When I first looked for a job in the United Arab Emirates (UAE), I was confused about the employment contracts and how they affect one’s career and future. The legal terms around limited and unlimited contracts seemed complex, but understanding these details made things clearer. As someone now working in the region, I’ve learned that knowing your employment structure isn’t just helpful — it’s essential.
According to the updated Labor Law, all employers in the UAE were required to convert their employee’s unlimited contracts into limited contracts by February 2023. The law now allows limited contracts to run for a duration of 2-3 years, and they can be renewed depending on your service period.
These changes in contract types provide employees more clarity on their rights and responsibilities, especially when planning long-term work goals. Having this knowledge early on truly helps in making informed decisions and securing a stable future.
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Limited vs Unlimited Contracts in UAE 2025: What are the Key Differences?
Under the UAE Labor Law, I discovered that an employer or a hiring company can offer two main contract types to their employees — limited and unlimited contracts. When I received my first offer in UAE 2023, it came with an explanation of both.
I learned that each has distinct conditions based on job structure, service duration, and service rules, which directly influence benefits like gratuity entitlements and other legal rights. This clarity helped me choose the type of contract that suited my goals and long-term plans.
What is a Limited Contract in UAE?
When I first signed a Limited or Fixed Term Employment Contract, it clearly outlined a specified duration during which I was expected to work for the hiring company. The employment began on a start date and ended on a specific end date, and the total work duration under limited contracts could vary depending on factors like the employee’s UAE residency, company’s rules, nature of job, project length, or even the employee’s salary.
I learned early that once my service end date arrived, if I didn’t renew my contract, it could be canceled at any time — a reality of working under a fixed-term contract that everyone should keep in mind.
One crucial thing I understood later was from Article 38 of the New Labor Law UAE 2022. It laid down how contract renewal should happen: through mutual agreement between the employer and the worker. Once renewed, the contract becomes an extension of the previous contract with the same legal terms, and that extended contract period gets added to your total service years. This gave me confidence to negotiate terms more wisely when I considered renewal.
What is an Unlimited Contract in UAE?
When I first came across an unlimited contract, I appreciated the flexibility. It wasn’t tied to any fixed working duration, and neither the employee nor the employer was bound to work together for a specified time. This made it ideal for those who valued freedom on both sides, as the setup was quite flexible for both parties involved. However, everything changed when the New Labor Law in the UAE was declared.
Under the updated regulations, unlimited contracts are no longer applicable. All employers were required to switch their employees from unlimited contracts to fixed-term contracts by February 2023. I personally went through this transition, and it was a major shift in how job agreements are structured here. It’s a change that now defines the professional landscape in the UAE.
Difference Between Resignation/Termination Rules for Limited vs Unlimited Contracts in UAE
Resignation and Termination for Limited Term Contract
As an employee, I once had to resign from a limited contract job, and it was essential to understand Article 121 of the Labor Law. It explains that contract termination under such agreements should occur with the mutual consent of both parties. Still, if either side, especially the employee, wants to exit before the project concludes, they must give written notice ranging from 1-3 months. I had to plan my departure carefully to stay compliant with this regulation.
There’s a different rule if you’re resigning during probation. If I had chosen to leave the country, a 14-day notice was required. But if I wanted to shift to another company, the law demanded a 30-day notice. Moreover, Article 38 of the New Labor Law UAE 2022 again reinforced that a limited contract has to comply with certain rules, which helped ensure both sides followed a fair and legal process during any employment transition.
Resignation and Termination for Unlimited Contracts
Under the UAE New Labor Law, resigning from an unlimited contract involves specific responsibilities for both the employer and employee. Both can terminate the contract by giving a prior notice of 30 days. However, if either party violates Article 120 or 121 of the UAE Labor Law, they may end the contract without serving a notice period. From my own case, understanding this clause helped me avoid an unexpected legal issue.
If someone wants to discontinue work instantly without prior notice, they must pay compensation equal to 30 days’ salary to the other party. Once, a colleague of mine had to do this, and it was financially tough. If the employee proves innocence, the hiring company is required to pay all pending dues and gratuity entitlements.
In contrast, if the employer fires a worker for reasons outside those listed in Article 120, they owe the employee 3 months’ gross salary and all pending dues. Likewise, if an employee quits without reasons supported by Article 121, they must pay 6 weeks of gross salary or settle all remaining dues with the hiring company. These rules make it vital to understand every exit path before making a move.
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Gratuity Calculation for Limited vs Unlimited Contracts in UAE
It’s important to know that under the New Labor Law of the UAE, all contracts were required to switch to fixed terms before February 2023. I went through this change myself, and after this transition, I noticed that gratuity is now calculated the same way, whether you’re under limited or unlimited contracts. This shift has streamlined how end-of-service benefits are handled for everyone.
Gratuity Calculation for Limited Contract
Under the Old Labor Law in the UAE, I found that limited contract gratuity or end-of-service benefits were calculated differently based on the length of your service years. If you worked fewer than five years, you’d receive 21 days of your employee’s basic salary per year. But for more than five years of service, the benefit increased to 30 days per year. This distinction helped me understand the long-term value of staying in one role under a limited contract.
Gratuity Calculation for Unlimited Contract
When it comes to unlimited contracts in the UAE, I realized that gratuity is calculated differently depending on the employee’s job leaving pattern—whether it’s resignation or termination. During my own research, I found that the gratuity estimation upon contract termination matches the rules of limited contracts. But when it comes to resignation, the formula changes significantly.
If an employee resigns after 1-3 years, seven days of basic wage is used to compute the gratuity. For 3-5 service years, it becomes 14 days of basic wage, and for anything more than five service years, the calculation is based on 21 days of basic wage. These breakdowns matter a lot when planning your exit or estimating your dues accurately.
How to Calculate End-of-Service Gratuity if the Employee Resign?
From my experience, if an employee working under a limited-term contract decides to resign before completing 5 years of service, they are generally not entitled to end-of-service benefits. However, once they have served more than 5 years, their gratuity is calculated just like those working on unlimited contracts.
For unlimited contracts, the end-of-service gratuity calculation varies depending on the years served: between 1-3 years, there is a 2/3 reduction; for 3-5 years, a 1/3 reduction applies; and for those who served above 5 years, there is no reduction. Understanding these rules helped me plan better for my career transitions.
How to Calculate UAE Gratuity if the Employer Terminates a Contract?
Based on my understanding, when an employee completes one full year of service under a limited-term contract, they become entitled to gratuity benefits under certain conditions. For the first 5 years, the benefit is 21 days of basic salary for each year, while for more than 5 years of service, it increases to 30 days for every additional year. But it’s important that the employee is not involved in any company misconduct or property loss to receive these benefits.
For unlimited contracts, the UAE gratuity is calculated differently when terminated by the employer: between 1-5 service years, the payout is 21 days of basic pay, and for above 5 years, it’s 30 days of basic pay. However, the total gratuity amount must not exceed two years of pay. This rule helped me better estimate what to expect in case of job changes.
Conclusion
In my experience, the unlimited-term contract is quite flexible and is frequently used across the UAE, especially for long-term or permanent jobs where employees are unsure about the exact duration of their project. Conversely, a limited contract tends to work best when employers require short-term collaboration with workers on projects that have a known end-date. This difference really helps clarify what kind of contract suits your career plans.
