UAE lifts three-year cap on private sector employment contracts

The UAE’s labour laws have been amended once again to lift the cap on the length of fixed-term employment contracts. The change comes after businesses expressed concern that the three-year cap could make it more difficult to attract and retain talent. However, it seems many firms in the region have already updated employment contracts to comply with the original three-year cap so where does this latest change leave them? We’ll hear from a Dubai-based lawyer. 

Gulf News reports on this and gives the background. The Labour Law, which first came into force in February 2022, required employers to ensure that all private sector employees were given fixed-term contracts of up to three years. Federal Decree Law No.14 of 2022 has removed the cap, enabling employers to agree the duration of fixed-term contracts with their employees, so helping to attract and retain staff. 

The other development to report is an earlier amendment to the UAE Labour Law introduced a new unemployment insurance scheme. Individuals who are subscribed to the scheme for at least one year will be able to receive income protection in certain circumstances following the termination of their employment. The full details of the scheme have not yet been published but it is expected that it will come into operation at some point next year with insurance premiums being deducted from the employees’ salaries by their employers.

But it is the removal of the three-year cap is the bigger story, so how is this affecting contracts of employment and what are the options now available to employers in the region? Earlier Ruth Stephen joined me by video-link from Dubai to discuss it. I put it to Ruth it’s odd that this has come about so soon after the last amendment: 

Ruth Stephen: “Yes, absolutely. So, I think it's only seven months down the line since the reform and the introduction of the new Federal UAE Labour Law and we are already seeing a change. So, an amendment to the law was introduced in September to, effectively, remove the cap on the three-year term that was put in place originally for the fixed term contract. So, one of the most significant changes under this new Labour Law is the requirement for all employees to be employed on a fixed term contract. Previously we could have unlimited contracts, and fixed term contracts, but unlimited contracts have been done away with. Initially under the law, there was a cap of a three-year term on the fixed term contract and there has been feedback and noises from the market, from employers and employees, that this cap of three years on the term maybe doesn't give the permanence and stability to the employment relationship which is required to attract and retain top talent in the market. Also, it's arguably at odds with the more long-term and stable work visas and employment sponsorships that have been introduced into the region which are excellent at getting skilled people into the country and making sure that businesses can thrive in the region. So, I think there are a few drivers for this change but certainly it should give a bit more stability and confidence, particularly for employees who are having to transition across from an unlimited to a fixed term employment contract now that the parties are free to agree the period of the term with no upper cap.”

Joe Glavina: “I gather thousands of employers have already updated employment contracts to comply with the original three-year cap. Is that right?”

Ruth Stephen: “Yes absolutely. So, we have this deadline of 1 February next year, 2023, to transition all existing employees across to this fixed term contract, remembering that new hires from 2 February this year onwards already have to be on a fixed term contract, and you're right, absolutely, lots of employees have already moved across and have signed up to a three year fixed term and that's fine, that that can remain the case, nothing needs to be changed and employers and some companies are happy to keep the three year fixed term, there's still the possibility for an auto renewal clause in the employment contract, that might be there already which gives extra stability and continuity. Equally, at the end of the term, or just before the end of the term, employers can agree with employees to renew the contract for the same term, a longer, or shorter period. So, there is that flexibility already there. For very senior, or key, employees, an option might be to update the employment contract and have a short side letter agreeing a longer term - maybe the three-year term is not suitable with reference to the employee’s seniority, and you would like to just increase that term maybe five, ten, years for example. So that's also an option. But because there is still the possibility to serve notice of termination under this fixed term contract it’s not too dissimilar to what we used to know under the old version of the unlimited term employment contract because there's no early termination compensation or anything like that under this fixed term contract, we can still serve notice provided it is for a valid reason. So, some employers are happy to keep it the position as it is with a three-year contract fixed term, whilst some are maybe thinking right, maybe for some select employees, we might just make some tweaks and an addendum, or a side letter. But yes, those are really the options and how we are advising our clients at the moment in light of this most recent change.”

Joe Glavina: “Now just like to move on to this new unemployment insurance scheme, could you tell me about that? What is it and what’s driver behind it? 

Ruth Stephen: “Yes, so this is really one of the first times we've seen a social security scheme, or platform, in the region and it applies equally to expatriates and UAE nationals, so the entire workforce. The driver could potentially be COVID. There were lots of layoffs during COVID and lots of the workforce here had to exit the country because their visa was cancelled, and expats no longer had the legal right to reside here. So, this gives a lot more stability in the workforce as a whole, gives a lot more protection and should open up options for employees to remain inside the country to seek new work if they are having a period of unemployment. So, lots of positive drivers at giving that stability and also to bolstering this new Labour Law that we have and giving it more structure and more credibility really.”

Ruth and team in Dubai have written about all of this in some detail in their article for Out-Law which you may like to read. That’s: ‘UAE Labour Law amended to help employers retain talent’ and we’ve put a link to it in the transcript of this programme.

LINKS
- Link to Out-Law article: ‘UAE Labour Law amended to help employers retain talent’