Six months on: the Ministerial Decrees and their impact on fixed term contracts

It is nearly six months since the Ministry of Labour (recently renamed Ministry of Human Resources and Emiratisation) (“MOL”) issued three new Ministerial Decrees (see our previous briefing). They were set to transform the employment contract process across the UAE.

Over the last six months, the MOL has reported an increase in the numbers of unlimited term contracts being issued. This is likely to be due to the changes brought about by the Ministerial Decrees in particular relating to fixed term contracts and the uncertainty as to how they may be interpreted if tested in practice. However, potentially fixed term contracts may be the more attractive option to UAE employers as the new Ministerial Decrees have given more flexibility in relation to their termination.

By virtue of Ministerial Decree No. 765 of 2015, fixed term contracts going forward will be limited to a maximum duration of two years, however, these fixed term contracts may be renewed. Under this Ministerial Decree, both employees and employers will be allowed to terminate a fixed term contract early before their expiry date by, firstly, giving notice in writing of between one to three months and, secondly, by providing compensation known as an early termination payment. This early termination payment is agreed upon by the parties in the contract and the amount should be anywhere between one to three months’ of the employee’s remuneration. The liability for the early termination payment shall be borne by the party giving the notice of early termination of the fixed term contract. With the Ministerial Decrees, the MOL issued a prescribed form offer letter and employment contract for each different type of employment arrangement: fixed term, unlimited term and renewal of a fixed term.

Therefore, it appears that there is more clarity for UAE employers in terms of risk and costs exposure relating to the early termination of fixed term contracts. This is because both parties will be aware of the payments due from the beginning of the employment relationship i.e. pay during the notice period and the agreed early termination payment. Going forward, it may transpire that a terminated employee will be less likely to file a claim against the employer as regards to early termination of a fixed term contract as the remedies are available pursuant to the employment documentation. Whereas, with termination of unlimited term contracts there is always an inherent risk in the UAE that a terminated employee will file a claim for arbitrary dismissal, and the costs exposure to the employer includes defending the claim as well as any awarded compensation. Therefore, as there is more clarity surrounding termination of fixed term contracts, potentially within the next six months, fixed term contracts could be seen as the more attractive option for UAE employers.