Difference between limited and unlimited contract (2023 Updated)

limited and unlimited contract

It is critical to choose the right type of agreement at the beginning of any employment relationship. Do you understand the different types of contracts and their key features? Under UAE Labour Law No. 8 of 1980, which applies to all employers in the UAE, businesses can issue 2 kinds of job contracts to employees, limited and unlimited contracts.

In this article, we will be talking about the difference between limited and unlimited contracts. The resolution of the statutory end-of-service bonus entitlement and severance implications differs between the limited and unlimited contract UAE in a number of ways. Let us see all the differences among these contracts here:

1. Learn all about the unlimited contract UAE

Firstly, let us define what is an unlimited contract in UAE.

An unrestricted agreement in UAE is a contract that does not have a set term, as its name suggests. As a result, there is no specified end date, making it an open-ended contract.

Nonetheless, as long as the decision goes according to the UAE Labour Law, either the employer or the worker may choose to end the contract for a variety of reasons.

If you are an employer who is setting up your company in Dubai, you must be aware of labor concerns in such contracts.

Thus, you must give an employee an employment contract if you recruit them. Moreover, in accordance with UAE Labor Law, you must specify the following if the contract is unlimited:

1.1 Most recent information about these contracts

Despite the fact that the unlimited contract is frequently adopted by employers, it is important to note that due to changes made to the labor law, employers are no longer permitted to offer unlimited contracts to prospective employees.

The first reform made to the law governing employment was to limit the length of employment contracts to three years.

The UAE later announced new revisions, removing the three-year limit on private sector contracts.

Nonetheless, employment contracts in the private sector must have a specified length and cannot be indefinite.

Also, the UAE is demanding that firms switch workers from unlimited to limited contracts. Employers have until December 31, 2023, to implement this modification. Consequently, it is important to make the labor contract modifications when as soon as possible.

2. Know about the limited contract in the UAE

Due to its predetermined length, a limited contract is often referred to as a fixed-term contract. The period of this type of contract will typically match that of the residency visa and work permit that an ex-pat asks for in the United Arab Emirates.

The contract may therefore be in effect for a period of two or three years, as that is the most typical duration. Both parties must agree on contract renewal if they want the working relationship to continue.

But, if the individual chooses they do not wish to continue, they must give the employer a letter of non-renewal. This will communicate to the employer that renewal is not necessary.

As you can see, the main difference between a limited and an unlimited contract in the UAE is that the first specifies a time frame whereas the latter is changeable.

3. Do you know the key differences between UAE limited and unlimited contract

What distinguishes a limited contract from an unlimited contract? It is crucial for both employers and employees to be aware of their key distinctions.

First and foremost, flexibility is the primary distinction between limited and unlimited contracts in the UAE in 2018.

Nonetheless, the following factors must be taken into account when determining the distinction between a restricted and unlimited contract:

  • Contract termination.
  • End-of-service gratuity.

When it comes to ending the work relationship and, consequently, in the end-of-service compensation, these two forms of contracts differ from one another.

3.1 What is the difference regarding termination between these two contracts?

If they have an unlimited contract, one of the most frequent concerns people ask themselves is if they can terminate it after six months. This is so because it has been said that if an employee has a contract with their employer, they are bound to that employer.

It is crucial to comprehend the distinction between a limited and an unlimited contract whenever it comes to dissolution.

3.1.1 Limited contract termination

A limited contract can be ended by either the employer or the employee. The worker has the right to early termination pay if the employer decides to end the contract.

This indicates that the employee must receive three months’ worth of pay, including salary and benefits.

But, if any of the reasons for termination listed in the labor legislation occur, this does not apply. For instance, if the employee disobeyed safety guidelines or took a fraudulent identity.

Also, if the employee was let go within the probationary period, they are not eligible for this early termination compensation. These are situations where workers may quit their jobs without giving any prior notice.

Furthermore, if an employee wants to end a limited contract early, there can be repercussions. Six weeks of wages must be paid to the employer by the employee. However, the employee is exempt from paying this if the employer assaults him or her or if the employer violates the conditions of the agreement or the legislation governing employment, such as by failing to pay the agreed-upon salary or other benefits.

3.1.2 Unlimited contract termination

What transpires following the termination of an unlimited contract may be a common concern. This changes depending on the grounds for the employee’s resignation or the employer’s decision to terminate the employment.

An infinite contract, nevertheless, offers more latitude for cancellation. If any party decides to end the agreement at any time, they must adhere to the requirements for the notice period and give a good reason (work-related). Due to this, the vast majority of employees in the UAE favor limitless contracts over limited contracts.

3.2 Is there a difference between a limited and unlimited contract according to gratuity?

If applicable, the employee should be paid a gratuity after a contract expires. To determine how much you will need to get, you could utilize an online gratuity calculator in this case.

However, the end-of-service tip varies according to the type of agreement:

  • Limited and limitless contracts (with employer termination): For the first 5 years of operation, the base salary is 21 days; for every additional year, it is 30 days. To get remuneration, the employee must have worked for at least a year.
  • Limited Agreement (Employee Termination): The employee is not eligible for gratuity pay if he has fewer than five years of service.
  • Contract with no end date (termination by the worker): The employee earns 1/3 of the 21-day gratuity pay every year between the ages of 1-3. An employee receives 2/3 of the 21-day incentive pay every year between three and five years of service. Employees with five or more years of service are subject to the entire 21-day gratuity each year.

3.3 What is the difference regarding renewal between these two contracts?

When a contract must be renewed is another significant distinction between limited and unlimited contracts.

Both parties must concur for a limited contract to be renewed. Both the worker and the manager must give their consent, which is crucial. If one or more of the parties decides not to renew the agreement, it need not be done automatically. They must, however, have a good justification for ending it.

Furthermore, since an unlimited contract has no end date and no end term specified, it is not essential to renew it.

4. When is it necessary to use an unlimited or limited contract?

limited and unlimited contract

You might be wondering under what circumstances an employer must choose between a limited or unlimited contract in the UAE given that there are 2 types of contracts.

Contracts of employment in the UAE are no longer able to be indefinite. Knowing when to use a limited and unlimited contract, though, is helpful.

Limited contracts are advantageous in this regard when:

  • A company requires a worker for a certain project or a certain amount of time, and both parties set a duration in advance.
  • When a company does not wish to keep a worker on a long-term basis.

The following situations made use of infinite contracts:

  • When a corporation wants a worker to be a permanent member.
  • When it is unknown how long the job will take.

5. Obtain the support of KPMPRO Services for your contracts in the UAE

Drafting contracts in the UAE can be difficult. Therefore, obtaining PRO services to have the necessary support while creating them is essential. With KPMPRO Services, employers can forget about the complexities of drafting contracts and just let experts manage them compliantly with no issues.

If you want us to start creating or amending your employment contracts in the UAE, get in touch now! Call us at +971 43 316 688. Also, you can reach us via email at contact@kpmpro.ae.

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