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Types of Employment Contracts

Types of Employment Contracts

Lawgical with LYLAW

30 October 2018

Hanan Arab:  Ludmila, we often receive questions about limited versus unlimited contracts for employment.  What are the major differences between the two in relevant terms?

Ludmila Yamalova:  Let me start with the definition of a limited contract versus an unlimited contract.  It’s a very simple principle.  For a limited contract to be limited it needs to have a start date and an end date.  For example, it could say the start date is January 1, 2018 and the end date is January 1, 2020, or it can say the start date is January 1, 2018 and the end date is two years from that date.  That would be considered a limited contract.

An unlimited contract is the one that only has a start date.  It does not have a reference to either an end date or the duration of the contract.  In simple terms, that is the difference and the definition between a limited and an unlimited contract.

In terms of the application of the labor law and the differences between limited and unlimited contracts in terms of benefits and rights to employees and companies, in relevant terms, and they are as follows:

If you have a limited contract, the difference comes into play between termination and resignation.  If an employee on a limited contract is being terminated, then he or she is entitled to the full end of service.  It may be based on the duration of the employee’s employment, plus arbitrary dismissal.  Arbitrary dismissal in limited contracts is the full three months of monthly salary.

For example, an employee is in a three-year employment contract and has been terminated a year and a half into his employment.  The company has to pay by default three months of salary, and that will be total salary, not basic salary but total salary, as compensation for arbitrarily dismissing that employee prior to the expiration of the contract.

If the employee resigns on a limited contract, then he or she walks away from the end-of-service payments.  Let’s say an employee worked for a company for four and a half years and otherwise would be entitled to 21 days of basic salary for every year of service.  If he or she resigns prematurely, let’s say it is a five-year contract and the employee resigns four and a half years into it, they walk away from all of that end of service, plus they will be required to pay 45 days or a month and a half of salary as compensation for terminating a limited contract prematurely.  That’s in the case of a limited contract.

If a contract is unlimited, again the differences come into play between termination and resignation.  In the termination case when an employee is being terminated, they would have to be paid end of service, plus arbitrary dismissal that will be calculated on the basis of up to three months of total monthly salary.

Whereas in the limited contract, the company’s obligation to pay for arbitrary dismissal is three months.  It is not subject to any interpretation or offsets.  In the limited contract, it’s up to three months, so it’s for the court to decide whether it should be one month, or it should be three months.  As a general rule based on experience, the longer an employee works for a company, the higher the chances that the courts will award the full three months of arbitrary dismissal even in cases of unlimited contracts.

If an employee resigns in an unlimited contract, then there are two different scenarios in terms of how the end of service is calculated or reduced.  Once again, an unlimited contract and a resignation.  If the employee resigns between year one and three, he or she is entitled to one third of end of service, which ends up being about one week of basic salary for every year of service.  If the employee resigns between year three and five, then he or she will be entitled to two thirds of end of service, which ends up being 14 days of basic salary for every year of service.

For example, an employee resigns on year two, which is between years and one and three, and with the basic salary of 15,000 dirhams, so he will receive 5,000 dirhams for every year of service which for two years of service would be 10,000 dirhams.  If the employee resigns between, let’s say on year four, between years three and five, on the same salary of 15,000, he will receive 10,000 dirhams for every year of service, which would be 40,000, which is 10,000 for every year of service, being four years, 40,000 dirhams.

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