Difference between limited and unlimited contracts in UAE

The UAE is an affluent location that attracts thousands of professionals every year in search of a job. Various factors such as career progression, higher salaries, quality of life, and tax-free environment contribute to the attraction of expats in the UAE. it is necessary to have a valid employment contract in the UAE to live and work here

In this article, we will explain the key difference between limited and unlimited contracts in UAE.

Types of Employment Contracts in UAE

There are two types of employment contracts in the UAE as stated under the UAE Labour Law No. 8 of 1980––Limited and Unlimited contracts.

1. Limited Contract

A limited contract is a fixed-term contract. It has a specified start date and end date with a duration to a maximum of four years. The employer and the employee can mutually agree to renew the contract at the end of the fixed-term. However, if the contract is not renewed, it automatically cancels on the specified end date.

2. Unlimited Contract

An unlimited contract is an open-ended type of contract with a start date but no defined end date. This type of contract is generally considered to be more friendly. It offers a degree of flexibility for employers and employees.

Differences Between Limited and Unlimited Contracts

1. Contract Duration

• Limited Contract: As mentioned earlier, a limited contract has a fixed start and end date, usually not exceeding four years. Both parties mutually agree upon the contract terms, which cannot be changed without mutual consent. This type of contract is mainly used for temporary or project-based roles.
• Unlimited Contract: It is an ongoing employment relationship that can continue indefinitely until one or both parties decide to terminate it or agree upon a new addendum. Unlike a limited contract, an unlimited contract has no fixed duration. This type of contract suits employees seeking long-term job security and career growth opportunities.

2. Renewal Of The Contract

• Limited Contract: Once the contract term expires, it automatically gets canceled unless renewed by mutual agreement of employee and employer. The renewal can be for a similar duration or with mutually agreed-upon changes. However, if the employer does not wish to renew the contract, they must give a notice period as per UAE Labor Law.
• Unlimited Contract: Because an unlimited contract has no fixed duration, there is no automatic requirement to renew it. However, if both parties wish to continue the employment, they can sign an addendum with new terms and conditions.

3. Termination of Contract

In the UAE, termination of contract happens frequently in various cases. Without knowing the rules, terminating a contract may lead to some consequences. Here’s to give you an idea:

• Limited Contract: When the employer terminates a limited contract before the end date and for reasons that are not stated in Article 120 of the UAE Labour Law, the employer is required to compensate the employee with three months salary, or for the remaining period of the contract–whichever is less.
  Similarly, when an employee decides for early termination of a limited contract for reasons that are not stated in Article 121 of the UAE Labour Law, the employee is liable to pay the employer with six weeks salary, or the remaining period of the contract––whichever is less.
• Unlimited Contract: An unlimited contract may be terminated at any time by either the employer or employee following a 30-day notice period condition. A notice period extension of no longer than three months is also possible under a mutual agreement of both parties.

Termination of Contract without notice

There are various grounds for termination of a contract without notice under the UAE Labour Law:

• The employer may terminate the contract without notice when the employee commits any of the mentioned violations in Article 120 of the UAE Labour Law.
• The employee may terminate the contract without notice if the employer fails to fill his obligation, as stated in Article 121 of the UAE Labour Law.

4. End-Of-Service Benefits (Gratuity)

End of service gratuity is calculated based on the most recent basic salary paid to the employee. Basic salary does not include allowances or bonuses that usually come with a salary package offered by employers.
It’s important to note that an employee who has not completed a one year of continuous service is not eligible for a gratuity pay. This rule applies whether the employee is under a limited or unlimited contract. Here’s how both contracts differ in gratuity calculation:

Limited Contract

• If an employee has served for more than one (1) year, but less than five (5) years, he is entitled to full gratuity pay based on 21 days’ salary for each year of work.
• If an employee has served more than five (5) years, he is entitled to the full gratuity of 30 days’ salary for each year of work following the first five (5) years.
• The entire gratuity pay should not exceed a total of two years salary.

Unlimited Contract

(when an employee resigns under an unlimited contract)

• If an employee has served between one (1) and three (3) years, he is entitled to one third (1/3) of 21 days’ basic salary as gratuity pay.
• If an employee has served between three (3) and five (5) years, he is entitled to two-thirds (2/3) of 21 days’ basic salary as gratuity pay.
• If an employee has served more than five (5) years, he is entitled to full 21 days’ basic salary as gratuity pay.

(when an employer terminates an unlimited contract)

• If an employee has served more than one (1) year, but less than five (5) years, he is entitled to 21 calendar days’ basic salary for each year of the first five years of work.
• If an employee has served more than five (5) years, he is entitled to 30 calendar days’ basic salary for each additional year, provided the entire compensation does not exceed two (2) years’ pay.
The Labour Law exists to protect both employers and employees’ employment rights in the UAE. It is important that you know the difference between limited and unlimited contracts. An employment contract is what legally binds them to each other. As a future employer, you will be accountable not only to your workers but also to your labour duties.