United Arab Emirates: Employment Terms in the UAE and the KSA - Unlimited and Limited Contracts

An unlimited term employment contract is a contract which continues for an indefinite period of time. An unlimited term contract requires certain actions by one or both of its parties in order to bring the employment to an end. By contrast, a limited term employment contract is, as the name suggests, for a set period of time and, generally, terminates on the expiry of the agreed term. This type of employment contract is often referred to as a fixed term employment contract.

Although these two concepts seem, on the face of it, fairly straight forward, different considerations arise in relation to each and we often see the two concepts confused in employment contracts. In this article we set out some of those considerations which apply to monthly paid employees in the UAE.

Under an unlimited term contract, an employer and an employee enter into a relationship on an on-going basis. The employment will continue, usually, until one of the parties decides to bring the employment relationship to an end. A well drafted employment contract should set out the various scenarios in which the employment may be brought to an end and what is required by either party in order to do so.

An unlimited term contract is generally terminated by one party giving notice in writing to the other party. The required length of notice is determined by the employer and the employee prior to the start of the employment and included in the contract. Any notice period agreed upon may be more than, but cannot be less than, the minimum prescribed statutory notice period. UAE Law No. 8 of 1980, as amended (the UAE Labour Law) requires a minimum of 30 days' notice in writing. Failure to give such written notice would constitute a breach of contract. Notice in this context is, essentially, one party informing the other of its intention to bring the employment to an end at a future date. The employment continues throughout the notice period (unless the parties agree that the employment will terminate early which may, depending on the circumstances, involve a payment in lieu of notice).

Under a fixed term contract, employment terminates automatically on the expiry of the specified term. The employer and employee should agree to the term at the start of the employment and the term should be set out in the contract. As the employment terminates automatically at the end of the fixed term, it is not necessary for one party to provide notice to the other. A contract can, however, impose on the parties an obligation to inform the other of the intention to renew or not to renew the contract. Strictly speaking, this is different to the notice requirement in relation to an unlimited term employment contract. In any event, where a fixed term contract is reaching expiry, as a matter of good practice it is sensible for an employer to inform the employee in advance whether the employment will terminate or whether the employer will offer the employee further employment beyond the expiry of the fixed term.

It is, of course, open to an employer and employee to enter into a further contract for a fixed term. Sometimes employees are employed on successive fixed term contracts. Article 138 of the UAE Labour Law provides that where an employee is employed on a fixed term basis and leaves employment of his own accord, the employee is not entitled to end of service gratuity unless his continuous period of service with the employer exceeds five years. This means that an employee who is employed on a fixed term contract (or successive fixed term contracts) cannot resign voluntarily without prejudicing, in its entirety, his end of service gratuity entitlement until he has served five years with the employer.

It should be noted that the UAE Labour Law provides that where an employer and employee continue to perform their obligations under a fixed term contract following its expiry, the contract is deemed to continue on an unlimited term basis.

Whether an employer should hire an individual employee on a fixed term or unlimited term basis will need to be assessed in each particular case, taking account of a number of factors such as the role in which the employee will be engaged, the nature of the employer's business and the certainty (or lack of certainty) of an on-going stream of work. It is common in the UAE to hire an employee on a fixed term basis in circumstances where:

(a) the employee is required for a specific project or a specific task (e.g. covering a period of absence such as sick leave or maternity leave) which has an identifiable end date; or

(b) the employee is posted on a secondment or assignment from another jurisdiction, and there is a need to retain the employees during such periods.

Careful consideration should be given when entering into a fixed term contract if early termination seems likely. Article 115 of the UAE Labour Law provides that where an employment contract is for a limited period and the employer revokes it (prior to its expiry) for reasons other than those specified in Article 120 (i.e. misconduct), the employer is required to compensate the employee for any prejudice the employee sustains, provided that the amount of compensation does not exceed the shorter of (i) the aggregate remuneration due for a period of three months or (ii) the remaining period of the contract, unless the contract contains a provision to the contrary. Therefore, three months' remuneration is the maximum compensation payable to an employee under Article 115 for the termination of a limited term contract prior to the expiry of its term, unless the employment contract contains a provision setting out an alternative amount. The UAE Labour Law also provides that an employee must pay an employer half the amount of compensation (i.e. a maximum of six weeks' remuneration) if the employee terminates a fixed term contract early.

Despite the statutory position outlined above, entering into a fixed term contract with an employee creates, at least, an expectation from the employee's perspective that the employment will continue for the agreed period of time. If, for example, an employer and an employee enter into a fixed term contract for a three year period, the expectation is that the employment will continue for the full three year term. If the employer terminates the employment after two years of service, the employee may have a greater propensity to challenge the termination (regardless of the legal grounds for such a challenge). This can also be the case where employment is for a fixed term but the contract states an intention that the employment will be renewed at the end of the term for a further period. Such a condition can often be included in a contract with the best of intentions but employers should be aware that its inclusion is likely to create a certain expectation in the mind of the employee and can result in confusion and uncertainty.

In contrast, the termination of an unlimited term contract requires one party to serve written notice on the other. The length of the notice period to be included in the contract will need to be assessed on a case by case basis but cannot be less than the statutory minimum. In our experience, it is not uncommon for employment contracts in the UAE to include the statutory minimum of 30 days for the majority of employees, increasing to three months for more senior and/or professional positions.

Regardless of the nature of a contract, it is open to an employer to terminate employment immediately (prior to the expiry of the fixed term or without notice, in the case of an unlimited term contract) in the event that an employee's conduct falls within one of the specified categories of misconduct set out in Article 120 of the UAE Labour Law. Likewise, an employee may terminate his employment early or without notice if the employer fails to comply with its obligations towards the employee or assaults the employee.

It is important to ensure, whether the parties agree that employment will be for a fixed term or an unlimited term, that all supporting documentation consistently reflects the agreed position. It is not uncommon to see a prescribed form employment contract (either on-shore or in a free zone) stating that the employment is for an unlimited period and the supplemental employment contract stating that the employment is for a limited period, or vice versa. In addition, fixed term contracts often include notice provisions for the termination of the employment (which is inconsistent with the overall concept of a fixed term contract). Such inconsistencies can lead to ambiguity on the termination of employment.

Saudi Law Considerations

While many of the basic principles relating to employment and labour conditions in the UAE have analogues in the Kingdom of Saudi Arabia (the KSA), certain considerations are worth noting, particularly with respect to the overarching framework and pragmatic context of employment in the KSA. Royal Decree No. M/51 of 2005 (the KSA Labour Law) offers several distinctions from the UAE Labour Law. First, Article 37 of the KSA Labour Law provides that all employment contracts with non-Saudi employees are, initially, for fixed terms. If the contract itself does not specify a term, then the statutory duration of the employment contract will be the term of the work permit for a non-Saudi employee.

Under the KSA Labour Law, where an employer and a Saudi national employee continue to perform their obligations under a fixed term contract following its expiry, the contract is deemed to be an unlimited term contract, but where an employer and an employee renew the contract for two consecutive terms, or the total duration extends beyond three years, the contract will be deemed unlimited regardless of all other factors.

With respect to end of service awards, Article 85 of the KSA Labour Law provides that if an employer terminates an employment contract – whether for a fixed term or an unlimited term - without cause, then the employee will be entitled to a full end of service award, together with other compensation depending on the circumstances. By contrast, if the employee terminates an employment contract, then the employee is entitled to one-third of the end of service award if the employee has been in the service of the employer for two to five years, two-thirds of the end of service award if service has lasted for five to ten years, and the full award if service has lasted for ten or more years. There is no distinction in the KSA in this respect between fixed term and unlimited term contracts.

In addition, concern and effort must be applied in the KSA to ensure that an employer maintains its records of employees at the relevant government agencies (especially social insurance registration, Saudization certificates, and similar matters). Foreign companies which retain Saudi nationals on their books who are no longer employed by the company can be severely penalized, including losing any capacity to obtain visas for foreign employees for a period of five years, along with other penalties depending on the circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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