What is the Difference between Limited and Unlimited Contracts in the UAE?

Do you want to start your own business or career in UAE?

Whatever your case is, as an employer or an employee, in UAE you need to have a proper understanding of the employment contract as it supports the country’s dynamic labor market.

As per the Research Gate report, 51% of the population of GCC are non-nationals, alone UAE has a foreign population of 89%, which means the market is very big for growing businesses and having a career.

When navigating your professional route in this vibrant and diverse location, have you ever considered the significance of the contract type?

Do not worry, we will give a clear understanding of employment contracts and their main types to give you a clear understanding of the major factors influencing the UAE’s labor market. Let’s explore the intricacies of these contracts and identify the options that best suit the various demands of employees and organizations navigating the wealth of prospects in the United Arab Emirates.

What is an Employee Contract in UAE?

In UAE, an employment contract is a legally binding contract or document between an employer and an employee that clearly states the terms and conditions of employment. Every organization in UAE runs with this employment contract. The details in the contract may vary depending on the nature of the job and the industry, but some of the terms commonly used in the employment contract include:

  • Information about both employer and employee
  • Job Description
  • Date of Commencement
  • Salary details
  • Duration of the Working Hours
  • Period of Probation
  • Compensation and Benefits
  • Conditions of Termination
  • Annual Leave Entitlement
  • Non-Compete Clauses

What are the Types of Employment Contracts in UAE?

According to the UAE Labor Law No.8 of 1980, there are two main types of employment contracts. These are- Limited Contracts and Unlimited contracts.

1. Limited Contracts

Limited contracts also known as fixed-term contracts are the common type of employment agreements in the UAE. these contracts are applicable for the roles that are hired for a particular project or on a temporary basis. The duration of this type of contract is fixed and is agreed upon in advance by both the employer and the employee.

Generally, the end date of these types of contracts is 3 years from the commencement of the employment date. However, the duration may vary but the renewal is done only after the mutual agreement and consent of both the employers and the employees. This type of contract is usually common in sectors that have projects with set timelines or the job requires hiring temporary workers.

Key Features

The key features of the fixed-term contract or the limited contract include:

  • Fixed Duration: This type of contract clearly mentions the date of commencement and the end date of the employment period. The duration may vary depending on the nature of the job and the type of organization. But in any case, it cannot exceed four years.
  • Salary Details: The contract clearly mentions the amount of the salary the employee can get and it remains the same till the end of the contract period. However, if both the employer and employee come into a mutual agreement then only the salary can be changed.
  • Renewal Process: The contract can be renewed after its expiration, but only if both the employer and employee mutually agree to do so. The employer may make this decision depending on the requirement of the project and the performance of the employee.
  • Termination: There is a provision to terminate the contract before its expiry if either of the parties wants to do so with a valid reason. But it also clearly mentions the notice period and compensation if that period is not served by either the employer or the employee.
  • Benefits: The employees who are under limited contracts have benefits which include leave, allowances, health insurance, gratuity, and other perks.

Limited-term contracts give both the employer and employee a degree of flexibility to adapt the the changes as per the market needs. It also offers the employees short-term opportunities to work in the organization and also gain experience and improve their skills.

2. Unlimited Contracts

The unlimited contracts are also termed as open-ended contracts, which means they have a specific start date but no end date. It thus gives a more sense of stability and continuity to both employees and employers. The terms and conditions mentioned in the contract remain in action until any one or both the employer and employee decide to terminate the contract.

This contract is applicable for long-term projects and permanent roles. Thus this type of contract is essential for the employees looking for long-term work under any organization. As per changes in the Labor law in 2024, most of the organizations have to remove indefinite contracts and have made it mandatory that all employment contracts be fixed-term.

Key Features

The Key features of unlimited contracts include:

  • Unlimited Duration: This type of contract does not have any fixed end date. The terms and conditions are mentioned in the contract until any one of the employees or employer agrees to terminate it.
  • Termination: Before terminating the unlimited contract both the employees and employer have to notify each other and employees have to serve a notice period. The duration of the notice period is already mentioned in the contract.
  • Job Security: This type of contract gives a sense of job security to the employees as it does not have an expiration date. This also helps employees who are looking for long-term work under any organization and aligns with the vision and mission of the organization.
  • Benefits: This unlimited type of contract has several benefits like leaves, overtime pay, sick leave, end-of-service benefits, etc.

Unlimited Term Contracts encourage dedication and devotion from both organizations and employees by offering a solid basis for long-term working partnerships.

Understanding the Difference Between Limited and Unlimited Contract?

Now that you have seen the essential key features of both types of contracts, it is time to look further at the differences between both limited and unlimited contracts.

1. Type of Job

Limited Contracts are generally used in organizations that have project-based work or have roles for a specific time. This is helpful for employers who are looking for temporary employment options. At the same time, this contract helps the employees to get exposure to the work environment and gain experience, and later can either switch or remain in the job depending on the termination clause of the contract.

On the other hand, unlimited contracts are usually applicable for organizations that have ongoing or continuous operations. Since this contract is of unlimited type, it gives more stability to both employees and employers and thus helps promote long-term relationships between them.

2. Duration of Contract

The limited type of contract has a fixed start and end date. This duration and the terms are decided by the mutual agreement of both employers and the employees and cannot be changed till the termination of the contract unless both parties want to.

Whereas, in the Unlimited type of contract there is no expiration date. Thus there is no fixed duration. The relationship between employer and employee continues to grow indefinitely until any one or both of them decide to terminate the contract. This gives a sense of security to both parties.

3. Process of Renewal

Since the limited contract has an end date, it expires automatically. This contract can be renewed only if both the employers and the employee come to a mutual agreement for it. The duration and the terms and conditions of the renewed contract can be either the same or different depending on the mutual agreement of both parties. Employers generally renew it depending on the performance of the employee or the nature of the work.

On the other hand, as you already know there is no expiration or fixed duration of the unlimited type of contract, so generally there is no requirement to renew it. However, if any of the parties wish to make any changes in the contract then can sign an addendum after mutual agreement of both the employers and employee. The addendum will then contain new terms and conditions and thus will help to maintain a healthy relationship between the employee and employer.

4. Procedure for Termination

In the limited contract, the contract gets automatically terminated as they have an expiration date. But the contract can be terminated early as stated in Article 120 of the UAE Labor Law for good cause. Notice periods for specific terminations range from 30 days to three months, and the reasons for termination might include gross misconduct, noncompliance with requirements, or legitimate causes listed in Article 117. Employees may cancel a contract before its expiration date under certain situations, such as when the employer assaults them or fails to perform its commitments, as specified in Article 121. If the provisions of the contract are not followed, the UAE may automatically impose a six-month labor prohibition.

On the other hand, according to Article 177 of the Labor Law, either party may end an unlimited contract by mutual consent with a minimum notice of one month. The employee is entitled to full pay and benefits during the notice period. Articles 120 and 88 provide terminations without notice, however, Article 121 grants the employee the option to quit without cause. Workers with limitless contracts are free to switch companies without being subject to labor laws.

5. Provision of Compensation

In the case of the limited contract, the employer is required to pay three months’ salary or the outstanding balance of the contract, whichever is less, in the event of an unjustified termination without cause or notice. When an employee quits without giving notice, they have to pay their employer their wage for the remaining 45 days.

On the other hand, if the unlimited contract is terminated without cause or notice, thirty days’ salary must be paid in compensation. The amount of compensation is 30 days’ wages, even in situations when there is mutual agreement and a 30-day notice period. If an employee is fired without cause, they will receive compensation equal to three months’ worth of pay.

6. Perspective of the Employer

Employers can adjust to shifting project requirements or seasonal demand with limited contract flexibility. Employees with specialized skills can be hired by employers for a predetermined amount of time without long-term commitment. This flexibility is especially useful in organizations where employer demands and project timetables are subject to change.

On the other hand, unlimited contracts represent an employer’s dedication to creating and preserving a steady workforce. This pledge gives workers a sense of security and encourages loyalty. These types of contracts are frequently chosen by organizations that want to build a lasting relationship with their employees and are involved in continuous operations.

7. The Perspective of the Employee

Limited Contracts are frequently attractive to employees looking for temporary jobs or project-based work opportunities. Employees who seek variation in their work experiences might experiment with new projects or jobs as this type of contract gives this flexibility.

On the other hand, Unlimited Contracts appeal to employees who want consistency, employment security, and a long-term commitment from their employers. Open-ended employment arrangements provide security and a sense of belonging to the organization, which makes this sort of contract appealing to workers.

8. Legal Structure

Under UAE labor law, limited contracts are subject to particular rules pertaining to fixed-term employment. These rules guarantee the same benefits and protections to employees on fixed-term contracts as to those on open-ended contracts. Treating every employee equally and fairly is emphasized by this legal structure.

On the other hand, the UAE’s regular employment regulations apply to Unlimited Contracts. A foundation for employment security, terms of termination, and severance pay is provided by these legal provisions. Unlimited Contracts follow the law to safeguard employees’ rights even when they aren’t expressly linked to a set length of time.

Wrapping Up

Employers and employees must understand the differences between limited and unlimited contracts in the United Arab Emirates. Each kind of contract has particular advantages and disadvantages that influence how jobs are filled in this ever-changing area. Concerns over job security and pay scales are only two examples of how decisions made by both sides affect employee’s careers and shape the changing story of the business climate in the United Arab Emirates.

The flexibility and variety of Limited and Unlimited Contracts continue to be important factors in determining the kind of employment in the UAE as it develops into a major international economic hub. Zimyo is an end-to-end HRMS solution that takes care of all your statutory compliances with its 48 modules that help in continuing your career journey in UAE and understanding all the changes in the labor market.

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