unlimited term. 

The most common type of contracts used by employers is those with unlimited term. However, this does not mean that unlimited contracts are always more advantageous than limited contracts.

Limited Term Contracts

A limited term contract has a fixed duration of employment which both the employee and employer must observe. According to Article 38, the term shall not exceed 4 years and it may be renewed for an equal or shorter term. Renewal is not guaranteed as it will require the mutual consent of the parties.

Unlimited Term Contracts

An unlimited or indefinite term contract is open-ended and will continue to be operative until terminated. According to Article 39, the employment contract shall, from its inception, be considered as an unlimited term contract if:

1. it is not written;
2. it is concluded for unlimited period;
3. it was originally written and concluded for a limited term but both parties, without a written agreement between them, continued to perform it after its expiry; or
4. it was originally concluded for the performance of a specific work that had no limited duration or that is recurrent by nature, but the contract continued after completion of that specific work.

Termination by Employer

Limited contract automatically expires upon the arrival of the specified end date unless renewed by the parties. When the contract is renewed, the renewal shall be deemed an extension of the original term and shall be added thereto when computing the years of service. 

The employer is entitled to terminate a limited contract prior to its expiration if the employee is under probationary period or has violated Article 88 (working for another company while on annual or sick leave) or Article 120 (the ten exhaustive grounds for dismissing an employee without notice). In case of violation of Article 88 or Article 120, the employee may face a 1-year or permanent ban for violating the imperative provisions of the Labor Code.

If the early termination of the limited contract is initiated by the employer for any other reasons, the employee must be compensated his aggregate wage due for a period of 3 months or the remaining period of the contract, whichever is lesser.

On the other hand, an unlimited contract may be terminated by the employer at any time following its conclusion by giving the employee a notice in writing at least 30 days prior to the intended date of termination. For day-paid laborers, the notice period shall be as follows:

1. One week: if the laborer is employed for more than 6 months but less than 1 year
2. Two weeks: if the laborer is employed for not less than 1 year
3. One month: if the laborer is employed for not less than 5 years.

If the employer disregards to serve or reduces the notice period, he shall pay his employee “compensation in lieu of notice” equal to the wage in respect of the entire or reduced notice period. 

In the same manner as limited contracts, the employer may terminate an unlimited contract without notice if the employee is on probation or violates Article 88 or Article 120. 

Resignation

An employee under a limited contract can terminate his employment prior to the expiry of the contract without incurring any penalties if resignation is under Article 121 which provides the 2 instances where the employee is justified to abandon his work:

1. if the employer fails to honor his obligations towards the employee, as provided for in the employment contract or in the Labor Code
2. if the employee is assaulted by the employer of the employer’s legal representative.

If the early termination of a limited contract is not based on Article 121, the employee shall be required to compensate the employer for damages which shall not exceed half a month wage for three months or for the remaining period of the contract, whichever is lesser. The employee will automatically get a 6-month employment ban. If requested by the employer, a 1-year ban may be imposed by the Ministry of Labor.

Unlimited contract may be terminated by the employee without notice if any of the 2 grounds specified in Article 121 exists. Otherwise, the resigning employee is required to give a 30-day notice (or such notice period stated in the contract). If the employee disregards to serve or reduces the notice period, he shall pay his employer compensation in lieu of notice. If the period of employment prior to resignation is less than 2 years, a 6-month ban will be imposed. If the employee did not give his termination notice or left his employment before the lapse of the 30-day notice period, the employer may request the Ministry of Labor to impose a 1-year ban.

End of Service Gratuity – Termination by Employer

An employee, whether under limited or unlimited contract who has completed one year or more of continuous service is entitled to gratuity calculated as follows:

• 21 day’s basic pay for each of the first 5 years of service 
• 30 day’s basic pay for each additional year up to a maximum of 2 years’ basic pay.

An employee who is terminated while on probation or due to violation of Article 88 or Article 120 is not entitled to end of service benefits.

End of Service Gratuity – Resignation

An employee under an unlimited contract who resigns (where the ground is not under Article 121) is entitled to gratuity computed as follows:

• continuous service of not less than 1 year and not more than 3 years: 7 days’ basic pay for each of the first 3 years
• continuous service exceeding 3 years up to 5 years: 14 days’ basic pay for each year
• continuous service exceeding 5 years: 30 days’  basic pay for each additional year up to a maximum of 2 years’ basic pay. 

An employee under limited contract who resigns (where the ground is not under Article 121) is not entitled to end of service benefits if the years of service is less than 5 years. Otherwise, the computation of gratuity is similar to unlimited contract.

When negotiating employment contracts, employees must not only take a look at the net pay but also consider their career plans and intended length of service with their potential employers in order to maximize employment benefits and avoid labor bans.

 

Source:
Atty. Barney Almazar
Atty. Barney Almazar is a director at the corporate-commercial department of Gulf Law in the Middle East, the Philippines and United Kingdom.
Atty. Barney holds a UAE legal consultancy license and is a lifetime member of the Philippine Bar.
Atty. Barney was awarded as one of Philippines’ The Outstanding Young Men (TOYM) for law and commended by the Philippine Senate in 2015 for his contribution in protecting the interests of more than 3 million overseas Filipinos in the Middle East.
He was named by the Asian Legal Business as Young Lawyer of Year for the Philippines in 2016 and Young Lawyer of the Year for Southeast Asia in 2017. Almazar is listed in Asia’s 40 under 40 with US$ 89 Million investment project deals across Middle East and Asia.
Atty. Barney Almazar is the head of the monthly free legal aid at the Philippine Embassy in Abu Dhabi and Philippine Consulate in Dubai.
Atty. Barney can be contacted at barney@gulflaw.info