Differences Between Limited & Unlimited Contracts

Tim Elliot: Welcome to another edition of Lawgical, the regular weekly podcast from the Dubai-based law firm, HPL Yamalova & Plewka. Lawgical is the Gulf Region's first and still the only legal podcast. I'm Tim Elliot, I’m here once again, floor 18 at Reef Tower to talk to the Managing Partner, Ludmila Yamalova. Hello again.

Ludmila Yamalova: Hello again to you as well. Great chatting with you, as always.

Tim Elliot: Now, who will this edition of Lawgical be interesting to, be relevant to?

Here’s who: Anyone looking for work in the UAE, anyone considering a job here in the United Arab Emirates, and also to anyone actually employed here in the United Arab Emirates, and I guess other interested parties as well. We are going to be talking about limited and unlimited employment contracts today, Ludmila.

First of all, what’s the difference between the two?

Ludmila Yamalova: Well, in fact, very simple. A limited contract is a contract that has a beginning and an end. An unlimited contract basically only has the beginning. Now, how does that look in real life?

For a limited contract to be limited, it can be basically one of two. It can just say this is a limited contract for a period of two years or three years, or it can say the contract starts on day 1 and it ends on day 365, so it actually states the beginning and the end of the contract period. That is what makes the contract limited. An unlimited contract, similarly, it can just either say an unlimited contract, or it can just say this is the starting date and that’s it.

Interestingly enough, if you have a discrepancy, and we have seen that, where it would say, for example, the title of the contract will say, it’s an unlimited contract and it starts on January 1, 2018 and ends on January 31, 2020.  In that case, it’s a limited contract. Just because it says at the head of it that it’s unlimited, but if it actually has a limited date in it, that particular clause will prevail over the unlimited term.

Tim Elliot: Okay. That’s where the plot thickens. Now, would it be fair to say that an unlimited contract is maybe more user-friendly, more flexible? Which of the two is better and why might one be better than the other?

Ludmila Yamalova: That’s not an easy question to answer in simple terms only because it really depends. It depends on whether you are an employee, whether you are an employer, and it depends on what you may want to do in the future, whether you want the flexibility in your employment relationship, for example, or you want security, whether you may want to resign or there is a termination. It truly depends. That’s because the separation terms differ based on whether it’s a limited contract versus unlimited. It truly depends, but I’d say if you did press me on what’s a more flexible term of the contract that would be unlimited.  It is more flexible and that works both ways, but perhaps it offers less security to both parties. So it’s more flexible but less security.

Tim Elliot: Okay. Let’s consider the distinctions between the two in more detail and let’s be fairly methodical about this. Let’s assume that I’m employed under a limited contract and I am terminated under the terms of that limited contract. What does that mean for the notice period, for gratuity, end-of-service benefits that I’m due under UAE law, and any other benefits?

Ludmila Yamalova: A limited contract as an employee, the idea here is that you have committed to working for, let’s say, me for three years. Relying on that basis you’ve relocated your family here and set up a base, rented a place, and bought yourself a car, and so on and so forth, again relying on that three-year contract. Now, a year into it, I terminate you. Because it’s a limited contract, your termination compensation will be as follows:

(1) You will be entitled to a notice period, and the notice period is anything from a minimum of one month or up to whatever else the contract may provide for in excess of one month.

(2) The end of service or gratuity as we often call it, and that’s basically 21 days of basic salary for every year of service.

(3) Then there is a concept that’s called arbitrary dismissal compensation.

In limited contracts, if that limited contract is terminated before its expiration, then the employee is entitled to three months of full salary as compensation for arbitrary dismissal. The word arbitrary obviously needs to be qualified. In order for it not to be arbitrary, it has to be something that the employee would have caused that would perhaps cause significant damage to the company, but even then that’s a very high bar that needs to be proven and in most cases just for the purposes of this particular discussion, we have yet to see arbitrary dismissal not being arbitrary.

In the majority of the cases, they are arbitrary dismissals because thresholds of terminating somebody for a good cause almost never been met. In the context of a limited contract, the proof that someone was terminated for a good cause is almost impossible to meet in relevant terms. Therefore, any kind of termination, even if I say, listen, I am not happy with your employment because your drafting skills are not very strong, that will not give me the right to terminate without paying your arbitrary dismissal compensation.

In relevant terms and in simple terms, in limited contracts, an employee who is terminated before the expiration of the limited contract would be entitled to three months of arbitrary dismissal of full salary.  Full salary is important because in many cases in the UAE the salary is split into basic and allowances. Often the basic is about 50% to 60% of the total salary, but for the purpose of arbitrary dismissal, you combine all that so it will be the full salary times three for just the compensation for being terminated early, unless - there is an unless - unless you’re being terminated at the end of your limited contract because the law states it’s the period of your limited contract or three months of full salary, whichever is shorter.

For example, if you’re now two months away from the expiration of your three-year contract, in that case, I would have to pay you only two months, and not three months, because that is the shorter period. But in most cases when there is a limited contract that is terminated, it’s terminated way before it’s close to its termination or expiration.

Tim Elliot: So that’s termination under a limited contract. Let’s say I resign while I’m employed under a limited contract. Let’s take the same example once again. In other words, how does my resignation impact the notice period?  Also, end-of-service benefits due, any other benefits due, and are there any penalties for my resignation?  Could there be any fines, for example?

Ludmila Yamalova: Yes. Let’s use a similar example. There is a three-year contract, and the same logic of security of a limited contract applies to both parties. You as an employee that committed to these three years, relying on my representation, and this is why if that promise is broken there is this expectation that you should be compensated for it. But equally so for me as an employer, I’ve hired you for three years and I expected you to stay with me for three years and perhaps I have invested in you, so now you resign and you resign prematurely. Let’s say you resign two years into it.

(1) Obviously, there is no arbitrary dismissal because I’m not the one who dismissed you.

(2) But more importantly, by resigning from a limited contract before its expiration, you waived your end of service. I use the example of two years because after two years your end of service or gratuity will have been higher and that’s 21 days of each year of service, so basically, depending on how your salary is structured, in general terms, you could be entitled to two months of salary at the end of your two-year term with me. However, because you’re resigning before your limited contract expires, you waive that entire end of service.

(3) Then also the law requires that you compensate the company for your early termination up to 45 days of your salary. That’s an interesting one. That is sort of the penalty that is often referred to in limited contracts that the employee has to pay the company for breaching the contract early. However, it is important to highlight that the way this particular clause is drafted, it’s not an automatic entitlement or it’s not an automatic penalty. The way the law is drafted, the employee has to compensate the company up to 45 days of their salary as compensation.

Now, compensation is a subjective term. In legal terms, the company cannot make the decision unilaterally that I need to be compensated. In legal terms, that’s really a decision for the court to decide whether the company has suffered and the company has to show that it has suffered damages and therefore it needs now to be compensated and that somehow an employee’s month and a half salary will be the adequate compensation for this particular damage. That’s in legal terms. That’s how it’s supposed to be done.

Yet, in most cases, companies use this particular term or the particular clause or provision in the law as an automatic right to deduct a month and a half of salary from employees, but in legal terms, as an employee, you can always challenge that and you will prevail on that front. In practical terms, it’s important to know that companies do automatically deduct it and therefore if you wanted to challenge it, in many cases your only recourse is going to court.

Tim Elliot: That’s limited contracts. Let’s consider unlimited contracts. What happens if I am terminated under an unlimited contract? What does that mean when it comes to the notice period, end-of-service gratuity, and any other benefits?

Ludmila Yamalova: An unlimited contract is much more flexible.

(1) If you’re terminated, let’s say two years into your contract, you will be entitled to your notice period saying whatever it is, a minimum of one month and the maximum of whatever the agreement may provide.

(2) You would be entitled to your end of service and that is the same concept, 21 days for every year of service.

(3) Then you may be entitled to what’s called arbitrary dismissal. However, the law on arbitrary dismissal is drafted as follows. For unlimited contracts, when an employee is being terminated without good cause, then they may be entitled to up to three months of full salary for arbitrary dismissal. In limited contracts, it is a fixed three months of arbitrary dismissal compensation, whereas in unlimited contracts it is up to three months.

There are two components here.

(1) It’s not a guaranteed or fixed three months, and then

(2) the good cause in unlimited contracts is a much more fluid concept than it is in limited contracts because with limited contracts whenever it’s anything apart from very egregious conduct would lead to arbitrary dismissal because you are ultimately breaching the contract by terminating it early, whereas with an unlimited contract you don’t have that. It’s more of a subjective exercise.

You have to show that the company in fact terminated you arbitrarily. The good cause in unlimited contracts is more of a subjective exercise and the company still has to show that the employee was terminated for good cause and by the way this cause has to be attributable to the employee, not to the company. Because often what companies do is that they use a good cause concept as, well, listen, we are closing down, or we’re scaling down, or we didn’t have a good year, or the particular position is now being phased out. Well, it’s not a good cause because the cause has to be attributable to the employee.  The burden of proving that the employee was terminated for good cause is less in unlimited contracts than it is in limited contracts.

(1) But still, a company needs to be prepared to prove it, to show that termination was not arbitrary.

(2) But even in that case, the compensation for it is up to three months, so it is not a guaranteed three months.

That particular provision is being interpreted by courts as follows: The longer your relationship, the higher the chances that you will get the full three months because in the court’s view if you worked for a company for five years, you are entitled to the full three months because you’ve given them enough of your investment  But the shorter the period, the higher the chance is that the court will not grant the full three months. In some cases, the higher the employee is being compensated and perhaps the less they worked for the company, the higher the chance is that the court will not award any arbitrary dismissal compensation.

There is no requirement for awarding arbitrary dismissal compensation at all. It just says up to three months, so it is up to the court to decide what the compensation should be, but in many cases the longer the relationship the higher the chance is that it will be the full three months, but also you need to brace yourself and be prepared that you may not get anything as an employee if the relationship is fairly new.

Tim Elliot: You know what’s coming. What happens if I resign on an unlimited contract? Once again, what does that mean for the notice period, end-of-service benefits due, and any other benefits?  Plus, if I resign, could there be any kind of financial penalty?

Ludmila Yamalova: In an unlimited contract, because it is a more flexible arrangement, there is no penalty for the employee to resign. You are not resigning early because there was no specific term for which you’ve committed. There is no penalty for the employee. The notice remains the same. Obviously, there will not be any arbitrary dismissal because you’re not being dismissed. You do not walk away from your end of service. The end of service, in particular, let’s say if you worked for four and a half years, and you are now walking away, then you will get your full end of service because it’s not linked to the term of your contract.

It’s much simpler to resign than in a limited contract. Now what’s important to highlight, now that we’ve covered both unlimited and limited, is that after five years of continued service, whether it’s a limited contract or an unlimited, the resignation is treated the same way. For example, if I have a limited contract and I’m now on my second term of that contract, my first one was three years, the other one is three years, and I’m now five and a half years into it and I resign, at that point I will be entitled to my end of service as if I worked for an unlimited contract.

In that case, you don’t lose your end of service. If you are terminated in the second term of your limited contract, you’ll still be entitled to arbitrary dismissal, the full three months. Let’s say if you resign, then you will still get your full end of service.

Tim Elliot: Ludmila Yamalova is the Managing Partner of the Dubai-based law firm, Yamalova & Plewka. As ever, Ludmila, your knowledge is much appreciated. Thank you.

Ludmila Yamalova: Thank you. Always a pleasure to be talking to you, Tim.

Tim Elliot: That’s another edition of Lawgical. For an answer to a legal question, get in touch via LYLawyers.com. Find us on Facebook, LinkedIn, Twitter, Instagram.  We’ll try to answer any questions you might have in a future edition of Lawgical. For a legal consultation, LYLawyers.com is the best place to start.

This article is a transcription of the Lawgical with LYLAW podcast episode published on 3 March 2020.

Written by:

Ludmila Yamalova | HPL Yamalova & Plewka DMCC