Employment contracts and their termination

Dennis Brand from HBJ Gateley Wareing looks at the vexing issue of terminating labour and employment contracts in the UAE.

With numerous projects and contracts being postponed or cancelled as a result of the global economic downturn, many employers have had to reduce staffing levels. Whether as employer or employee, it is at such times that the provisions of Federal Law No. (8) of 1980 (as amended) (the ‘Labour Law') become the focus of attention.

We have all seen the government form of labour contract, a printed form in English and Arabic, which contains the basic of information concerning an employee's terms of employment - for example, names of the employer and employee, title, monthly salary, details of any allowances, date the employment began, whether the contract is of limited or unlimited duration, number of working hours each day and number of annual days leave.

The labour contract contains little else by way of information concerning the terms and conditions of employment, relying on the provisions of the Labour Law. It is not surprising therefore that many foreign companies with a branch or subsidiary registered in the UAE issue a contract of employment quite separate from the labour contract which, in addition to the provisions that one finds in the labour contract, also contain provisions relating to disciplinary and grievance procedures, pension schemes and bonuses and other provisions such as notice and termination.

It is immaterial whether or not the contract of employment states that it is governed by UAE law, because in terms of any employee of a company working in the UAE, their employment will be governed by the Labour Law. Under the Labour Law, there are two types of contract of employment, ‘limited' contract and ‘unlimited' contract.

Expiry date

A limited contract is for a fixed term; an unlimited contract has no expiry date, and can only be terminated by notice being given by the employer or the employee. Where a limited contract contains a termination provision (which is quite unusual), in the case of an unlimited contract, the Labour Law provides that the period of notice shall be a period of one month.

Where the parties have also entered into a contract of employment separately from the labour contract, then if that contract of employment contains a notice period longer than one month, the Labour Court will apply that longer period. Indeed, in the event of a dispute which is referred to the Labour Court, the Court will not only look at the labour contract, but will also look at the contract of employment and any other evidence which will assist the Court.

The Labour Law is also quite specific about notice periods and entitlements, and provides that the employer or the employee, when terminating an unlimited contract, must give the required notice to the other party. The employee has no right to attend his place of work during the period of the notice; the employer may require the employee to remain away from his place of work for all or part of the notice period, but the employee must be paid both salary and benefits for the whole period.

Where an employer terminates an employee for reasons of serious misconduct (being one or more of the specific reasons given in Article 120 of the Labour Law) the employee is not entitled to notice or payment in lieu of notice, nor is he or she entitled to any entitlements under the Labour Law (see later).However, should the employer terminate the employee's employment arbitrarily - that is, not in accordance with the provisions of Article 120 of the Labour Law, the employee shall be entitled to compensation of up to three months' basic salary in addition to payment in lieu of notice.

Entitlement

In the case of a fixed contract, whether there is a notice provision or otherwise, in the event that an employer terminates the contract, then the employee will have a similar entitlement to compensation. Should an employee seek to terminate a limited contract, then the employee may find himself having to compensate the employer for the cost of his visa and other expenditure that the employer may have incurred in bringing the employee to the UAE.

Where an employee on a limited or unlimited contract has completed at least 12 months' continuous employment, he/she will be entitled to payment of an end of service gratuity, calculated as 21 days salary for every completed year or part thereof up to five years, and 30 days salary for each additional year of employment after five years.

Where an employee terminates his employment - that is, gives notice - then in the case of an unlimited contract, the employee is entitled to seven days salary for each completed year or part thereof up to three years employment, and 14 days for the fourth and fifth years of employment. Where employment has exceeded five years, then an employee will receive 30 days salary in respect of each completed year or part thereof. The maximum gratuity payable in either case is equivalent to two years' salary.

In the case of a limited contract, an employee will only be entitled to an end of service gratuity if he/she has been continuously employed under the same contract for a period exceeding five years.  In relation to any payment by way of end of service gratuity, this is calculated on the base salary - that is, salary without allowances, which is payable to the employee at the date he or she gave notice.

There is today a general move to where one sum is described as salary. If not separated out as allowances, then the sum quoted in the contract as salary will be considered as the base salary on which all end of service entitlements will be ultimately calculated.

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