Monday, October 11, 2010

Focus on Labor Law: Fixed-Term Employment Contracts

For most companies, entering into contracts that are well drafted and carefully negotiated is key to carrying out their business smoothly and successfully. Often, some of a company’s most important contracts are those with its own employees.

Employment contracts can be of indefinite duration or for a fixed term. As this article discusses, while employment contracts are typically of indefinite duration, fixed-term contracts can offer companies distinct advantages in some cases.

Employment Contracts of Indefinite Duration

In the Sultanate of Oman, as in other countries, employment contracts are typically entered into for an indefinite duration. This embodies the company’s and the employee’s shared good-faith intention to form a lasting relationship in which the employee is committed to the company, and the company is committed to the employee for the long term.

The difficulty for the company can be that, if the employment relationship sours or the economic viability of the business turns down, terminating an employee may often require more than simply providing the required notice. (The Omani Labor Law specifies that the notice period shall be a minimum of 30 days for workers employed on a monthly basis, or a minimum of 15 days for all other workers. The Labor Law further provides that if an employment contract specifies a longer notice period than the statutory minimum, the longer notice period specified in the contract shall apply). Beyond giving the required notice, companies may often find themselves facing unfair dismissal suits by the terminated employee.

There are a number of ways that the company can successfully defend against an unfair dismissal suit. If the employee has committed acts considered by the Omani Labor Law to be gross misconduct acts – including using a false identity, intoxication or assault at the workplace, or heavy absenteeism – the company may terminate the employee without having to pay damages (indeed, the Omani Labor Law provides that in the specified cases the company need not provide notice or pay end-of-service gratuity either). Furthermore, companies often succeed in defending against unfair dismissal claims by arguing that lay-offs in a money-losing division were economically necessary.

However, notwithstanding the foregoing, Omani courts are generally inclined to be highly protective of employees. And whether they would ultimately win or lose, most companies try to minimize the risk of unfair dismissal suits being brought against them in the first place. One way to mitigate this risk is by using fixed-term contracts.

Fixed-Term Employment Contracts

The Omani Labor Law allows for employment contracts to be for a fixed rather than unlimited duration, and explicitly provides that fixed-term contracts shall be effective, stating “The contract of work shall terminate [upon] … the expiry of its period or completion of the work agreed upon.” The Omani courts, in turn, are generally very respectful of fixed-term employment contracts. While the courts often hear unfair dismissal cases brought by employees whose contract of indefinite duration was terminated, the courts are unlikely to countenance unfair dismissal claims by employees who were asked to leave the company upon the expiration of their fixed-term contracts. Although the Omani Labor Law in general favors employees, its respect for fixed-term arrangements is one of the areas where the law is protective of employers.

Although they can be used in a variety of circumstances, fixed-term contracts are naturally most useful for hiring employees that will be working on a single, discrete project with a well-defined timeframe. Fixed-term contracts may also be especially useful to foreign companies that only plan to operate in Oman for a limited period of time. By lowering the risk of unfair dismissal claims, fixed-term contracts could help to protect against overhanging liabilities that could interfere with the company’s plans to smoothly conclude its affairs in the Sultanate.

There are subtle but important nuances to the Omani Labor Law, such as the requirement that a fixed-term employment relationship must be severed at the expiration of its term, lest a continuing relationship be deemed by the Labor Law to constitute a renewal of the employment contract for an indefinite period. In light of these complexities, we recommend that you consult with legal advisors in drafting your employment contracts, particularly for senior-level employees; employment contracts are truly a field where “an ounce of prevention is worth a pound of cure.”