United Arab Emirates: Limited Term Contracts In The UAE

By way of reminder, a limited term contract is for a finite period and has a prescribed termination date (although it may be renewed for further periods). An unlimited term contract is for an indefinite period and continues until such time as it is terminated in accordance with its terms or with the UAE Labour Law.

You will have no doubt seen the recent announcements regarding the new Ministerial Decrees and their impact on the way in which limited term contracts operate. Whilst the Ministerial Decrees (explained below) primarily only affect employers falling under the Ministry of Labour's (MoL) jurisdiction (not those governed under the jurisdiction of the Ministry of Education (MoE), for example), nevertheless, it is helpful to bear the changes in mind. Even where a Ministerial Decree does not have direct effect, it is possible that over time the appropriate authorities and the Labour Court will start to apply the spirit of the Ministerial Decree.

This article briefly explores the potential impact of the new Ministerial Decrees on how limited term contracts operate, together with ways of managing the use of limited term contracts in the education sector.

A reminder of the provisions relating to limited term contracts under the UAE Labour Law

Under the UAE Labour Law, a limited term contract may not exceed 4 years' duration, although it may be renewed for further terms.

A limited term contract may not be terminated prior to its expiry date save in certain circumstances (explained below) without attracting early termination compensation.

The circumstances in which a limited term contract may be terminated prior to the agreed expiry date without attracting early termination compensation are as follows:

• in the case of the employer, in one of the exhaustive list of circumstances set out under Article 120 of the UAE Labour Law (primarily, where the employee commits a serious act of gross misconduct); or
• in the case of the employee, where the employer breaches its contractual or legal obligations towards the employee (Article 121 of the UAE Labour Law).

Early termination compensation is calculated by reference to the total remuneration which would otherwise have been payable to the employee for the remainder of the contract, or for three months, whichever is shorter. In the case of termination by the employer, this is calculated on the basis of full remuneration. In the case of termination by the employee, this is calculated on the basis of half remuneration.

Where an employee resigns from a limited term contract with service of 5 years or less, the employee is not entitled to receive any end of service gratuity. Where an employee has over 5 years' service at the time his employment terminates by reason of resignation, his end of service gratuity is calculated in the usual way.

Ministerial Decree 765 of 2015 - Rules and Conditions for the Termination of Employment Relations

This Ministerial Decree, which relates to the termination of limited and unlimited term contracts, took effect from 1 January 2016.

In relation to limited term contracts, the maximum duration of each limited term contract is reduced from four years to two years (although a limited term contract may still be renewed for further periods).

Additionally, the MoL has now issued two limited term contracts; one for the initial term and one for any renewal periods.

The limited term contract for the initial term will continue to operate in the usual way; namely if either party seeks to terminate the contract prior to the agreed expiry date, early termination compensation (as set out under the UAE Labour Law) will be payable.

The parties do, however, have more flexibility to terminate a renewed limited term contract. Either party will be permitted to terminate the contract prior to the agreed expiry date by the provision of between one to three months' notice (such notice period to be agreed between the parties). In circumstances where a party terminates the limited term contract early on the provision of contractually agreed notice (other than due to the other party's misconduct), compensation of between one to three months' remuneration (to be agreed between the parties) will be payable.

If an employee is currently engaged on a renewed fixed term contract which does not contain a notice period, a notice period of three months will automatically apply. Similarly, if no compensation has been contractually agreed, the provisions set out in the UAE Labour Law relating to early termination compensation will apply.

The Ministerial Decree does not formally amend the UAE Labour Law so the provisions set out above relating to early termination compensation still apply. It is currently unclear how the interplay Ministerial Decree and the UAE Labour Law will work in practice.

Additionally, as set out above, it remains to be seen the extent to which the authorities and/or the Labour Court will expect employers falling outside of the MoL's jurisdiction to comply with the spirit of this Ministerial Decree.

Ministry of Education Contract

Employers falling under the MoE's jurisdiction must issue employees with a prescribed form employment contract (MoE Contract).

The current standard form MoE Contract already largely reflects the position under Ministerial Decree 765 of 2015 (explained above). Specifically, the MoE Contract contains a 2 month notice period (notwithstanding that it may be for a limited period) and provides that, where either party terminates the contract prior to the agreed expiry date, it must pay compensation to the other party equivalent to one month's salary.

It is not entirely clear how, in the event of a dispute, this contractual entitlement to one month's compensation for early termination of the contract would be reconciled with the entitlement to early termination compensation under the UAE Labour Law.

Managing limited term contracts in practice

Renewal

As set out above, under the MoE Contract, a teacher is only required to provide the school with 2 months' notice of their intention to terminate their contract which is unlikely to be sufficient to enable the school to recruit a new teacher (particularly from overseas) to start at the beginning of the academic year.

To manage teaching resources, schools will often seek to have conversations with teaching staff at the earliest opportunity to ascertain whether or not they intend to renew their limited term contracts.

To formalise these early discussions, it may be prudent for schools to stipulate a longer notice period in the supplementary company contract and (subject to such a clause being approved) in the MoE Contract. In order to manage expectations, it may also be helpful to have a written policy setting out when discussions regarding renewal of contracts for teaching staff will take place.

Duration

Schools should carefully consider the duration of limited term contracts, particularly for teaching staff.

As set out above, the 2 year cap on the duration of each limited term contract set out under the recent Ministerial Decree will not directly apply to employers falling outside of the MoL's jurisdiction. Potentially therefore, it should therefore still be possible for employers falling under the MoE's jurisdiction, for example, to enter into limited term contracts with a duration of up to 4 years (the cap under the UAE Labour Law) for example (although, as set out above, the extent to which the authorities and the Labour Court would expect employers falling outside of the MoL's jurisdiction to comply with the spirit of the Ministerial Decree is unclear).

On the one hand, given the difficulties and penalties associated with terminating a limited term contract early, making the duration of the limited term contracts longer can serve as a useful employee retention tool.

On the other hand, it is, of course, also harder for the school to terminate the employee's employment prior to the expiry of the limited term contract without attracting penalties. Additionally, given the fairly restrictive nature of limited term contracts, teaching staff may be reluctant to sign up to such contracts with a lengthy duration.

Use of Probationary Periods

Termination of an employee's employment during the probationary period falls under Article 120 of the UAE Labour Law. This means that an employer may terminate a limited term contract prior to its expiry date where it does so during the employee's probationary period.

In such circumstances, the employee would not be entitled to any notice pay (unless anything to the contrary has been contractually agreed) nor to any statutory end of service gratuity payment. Additionally, the Labour Court recognises an employer's right to terminate an employee's employment during the probationary period so the risk of a successful arbitrary dismissal claim in these circumstances is relatively low.

Under the UAE Labour Law, a probationary period of up to 6 months is permitted. Such a probationary period may only be imposed once during an employee's period of employment with the employer – it is not, for example, possible to impose a new probationary period every time a limited term contract is renewed.

The MoE Contract provides for a probationary period of just 2 months. Given the difficulties and penalties associated with terminating a limited term contract after the probationary period has expired, it is often preferable from the employer's perspective to set the probationary period at the maximum 6 months. Schools may wish to stipulate a 6 month probationary period in the supplementary company contract as well as (subject to approval being obtained) in the MoE Contract.

Summary

In light of the new Ministerial Decrees, the way in which limited term contracts operate for those under the MoL's jurisdiction is likely to change fairly significantly, with some predicting a reduction in their use. The extent to which this will impact on employers outside of the MoL's jurisdiction remains to be seen.

Limited Term Contracts In The UAE

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.