What is Limited vs Unlimited Contracts in UAE 2025
Most employees and employers in the UAE grapple with complex employment contracts under the current Labour Law of UAE. Now, in 2025, amidst Federal Decree-Law No. 33 of 2021 and its iterations, the distinction between limited and unlimited contracts is imperative when taking decisions about one’s career and/or business.
Whether you are thinking about resigning, being terminated, or working out your end-of-service gratuity, understanding your type of contract has an impact on your rights, responsibilities, and financial entitlements. The latest labour law changes have simplified many processes and added new safeguards for employees and employers alike, so it is important to know what the current rules are.
Check our UAE Gratuity Calculator or read How to Calculate Gratuity in UAE
Limited vs Unlimited Contracts in UAE 2023: What are the Key Differences?
It is important for employees and employers within the UAE labour market to understand the fundamental differences between these types of contracts. Please find below a table to compare aspects to distinguish limited from unlimited contracts under the current UAE Labour Law.
| Feature | Limited Contract | Unlimited Contract |
|---|
| Duration | Fixed term (2–3 years) | No fixed end date |
| Renewal | Requires agreement from both parties | Automatically continues |
| Resignation Notice | Possible penalties if resigning early | 30 days notice standard |
| Termination Rules | Employer/employee must follow end date | Easier termination with notice |
| Gratuity | Based on years worked; stricter rules | Based on years worked; more flexibility |
The labour law system of the UAE ensures that conditions under both types of contract offer workers sufficient protection, while keeping companies well positioned for a degree of flexibility. But there are real-world consequences of picking one over the other that can greatly affect your on-the-job experience and bottom line.
What is a Limited Contract in UAE?
A limited contract (also referred to as a fixed-term contract) is a contract with a predetermined date for the commencement and termination. Usually it is for 2-3 years and may be renewed by the employer and the employee. This model has been made the default for all new contracts following the 2022 reforms by Federal Decree-Law No. 33 of 2021.
For employees, pros include a clearer sense of job tenure and the possibility of renewal bonuses, while cons might include less flexibility should circumstances change. For employers, it’s great for project-based or temporary roles, adding predictability in workforce planning. Should the contract not be renewed though, it naturally comes to an end without further termination process.
Well suited for temporary or short-term work, fixed-term contracts help both sides stick to the timeline. Legal basis: Article 8 of Federal Decree-Law No. 33 of 2021 states that all private sector contracts must have a limited duration, to stabilize the relationship.
What is an Unlimited Contract in UAE?
Unlimited contract is a form of contract where no termination date is provided in the contract, allowing for longer term roles. But following labour law reforms in 2022, unlimited contracts are now no longer given to new recruits, and are considered a historic form of contract. Existing ones were required to convert to limited-term by 2023, though some may continue if not renewed.
“This wasn’t a difficult one to figure out,” Mr. Wundrach said of the system before reform.International best practice?WASHINGTON: Mute feature rises in pollsThe mute button has star status in the debate polls. For workers under open-ended contracts, the benefits are that it is easier to quit without penalties for leaving early, and that there is more job security against an arbitrary sacking. It gives the power to keep talented employees indefinitely and yet be fired only for “cause” to the employer.
If you are on a legacy unlimited contract, in 2025 it remains covered by UAE Labour Law that was there to make flexible working practices more fairer.
Difference Between Resignation/Termination Rules for Limited vs Unlimited Contracts in UAE
The rules on resignation and termination are very different depending on the type of contracts, and also the way work comes to end is effected by the definition of the contract type. Notice periods are between 30-90 days under UAE Labour Law, according to your contract. Non-compliance can result in penalties including bans on work or compensation.
Resignation and dismissal under temporary contract.
For fixed-term contracts, a resigning employee is usually required to give notice (e.g., 30-90 days) and be liable for any penalty if he or she leaves the employment before the contract ends without good reason. Penalties might include repaying the employer for recruitment expenses or up to 45 days of pay. Unless, of course, the leave matches up with when the contract expires in which case there are such penalties.
Termination of limited contracts by the employer, on the other hand, is based on a justified reason (such as poor performance) and requires notice. If the dismissal is unjustifiable, the employer is liable to pay compensation at the rate of the remainder of the contractual term, or three months’ salary, whichever is lower. Rules regarding compensation protect workers from being unfairly dismissed.
Real-life example: An employee with a 2-year limited contract resigning after 1 year to accept a better opportunity. They may have to pay the employer for early termination but they still get 1 year’s gratuity if they worked at least 1 full yr.
Resignation and Termination Unlimited Contracts
In the case of older unlimited contracts, an employee can leave his or her employer by giving 30-90 days’ notice period and there are no early exit penalties as long as the notice period is fulfilled. That’s better, if not ideal, and certainly offers a lot more freedom than independent contracts do.
Employer termination has to be noticed and for a good reason (e.g., reduction in force) and be compensated if arbitrary. And The UAE Labour Law guarantees fairness as an employee can appeal to the MOHRE. Good exits, it is noted, are generally in mutual agreement, and employees are given full protection from discrimination.
Gratuity Calculation for Limited vs Unlimited Contracts in UAE
End of service benefit is a payable benefit as per the UAE Labour Law which is calculated on basic salary (excluding allowances) and service tenure. The formula is simple: 21 days’ salary per year for the first 5, and 30 per year after that. No tip if less than one year of service.
Gratuity Calculation for Limited Contract
For non-standard contracts, gratuity is paid at the end of the contract or on termination, and with no deductions for resignation. Formula: (Basic Salary / 30) x 21 x Years (first 5), plus (Basic Salary / 30) x 30 x Years (after 5).
For exact numbers, consult our in-house tool: Gratuity Calculator.
Gratuity Calculation for Unlimited Contract
For old unlimited contracts, the formula is the same only if the employee resigns before completing 5 years then gratuity is calculated as following: 1/3 for 1 to 3 years and 2/3 for 3 to 5 years. Full if terminated by employer.
How to Calculate End-of-Service Gratuity if the Employee Resigns?
How to Calculate UAE Gratuity if the Employer Terminates a Contract?
Termination by employer entitles full gratuity (no reductions) for both types, plus potential severance. Example: 4 years service, AED 10,000 salary = (10,000 / 30) x 21 x 4 = AED 28,000. Focus on protection: Law mandates payment within 14 days of termination.
- Full gratuity is paid if termination is not due to misconduct.
- Employee protection under UAE law ensures fair compensation.
Final Thoughts
You need to know about limited vs unlimited contracts in UAE to be able to take charge of your career and rights in 2025. Refer to your contract, understand relevant UAE Labour Law and calculate using online gratuity calculators so you can accurately calculate what your entitlement would be. Transparency is a win-win for both employers and employees, cutting down on disputes and enforcing compliance
