Difference Between Limited and Unlimited Contract UAE
The UAE has around 89% population of expatriates and the most important thing for any worker in the UAE is their job contract. People often didn’t know if they had a limited or an unlimited contract and what that meant for their job security and final pay.
But now, the rules have completely changed which has made things much clearer for everyone. The UAE’s new labour law has removed unlimited contracts for all new employees. This is a big update that affects how you work, how you can resign, and even how you use a gratuity calculator Dubai for your end-of-service benefits.
In this guide, I will explain the difference between limited and unlimited contract UAE under the new law, so you know exactly what your rights are.
What is a Limited Contract in UAE?
A limited contract is now the standard and only type of job contract for all employees in the UAE under the new UAE labour law. Consider it a “fixed-term” deal. This means that your job contract has a clear start date and, even more importantly, a clear end date.
The main purpose of the limited contract is to provide clarity for both you and your company. The contract is for a fixed time duration, which is written in the agreement (for example, two or three years). Once the contract period is over, it can be renewed if both you and your employer agree to continue working together.
Renewal of Limited Contract
You can definitely renew a limited contract. You and your employer can just agree to keep working together when your contract is about to end. As per labour law, the renewed contract will be an extension of your old contract, with the same terms and conditions unless you both agree to new ones.
Most importantly, the time you’ve already worked will be added to your total service period, which is great for your gratuity calculation.
Termination Conditions and Compensation Deductions in Limited Contract
Even with a fixed end date, there are situations where you or your employer might need to end the contract early. Under the new UAE labour law, this is possible but there are clear rules to follow.
Early Termination by Employer in Limited Contract
Yes, an employer can end your limited contract before the agreed end date. They must have a valid reason; it’s not as simple as just saying goodbye!
If your employer decides to terminate your contract early, they are legally required to do two things:
Written Notice: Your employer must provide the official notice period mentioned in your contract (between 30 and 90 days).
Compensation: They must pay you an “early termination compensation.” This will equal to three months of your total salary. However, if your contract has less than three months remaining, they will pay you for the remaining period only.
Early Termination by Employee in Limited Contract
As an employee, you also have the right to resign from your limited contract before the end date. Just like your employer, you have two important responsibilities.
First, you must serve the full written notice period as mentioned in your contract, which is usually between 30 and 90 days. Second, you are required to pay your employer an “early termination compensation.”
Under the new law, this compensation is equal to three months of your total salary. If your contract has less than three months left, you will pay for the remaining period. This rule is fair to both sides as it ensures that your company does not suffer suddenly from your departure.
What is an Unlimited Contract in UAE?
An unlimited contract was a type of job agreement that had no specific end date. Your employment would continue for as long as you and your employer were happy to work together. However, it’s important to note that unlimited contracts are no longer available in the UAE.
Under the new UAE labour law that started on February 2, 2022, this entire system was replaced. All companies were given a deadline until February 2023 to move their employees from old unlimited contracts to new contracts. So as of now, every employee in the UAE’s private sector is on a fixed-term (limited) contract.
Key Differences Between Limited and Unlimited Contracts in UAE
Even though there are no more unlimited contracts in UAE, it’s still very important to know the main differences between the two contracts. Why? A lot of people still remember the old rules which can make things very confusing when it comes to notice periods, termination, and gratuity.
To make things smoother, let’s look at the old unlimited contract and the new fixed-term (limited) contract side by side on the following important points. This will help you learn about the changes and what your rights are under the new law.
Duration
The main difference between the two contracts was always the timeline for the job. A limited contract (the only type of contract available now) is for a fixed time duration e.g., two-year agreement.
It has a clear start and end date. The old unlimited contract, on the other hand, didn’t have a set end date. It lasted until either the employee or the company decided to end it.
Purpose
In the past, each contract had a different purpose. People thought that unlimited contracts were for a lifetime, while limited contracts were only for certain limited projects.
The new law explains that all jobs must have fixed-term (limited) contracts. The main goal is to make sure that both the company and the employee know what to expect and have stability from day one.
Flexibility
In the old system, unlimited contracts were thought to be more flexible for both employees and employers because either party could end the contract with a proper notice period. But the new law has made fixed-term contracts just as flexible.
Both the employer and the employee can end the contract before the official end date as long as they follow the notice period rules.
Compensations
In the past, unlimited contracts were often seen as better for compensation if the company ended the contract. However, the new law has removed this confusion. Now, under the limited contract, the rules for your end-of-service benefits and gratuity are the same for everyone. This makes the process much clearer.
Resignation
In an unlimited contract, the rules for resignation were very different. An employee on an unlimited contract could resign by just serving a notice period, but an employee on a limited contract often had to pay a penalty for resigning early.
Now, any employee can resign before their contract ends without paying the compensation by simply serving the notice period agreed upon in their employment contract.
Termination
Just like with resignation, the termination rules have also been simplified under the new labour law. In the past, it was easier for an employer to terminate an employee on an unlimited contract.
Now, the rules are the same for both employees and employer. An employer can terminate any employee by giving them the notice period (between 30 and 90 days subject to the contract).
Implications for Employees
It’s important to know about the contract types as they affect your job security, benefits, and how you can leave or be terminated. Let’s explore each.
Limited Contract
A limited contract gives an employee clear job security for specific time period. In the past, you had to pay fines if you left early. This has changed with the new law. Now, if you want to leave the job, all you have to do is serve the notice period that was agreed upon in your employment contract.
Unlimited Contract
The old unlimited contract was a great initiative for employees because it did not have an end date, which made it feel like a long-term job. Employers also liked it because it helped them keep skilled workers for a long time to meet their business requirements.
But keep in mind that the new UAE labor law no longer allows this kind of contract.
Separation Rules for Limited vs Unlimited Contracts in UAE
How you resign or if your employer terminates you is different in both contracts. Let’s explore each;
Resignation and Termination for Limited Term Contract
As per the UAE labour law Article 121, both employee and employer can decide when to end the contract with the consent of both parties. An employee must give 1-3 months notice period if he wants to resign before the contract ends.
Similarly, if an employee is going to leave the country, he must give 14 days notice period, and if an employee is joining another company in the UAE, he must serve 30 days notice period.
Resignation and Termination for Unlimited Contracts
Previously, terminating unlimited contracts was a bit different. It’s important to know that these rules no longer apply to new contracts, but understanding the old system can be helpful.
Notice Period: To resign or terminate, a notice period of 30 to 90 days was typically required.
Employer Termination: If the employer terminated you without a ‘valid’ reason, they could be liable to pay compensation of up to 3 months’ salary.
Employee Resignation: If you resigned, you didn’t have to pay any compensation, you only had to serve the notice period.
Gratuity: If you resigned before completing 5 years of service, a portion of your gratuity could be deducted.
This old system has now been abolished. Under the new law, every employee is on fixed-term contracts with clear and straightforward rules.
Gratuity Calculation for Limited vs Unlimited Contracts in UAE
The way your end-of-service gratuity in salary is calculated is one of the biggest differences between the contract types. Let’s break;
Gratuity Calculation for Limited Contract
When it comes to gratuity, the rules for a limited contract is quite straightforward and generally better for the employee if they complete their term. The calculation is based on your last drawn basic salary;
The standard formula was:
21 days’ basic salary for each of your first five years of service.
30 days’ basic salary for each year of service after the fifth year.
The most important point here was that if you complete your contract, you are entitled to your full gratuity without any deductions, regardless of your service duration (as long as it is over one year). Please note that these calculations apply to standard private sector employees only. Domestic workers in the UAE have different gratuity calculations. They can use our domestic worker gratuity calculator to calculate their accurate end-of-service benefits.
Gratuity Calculation for Unlimited Contract
This is where things used to get very confusing for employees under the old law. While the basic formula was the same as a limited contract, your final gratuity amount would change significantly if you resigned.
If the employer terminated an unlimited contract, the calculation was simple:
21 days’ basic salary for each of the first five years.
30 days’ basic salary for each year after that.
However, if an employee resigned from an unlimited contract, the gratuity was reduced based on service duration:
1 to 3 years of service: You would only get one-third (1/3) of your total calculated gratuity.
3 to 5 years of service: You would get two-thirds (2/3) of your total calculated gratuity.
More than 5 years of service: You would get your full gratuity.
It’s very important to know that this confusing deduction system no longer exists under the new law. Today, if you complete more than one year of service, you are entitled to your full gratuity calculation without any deductions for resigning.
Summary of the Difference Between Limited & Unlimited Contract
Here is the detailed comparison and difference between Limited and Unlimited Contracts that will help you understand the real concept.
Feature | Current Law (Limited Contract) | Old Law (Unlimited Contract) |
|---|---|---|
Status | Active & Standard | Discontinued |
Duration | Fixed-term with a clear end date (e.g., 2 or 3 years). | Open-ended with no specific end date. |
Termination | Can be ended by either party by serving a notice period of 30-90 days as per the contract. | Could be ended by either party with a notice period of 30-90 days. |
Penalty for Resigning Early | No penalty. You just have to serve your notice period. | Yes, you had to pay a penalty (compensation) to your employer. |
Gratuity (If You Resign) | You get your full gratuity (if you’ve served >1 year). No deductions. | Your gratuity was reduced if you resigned with less than 5 years of service. |
Final Words
Because either party could terminate the agreement by providing a notice period of 30 to 90 days, unlimited contracts were once thought to be more flexible. This indicates that the employer could fire a worker for a good reason and not be compensated.
Employers were more constrained under a limited contract, however, and were unable to fire a worker before the contract’s expiration date without a compelling and legally valid reason. If they did, they were often required to pay a penalty.
