Limited Vs Unlimited Contract UAE 2025

Are you seeking employment opportunities in the United Arab Emirates? If so, it is important to understand employment contracts in the UAE first, specifically the difference between limited and unlimited contracts and their legal terms. Having this knowledge will help you make informed decisions about your career options and ensure greater security for your future. So, below, we will briefly discuss both contract types. 

Update About UAE Employment Contract Law 2025

​As of March 2025 according to UAE New Labour Law, the United Arab Emirates (UAE) has implemented significant changes to its employment contract regulations. According to Federal Decree-Law No. (33) of 2021, all private sector employers were required to transition from unlimited-term to limited-term employment contracts by December 2023. This mandate applied to both mainland and free zone entities. ​

As of March 2025, the United Arab Emirates (UAE) has implemented significant changes to its employment contract regulations. Under the new labour law for limited contract in UAE, outlined in Federal Decree-Law No. (33) of 2021, all private sector employers were required to transition from unlimited-term to limited-term employment contracts by December 2023. This mandate applied to both mainland and free zone entities.

Limited-term contracts are fixed-duration agreements, typically lasting up to two or three years, and are often linked to the duration of an employee’s residency visa. These contracts automatically terminate at the end of the specified term unless renewed by mutual agreement. 

It’s important to note that employers operating within the Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC), as well as those employing domestic workers, are exempt from this requirement.

Reminder:

Employers who have not yet updated their employees’ contracts to limited-term agreements should do so promptly to ensure compliance with UAE labor laws and avoid potential penalties.

How is Gratuity Calculated in the UAE?

The gratuity amount in the UAE depends on the type of employment contract, \limited or unlimited; and is calculated based on the employee’s basic salary and years of service. Allowances are not included in this calculation. The Online Gratuity Calculator UAE can help you find the gratuity calculation for both types of contracts. 

Gratuity Calculation for Unlimited Contracts in UAE

An unlimited contract has no fixed end date and continues until terminated by either party with proper notice. However, the amount received depends on factors such as years of service, contract type, and whether the employee resigned or was terminated. Below is a detailed breakdown of gratuity calculations for employees under an unlimited contract based on their resignation or termination status. 

• Gratuity Calculation for Resignation

If an employee resigns from their job under an unlimited contract, gratuity is calculated based on the length of service as follows:

• Resignation Before Completing 1 Year of Service
  • Employees who leave their job before completing one full year of continuous service are not eligible for end-of-service gratuity.
• Resignation Between 1 and 3 Years of Service
  • Employees who resign after completing at least 1 year but before 3 years are entitled to one-third (1/3) of 21 days’ basic salary per year of service.
  • Example: If the employee’s basic salary is AED 10,000, the gratuity calculation would be:(21 days ÷ 3) × (AED 10,000 ÷ 30) × Years of Service
• Resignation Between 3 and 5 Years of Service
  • Employees resigning after completing at least 3 years but before 5 years are entitled to two-thirds (2/3) of 21 days’ basic salary per year of service.
  • Example: If the basic salary is AED 10,000, the gratuity calculation would be:
    • (21 days × 2/3) × (AED 10,000 ÷ 30) × Years of Service
• Resignation After Completing 5 Years of Service
  • Employees resigning after 5 years are entitled to full gratuity benefits:
    • 21 days’ basic salary per year for the first five years.
    • 30 days’ basic salary per year for each additional year beyond five years.
  • Example: If the employee worked for 7 years with a basic salary of AED 10,000, the gratuity would be:
    • (21 days × 5 years) + (30 days × 2 years) 
    • (21 × AED 10,000 ÷ 30 × 5) + (30 × AED 10,000 ÷ 30 × 2)

• Gratuity Calculation for Termination

If an employee is terminated under an unlimited contract, gratuity is calculated differently:

• Termination Before Completing 1 Year of Service
  • Employees who are terminated before completing one year of continuous service are not entitled to any gratuity.
• Termination Between 1 and 5 Years of Service
  • Employees terminated after at least 1 year but before 5 years are entitled to 21 days’ basic salary per year of service.
  • Example:If the basic salary is AED 10,000, the gratuity calculation would be:
    • (21 days × AED 10,000 ÷ 30) × Years of Service
• Termination After Completing More Than 5 Years of Service
  • Employees terminated after more than 5 years are entitled to:
    • 21 days’ basic salary per year for the first 5 years.
    • 30 days’ basic salary per year for each additional year after 5 years.
  • Example: If the employee worked for 8 years with a basic salary of AED 10,000, the gratuity calculation would be:
    • (21 days × 5 years) + (30 days × 3 years)
    • (21 × AED 10,000 ÷ 30 × 5) + (30 × AED 10,000 ÷ 30 × 3)

Gratuity Calculation for Unlimited Contracts in UAE

A limited contract has a fixed duration, meaning it has a start and end date mentioned in the agreement. The contract automatically expires unless renewed by both parties.

While a “terminated contract” means any employment contract that has ended before its natural expiration date, whether it was a limited contract or an unlimited one, due to action taken by either the employer or employee. 

• Less than 1 year → No gratuity.
• 1 to 5 years → Full 21 days’ salary per year.
• More than 5 years → 30 days’ salary per year for each additional year.

Gratuity Calculation for Unlimited Contracts in UAE

Key Points	Limited Contract	Unlimited Contract
Duration	Fixed start and end date (max 4 years).	No fixed duration; continues until terminated.
Renewal	Automatically ends unless renewed by mutual agreement.	No need for renewal; continues unless terminated or modified by agreement.
Termination	Ends at expiry or earlier if a valid reason exists. Termination before expiry can lead to penalties or labor ban.	Can be terminated anytime with proper notice. Employee can transfer without labor bans.
Notice Period	Employer must give notice as per UAE Labour Law.	Minimum 30-day notice or as agreed in the contract.
Early Termination Conditions	Termination must follow UAE Labour Law Articles 120, 121, and 117. Breach can result in compensation or labor bans.	Can be ended by either party with notice. Articles 120 and 121 apply for justified dismissal or resignation.
Employee Resignation	Employee cannot resign before expiry unless exceptional reasons exist (e.g., assault, employer breach).	Employee can resign anytime with notice. Protected from unjust dismissal.
Compensation	→ Employer terminates: Up to 3 months’ salary or balance of contract (whichever is less). → Employee resigns: 45 days’ salary or balance.	→ Without valid reason: 30 days’ salary. → Unjustified dismissal: Compensation up to 3 months’ salary.
End-of-Service Gratuity	→ <1 year: Not eligible. → 1–5 years: 21 days’ salary/year. → >5 years: 30 days’ salary/year.	→ 1–3 years (resignation): 1/3 of 21 days’ salary/year. → 3–5 years: 2/3. → >5 years: Full gratuity applies.
Use Cases	Ideal for temporary, seasonal, or project-based roles.	Best for permanent roles with long-term employment.
Employee Implications	Less job security. Penalties for early termination. Risk of losing gratuity if leaving early.	More job stability and freedom to change jobs without bans.
Employer Implications	Must monitor contract end dates, manage renewal and visa cancellation, follow strict termination procedures.	Greater flexibility, but must still follow proper notice and gratuity rules.
Visa Cancellation	Visa must be canceled upon contract expiry or termination.	Same applies, but the process may vary slightly.
Litigation Risk	Higher if the employer fails to follow law in termination or renewal.	Still present, but more manageable if procedures are followed.
Legal Updates 2025	Now the standard for all private sector employees in UAE	Phased out by December 2023 (except for certain zones)
Applies to	All mainland and free zone employees (except ADGM, DIFC, domestic workers)	Previously common; now only used in exempt areas

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