Limited vs Unlimited Contracts in UAE: Differences?

Are you trying to get a job in the United Arab Emirates? If yes, you must know the different types of employment contracts (limited vs unlimited contracts in UAE) and legal terms. The accurate knowledge will help you decide the best possible career option and secure your future. According to the UAE New Labor Law, employers must have to convert their employee’s unlimited contracts to limited contracts in the UAE before February 2023. This law states that the duration of the limited contract will be 2-3 years, which can be renewed before the end of your service.

Let’s look into the details of employment structure based on the contract types in the UAE!

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Limited vs Unlimited Contracts in UAE 2023: What are the Key Differences?

As per the UAE Labor Law, an employer or the hiring company can offer two types of contracts to their employees in the UAE 2023, i.e., limited and unlimited contracts. Both contract types differ based on job structure, service duration, service rules, gratuity entitlements, and other legal rights.

What is Limited Contract in UAE?

Limited or Fixed Term Employment Contract refers to an employment type in which an employee agrees to work for the hiring company for a specified duration. This type of contract mentions the start and end date of the job. The work duration in limited contracts may depend on several factors, such as:

The employee’s UAE residency
Hiring company’s rules
Nature of Job
Project length
Employee’s Salary

After the service end date, if the employee doesn’t renew his contract, it may be cancelled at any time. Therefore, if you’re working on a fixed-term contract, you should remember its last service date.

According to Article 38 of the New Labor Law UAE 2022, a limited contract renewal must follow the below-mentioned rules:

The mutual agreement of the employer and the worker may carry out the contract renewal.
The renewed contract will be considered an extension of the previous contract with the same legal terms.
The extended contract period will be added to the employee’s total service years.

What is an Unlimited Contract in UAE?

The unlimited contract is not based on any fixed working duration, or you can say the employee and the employer are not bound to collaborate for a specified time. It’s flexible for both parties. However, the New Labor Law of the UAE has now declared that unlimited contracts will no longer be applicable in the UAE. This law states that all employers must switch their employees’ unlimited contracts to fixed-term until February 2023.

Read the article: Legal Reasons Your Employer Denies Gratuity

Difference Between Resignation/Termination Rules for Limited vs Unlimited Contracts in UAE

Resignation and Termination for Limited Term Contract

The employee may resign from his limited contract job according to Article 121 of the Labor Law, which states that the contract termination will be the mutual consent of both parties. However, if any party employee wants to resign before the project ends, he must provide written notice of 1-3 months.

On the other hand, when an employee intends to resign on probation, he should provide a notice of 14 days in case he leaves the country and 30 days if he wants to join another company.

According to Article 38 of the New Labor Law UAE 2022, a limited contract must follow the below-mentioned rules:

Resignation and Termination for Unlimited Contracts

The UAE New Labor Law states that the following terms apply to resigning from an unlimited contract:

The employer and the employee may terminate the contract by providing prior notice of 30 days. However, In case of defiance of Article 120 or 121 of the UAE Labor Law, the employer or employee may terminate the contract without issuing a notice period.
Similarly, if any party wants to discontinue work immediately without providing prior notice, he has to pay compensation in the form of 30 days’ salary to the other party.
On the other hand, if the employee proves to be innocent, the hiring company would pay him all the pending dues and gratuity entitlements.
If the employer terminates his worker for reasons other than what is stated in Article 120, he must pay him 3 months’ gross salary and other pending dues.
If the employee terminates a contract for reasons other than what is stated in Article 121, he must pay 6 weeks of gross salary to his hiring company or all other pending dues.

Gratuity Calculation for Limited vs Unlimited Contracts in UAE

It is essential to mention that the New Labor Law of UAE has declared all the contracts to switch to fixed terms before February 2023. After this period, the gratuity will be calculated in the same way for both limited and unlimited contracts.

Gratuity Calculation for Limited Contract

As per the Old Labor Law of the UAE, limited contract gratuity or end-of-service benefits are calculated based on 21 days of the employee’s basic salary for service years fewer than five years and 30 days of basic salary for service more than five years.

Gratuity Calculation for Unlimited Contract

On the contrary, there are two ways to calculate gratuity for unlimited contracts in UAE based on the employee’s job leaving pattern (resignation or termination).

The gratuity estimation upon contract termination is the same as for limited contracts; however, it becomes different on resignation. Seven days of basic wage is used to compute gratuity upon serving 1-3 years, 14 days of the basic wage for 3-5 service years, and 21 days of the basic wage for more than five service years.

How to Calculate End-of-Service Gratuity if the Employee Resign?

If an employee, under a limited-term contract, resigns from a job on less than 5 years of service, he is not entitled to end-of-service benefits. However, if he has served more than 5 years, his gratuity will be calculated the same as unlimited contract employees.

In the case of unlimited contracts, the end-of-service gratuity will be calculated as follows:

1-3 years of service: 2/3 reduction
3-5 years of service: 1/3 reduction
Above 5 years of service: No reduction

How to Calculate UAE Gratuity if the Employer Terminates a Contract?

On completing one full year of service, the employee, under a limited-term contract, is entitled to get gratuity benefits under the following conditions:

For the first 5 years: 21 days of basic salary for each year
Upon completing more than 5 years of service: 30 days of basic salary for each additional year

However, the employee must not be involved in any company misconduct or property loss to get gratuity benefits.

The UAE gratuity for unlimited contracts should be calculated as follows in case of termination by the employer:

1-5 service years: 21 days of basic pay
Above 5 years of service: 30 days of basic pay

However, the total amount should not exceed two years of pay.

Bottom Line

An unlimited-term contract is flexible and more frequently used in the UAE. It is most suitable for long-term or permanent jobs where the employees don’t know the exact duration of the project. On the other hand, a limited contract is best when employers need short-term collaboration with employees for known end-date projects.

Limited vs Unlimited Contracts in UAE: Differences?