What is the Difference Between a Limited and Unlimited Contract in The UAE?

What is the Difference Between a Limited and Unlimited Contract in The UAE?


Ambia Hoque


Suppose you want to secure a job in the United Arab Emirates (UAE). In that case, you’ll likely be faced with a limited or unlimited contract. In today’s competitive job market, it’s essential to know the differences between these contract types. This article will break down both contract types under UAE labour law for you, discussing their benefits, obligations, and termination procedures.

We’ll also look at the significant changes to employment contracts in recent years and the latest laws surrounding unlimited contracts. Whether you’re about to start your employment journey in this vibrant region or want to upgrade your knowledge, this article will help you navigate the complexities of UAE employment contracts.

UAE Employment Contracts

In the UAE, employment contracts aren’t just a formality. They’re a crucial part of the working relationship between you and your employer. They lay out the terms and conditions of your employment, providing a clear framework for both parties to understand their rights, responsibilities, and obligations.

Importance of Employment Contracts

Employment contracts aren’t just important. They’re the legal backbone of your employment relationship. They outline everything from your salary and benefits to your job responsibilities and the duration of your employment. They’re designed to protect both you and your employer, ensuring that everyone is aware of their rights and obligations.

In the UAE, it’s essential for both employers and employees to carefully review and understand the terms of the contract before signing. That’s because the UAE Labour Law provides certain employee protections, such as minimum wage, working hours, annual leave, sick leave, maternity leave, and other benefits. Suppose you’re facing any disputes or issues regarding the contract. In that case, it’s wise to seek legal advice or consult with the relevant authorities, such as MoHRE (Ministry of Human Resources and Emiratisation).

Types of Employment Contracts in UAE

In the UAE, you’ll come across two main types of employment contracts: limited and unlimited. A limited contract is a fixed-term contract that specifies the duration of employment, usually for two years. This type of contract is generally for temporary or project-based work. At the end of the contract term, either the employer can choose to renew the contract or terminate your employment. If you wish to terminate the agreement before the end of the set period, you might be required to pay a penalty.

On the other hand, the difference between a limited and an unlimited contract is that an unlimited contract doesn’t have a fixed term and can be terminated by either party with notice. This type of contract is more common for long-term employment. The notice period for termination is typically 30 days. Still, it can vary depending on the terms of the contract or the labour laws of the UAE. Unlike a limited contract, there’s no penalty for early termination of an unlimited contract.

Limited and unlimited contracts provide certain rights and protections for employees, such as annual leave, sick leave, and end-of-service benefits. However, the specific terms and conditions may vary depending on the type of contract.

Role of Employment Contracts in UAE’s Labour Laws

The UAE Labour Law governs employment contracts in the UAE. It provides guidelines and regulations for employment contracts in the private sector to ensure fair and lawful employment practices. The law allows for different types of work arrangements, including full-time, part-time, temporary work, flexible working, remote work, and job sharing. It also stipulates that the probation period if an employer fails an employee must not exceed six months.

The UAE Labour Law also recognises the concept of redundancy as a legitimate reason for termination, along with other reasons such as bankruptcy, insolvency, economic reasons, or exceptional circumstances. It also allows the addition of non-compete restrictions in employment contracts, provided they’re limited in respect of time, place, and the nature of work.

In recent years, there’ve been significant changes to employment contracts in the UAE. One of the significant changes is the abolition of unlimited contracts and the introduction of limited or fixed-term contracts. Under the new law, all employees in the private sector must have fixed-term contracts, except those employed within the Dubai International Financial Centre and Abu Dhabi Global Markets free zones.

These changes highlight the need to stay updated with the different types of employment contracts in the UAE and their role in the country’s labour laws. Employers and employees must stay updated with the latest changes in various labour laws to ensure compliance and avoid any potential issues in the future.

What is a limited contract In UAE?

Key Features

A limited contract in the UAE is typically tied to the duration of the UAE residency visa. It can extend up to three years in certain situations. The unique aspect of this contract is the specification of a start and end date, providing job security for the agreed period, especially beneficial for expatriate workers.

Suppose you end the contract before the stipulated duration by mutual agreement. In that case, you may be liable to pay “early termination compensation”. Conversely, suppose the employer ends the contract prematurely without a valid reason as per the UAE Labour Law. In that case, they may have to compensate you.

Employers vs. Employees

As an employee under a limited contract, you must perform the work personally and not delegate it to another entity. Suppose your role involves access to the employer’s clients or confidential information. In that case, it prohibits you from working on the employer’s business or any competing project in the same sector for two years after the contract termination.

You are entitled to a day off with full pay on public holidays. If you work during these holidays, you should be compensated with an additional day off or extra income. All payments, wages, and other entitlements should be provided within 14 days from the contract term’s end date.

Female employees can avail of maternity leave of 60 days, with full wage for the first 45 days and half pay for the remaining 15 days.

Upon contract completion, employers must provide end-of-service benefits, calculated based on your service length and last drawn salary. If you’re a foreign worker with a year or more of continuous service, you’re eligible for these benefits.

All limited contracts must adhere to the UAE Labour Law, ensuring certain protections and benefits for employees. Therefore, it’s recommended to seek legal advice for any concerns or issues related to your employment contracts, as the labour law in the UAE can be intricate and subject to interpretation.

What is an unlimited contract in UAE?

A specific duration does not bind an unlimited contract in the UAE. This type of contract is prevalent in long-term employment scenarios. Either party can initiate termination of this contract, provided that a contractual notice period is given. The duration of the notice period is usually outlined in the contract or as per the UAE Labour Law.

Key features

A key feature of an unlimited contract is the provision of end-of-service benefits, regardless of the duration of employment. These benefits include a gratuity, which is calculated based on your total service period with both the employee and employer. In the event of termination, a notice from either party is mandatory. This is usually 30 days notice.

If there are violations of the contract by an employee, the employer can terminate without notice. Suppose an employer terminates an unlimited contract without legal reason. In that case, the employee is entitled to 21 calendar days’ basic salary for each year of the first five years of work and 30 calendar days’ basic wage for each additional year, up to a maximum of two years’ pay.

Unlimited contracts, unlike their limited counterparts, continue until terminated by either the employee resigns or the party, offering more flexibility to the employee.

Employers vs. Employees

Both parties must understand the terms and conditions of their employment contracts. This includes knowing the type of contract and understanding the rights and obligations associated with each. The UAE Labour Law provides guidelines and regulations regarding employment contracts, including provisions for both contract types. As an employer, it’s essential to ensure your employment contracts comply with the UAE Labour Law to prevent future legal complications or disputes.

As an employee, it’s advisable to thoroughly review your employment contract and seek legal counsel if you need clarification on any of your rights and entitlements under the contract. The MoHRE can provide legal advice on employment contracts.

Limited vs Unlimited Contracts

Comparison in Terms of Job Security

Limited contracts can be particularly appealing to expatriate workers, as they offer a sense of stability for the remaining contract period’s duration. However, early termination of such contracts may require you to compensate the employer.

Unlimited contracts, on the other hand, provide more adaptability for both parties involved. Termination can occur at any time, provided a notice period is served. The length of this notice period can fluctuate based on both the employer and the duration of employment.

Ensuing Benefits and Obligations

Both limited and unlimited contracts in the UAE are types that come with their own set of benefits and obligations. For instance, limited contracts may include provisions for overtime pay and allowances in addition to the standard benefits as per UAE labour law.

The end-of-service gratuity payment varies between the two. For limited contracts, the gratuity is calculated as 21 days’ basic pay for each year of the first five years of service and 30 days’ basic salary for each additional year. For unlimited contracts, the gratuity pay is calculated based on the duration of service, with a reduction in the gratuity for shorter periods of service.

Appropriate Situations for Each Contract Type

Limited contracts are beneficial when an employer requires an employee for a specific project or a set period. They offer more control over the employment relationship and simplify the process of ending employment.

Unlimited contracts are advantageous when an employer desires a permanent employee or when the project duration is uncertain. They offer you, as an employee, the ability to switch jobs without having to wait for the contract to expire.

What is the new law for unlimited contracts in the UAE?

The Federal Decree-Law No. (33) of 2021 has brought about a significant shift in the UAE’s employment landscape. This law mandates that all employees must be employed under limited-term contracts, a departure from the previous system that allowed for both limited-term employment contracts and unlimited contracts.

The initial version of the law capped the duration of limited-term contracts at three years. However, this was later revised to allow employers and employees to agree on the contract length mutually. This amendment provides greater flexibility and reduces administrative burdens, particularly for employers seeking to retain skilled employees for extended periods.

The transition from an unlimited-term contract to a limited contract was initially slated for completion by 1 February 2023. However, the UAE Government has extended this deadline to 31 December 2023, providing employers with additional time to adapt to the new regulations and convert existing unlimited-term contracts to limited ones.

In September 2022, the law introduced a mandatory unemployment insurance scheme. This scheme provides financial protection to employees terminated for non-disciplinary reasons. To be eligible for this scheme, employees must register and pay a premium for an insurance policy from an approved insurer. The policy covers 60% of the employee’s monthly basic salary for up to three consecutive months from the date of termination, subject to a monthly cap.

The law also revised the entry and residence visa options for individuals seeking employment or business opportunities in the UAE. The duration of work permits was reduced from three to two years, and the eligibility criteria for the Golden Visa and Green Visa were expanded.

Despite these changes, the UAE’s Wage Protection System (WPS) continues to enforce timely salary payments by employers. Employers are required to process salary transfers of 80% of eligible employees through the WPS. Non-compliance with the WPS requirements can result in penalties, including increased scrutiny, suspension of work permit issuance, and referral to the Public Prosecution office.

The new law primarily applies to employers registered with the MoHRE. However, some free zone authorities may adopt similar measures. Therefore, it is crucial for all parties to familiarise themselves with these changes and their implications to ensure compliance with the new law.

Navigating Employment Contracts in UAE

Navigating the employment contract landscape in the UAE might seem complex. Still, it’s a crucial part of keeping a healthy and lawful employer-employee relationship. Keep in mind the type of contract – whether it’s limited or unlimited – doesn’t just impact your job security but also the benefits and obligations that come with it. It’s essential for you to stay updated with changes in UAE labour laws, like the recent shift from an unlimited employment contract to a limited contract.

As we move into this new era of UAE employment, make sure you’re clear on the terms of your contract, and don’t be shy about seeking advice from legal professionals or the MoHRE for clarity. After all, a contract that you fully understand is what makes a successful working relationship.

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