Laying off employees can be difficult but it is an important HR function that must be handled professionally. Termination of employment requires the legal formalities to be carried out properly. In the UAE, the termination of a limited contract and an unlimited contract are carried out differently.
Terminating a limited contract: A limited contract does not exceed a 2-year term period and requires a notice period of at least 1 month and up to 3 months. It can be terminated by either the employee or the employer if the following conditions are met:
Inform in writing at least 1 month in advance, no more than 3 months in advance
Honor the contract for the duration of the notice period
Compensate the employee as agreed by both parties, given that this does not exceed the equal of 3-month gross wages
A limited contract can be terminated if the contract expires and is not renewed, both parties agree to end the contract mutually or the employee violates the UAE labor law.
“Once the contract is terminated, the employee is granted a 30-day grace period from the date of cancellation to either obtain a new visa or leave the country.”
Terminating an unlimited contract: Unlimited contracts have a start date but not an end date. They can be terminated by either the employee or the employer. The notice period remains the same as limited contracts and the employee must honor the contract for the duration of the notice period.
Unlimited contracts can also be terminated singly, by any one of the parties without obeying the notice period requirements. In such a case, the terminating party must bear the legal consequences of early termination. Once the contract is terminated, the employee is granted a 30-day grace period from the date of cancellation to either obtain a new visa or leave the country.
One of the most important points to keep in mind during the time of termination is the calculation of gratuity pay for the employee. Any employee who has completed one year or more of continuous service is entitled to severance pay or gratuity pay at the end of employment. Gratuity is calculated based on the most recent salary paid to the employee, without allowances or bonuses. This means it does not include allowances like housing, conveyance or utilities. You can check out this blog for additional information on gratuity calculations.
Whether the employee is on a limited contract or an unlimited contract, if the contract is terminated before 1 year of service, no gratuity will be paid to the employee. If the employee completes one year of continuous service, they are entitled to gratuity pay based on the following calculations for limited and unlimited contracts:
Limited Contract:
1 year - 5 years of service - Full gratuity pay based on 21 days salary for each year of work
5 years or more of service - Full gratuity pay based on 30 days salary for each year of work
Unlimited Contract:
1 year – 3 years of service - Gratuity pay equivalent to 1/3rd of the 21-day salary
3 years – 5 years of service - Gratuity pay equivalent to 2/3rd of the 21-day salary
5 years or more of service - Gratuity pay equivalent to the full 21-day salary
Calculating gratuity can be difficult if done manually. A good option would be to opt for UAE based HR Software such as Bayzat Benefits, that has a built-in gratuity calculators that can make your job easier. This way not only will the gratuity be calculated but your payroll process will also be seamless.