The UAE is a prosperous location that attracts thousands of professionals per year in search of a job. Given that it is necessary to have a valid employment contract in the UAE to work, expatriates need to understand the difference between limited and unlimited contract.
In this article, you are going to learn everything about unlimited and limited contract in UAE. In particular, you will understand the main difference between limited and unlimited contract. Let us observe:
- Know what is unlimited contract in UAE
- Learn what is limited contract in UAE
- Understanding the difference between limited and unlimited contract in UAE
- See when it is necessary to use a limited or unlimited contract
- Difference between limited and unlimited contract regarding termination
- Get to know how to renew a UAE limited and unlimited contract
1. Know what is unlimited contract in UAE
What is limited and unlimited contract in UAE? It is important to point out that they have some differences.
An unlimited contract UAE is, as its name implies, a contract that does not have a fixed term. Thus, it is an open-ended contract, meaning that there is no established termination date.
However, the employer or the employee can decide to terminate the contract for various reasons, as long as they are under the UAE Labour Law.
1.1 See which items are included in an unlimited contract
If you are an employer that has carried out the business setup in Dubai, you need to be well-informed regarding labour issues such as contracts.
Therefore, whenever you hire an employee, you have to provide them with an employment contract. And, if it is an unlimited contract, you have to specify the following as per the UAE Labour Law:
- Date of start.
- Nature of work.
1.2 The most recent news regarding unlimited contracts in the UAE
Although the unlimited contract is the main type chosen by employers, it is worth noting that based on the amendments to the labour law, now employers cannot offer unlimited contracts to potential employees.
First, the employment law was changed establishing that employment contracts could not last more than three years.
But, the UAE then made new amendments stating that the three-year cap on private sector contracts was removed.
Nevertheless, private-sector employment contracts cannot be unlimited, they have to be fixed-term contracts.
Also, the UAE requested employers to transition employees from unlimited contracts to limited contracts. Employers have until 31 December 2023 to make this change.
2. Learn what is limited contract in UAE
A limited contract is also known as a fixed-term contract because it has a specified duration. Usually, when an expatriate applies for a residence visa in UAE, it will have the same duration as the limited contract.
Therefore, the contract can be valid for two or three years, as that is the most common validity. If both parties want to continue with the employment relationship, then they have to agree on contract renewal.
But, if the employee does not want to continue, he or she must submit a non-renewal letter from the employee to the employer. This will let the employer know that it is not necessary to proceed with renewal.
So, as you can see, the main difference between a limited and unlimited contract UAE is that one has a fixed term while the other is flexible.
3. Understanding the difference between limited and unlimited contract in UAE
What is the difference between limited and unlimited contract? They have primary distinctions, and as an employer or employee, it is important to know about that.
First of all, the main difference between limited and unlimited contract in UAE 2018 is flexibility.
However, when we want to know the difference between limited and unlimited contract, we have to consider the following aspects:
- Contract termination.
- End-of-service gratuity.
These two types of contracts are different when it comes to terminating the employment relationship and thus in the end-of-service pay.
4. See when it is necessary to use a limited or unlimited contract
Given that there are two types of contracts, you may be wondering in which cases an employer has to choose between limited vs unlimited contract UAE.
As we mentioned before, employment contracts in the UAE can no longer be unlimited. However, it is useful to know when it was needed to use a limited and unlimited contract.
In this regard, limited contracts are useful when:
- An employer needs an employee for a specific project or a given period and the length is known in advance.
- When the employer does not want to have an employee on a long-term.
Similarly, unlimited contracts were useful in the following scenarios:
- When an employer wants an employee to be permanent in the company.
- When the length of the project is not known in advance.
5. Difference between limited and unlimited contract regarding termination
One of the main questions individuals ask themselves is if they can resign after 6 months in an unlimited contract. This is because it has been stated that employees are tied to their employers if they are under a contract.
For this reason, it is important to understand the difference between limited and unlimited contract when it comes to termination.
5.1 How to terminate a limited contract
An employer or an employee may decide to terminate a limited contract. If the employer wants to terminate the contract, the employee is entitled to early termination compensation.
This means the employee has to receive three months’ remuneration, including salary and allowances.
However, this does not apply if any of the grounds of termination as specified under the labour law occur. For example, if the employee had assumed a false identity, or if he or she disobeys safety instructions.
Also, the employee is not entitled to this early termination compensation if he or she was dismissed during the probation period. These are cases in which the employees can leave a job without notice.
And, if the employee wants to terminate a limited contract early, he may face consequences. The employee has to pay the employer six weeks of salary. Nevertheless, the employee does not have to pay this if he or she is assaulted by the employer, or if the employer fails to comply with the obligations provided in the contract or the labour law, such as not receiving the salary and other benefits stated in the contract.
5.2 How to terminate an unlimited contract
Many people may wonder what happens after an unlimited contract is terminated. This varies depending on the reasons why the employee has decided to resign or why the employer has decided to dismiss the employee.
Nevertheless, an unlimited contract is more flexible when it comes to termination. If any of the parties agree to terminate the contract at any time, they have to meet the notice period obligations and provide a valid reason (work-related). This is why most employees in the UAE prefer the unlimited contract over the limited contract.
5.3 Did you know the end-of-service gratuity is different?
When a contract ends, the employee should receive a gratuity pay, if applicable. In this regard, you may choose to use a gratuity calculator online to check how much you will have to receive.
Nonetheless, the end-of-service gratuity is different depending on the type of contract:
- Limited contract and unlimited contract (termination by employer): 21 days of basic pay for the first five years of service and 30 days for each additional year. The employee has to complete one year or more of service to get the payment.
- Limited contract (termination by the employee): if the employee has less than 5 years of service, he does not get to receive gratuity pay.
- Unlimited contract (termination by the employee): between 1-3 years employee receives ⅓ of 21-days gratuity pay for each year. Between 3-5 years of service, an employee receives ⅔ of 21-day gratuity pay for each year. 5 or more years of service employee receives full 21-day gratuity pay for each year.
This is why the end-of-service savings scheme for expats in Dubai is becoming so popular.
6. Get to know how to renew a UAE limited and unlimited contract
Another important difference between limited and unlimited contract is when it is time to renew them.
To renew a limited contract, both parties have to agree. It is important to have consent from both the employee and the employer. The contract does not have to be automatically renewed just in case any of the parties do not want to renew it. Nevertheless, they must have a valid reason for terminating it.
And, given an unlimited contract does not have a termination date, it is not necessary to renew it given it does not specify an end term.
Learning about labour contracts in the UAE is very important both for employers and employees. If you want to get more valuable information, we invite you to visit our blog. You can see our complete guides about working with temporary and contract employees or unemployment insurance in the UAE.