Limited and Unlimited ​Contracts as per UAE Labour Law

When starting a new job in the UAE, it’s important to understand the type of employment contract you’re signing. The right contract can help both employees and employers avoid misunderstandings and ensure a smooth working relationship.

In the UAE, under Labour Law No. 8 of 1980 (as amended), two main types of contracts are available: limited and unlimited contracts. Each comes with its own conditions, especially when it comes to end-of-service benefits and termination.

Let’s break down the differences to help you make the best decision.

Limited Term Contracts

What is a Limited Term Contract?

A limited term contract is a fixed-duration agreement that usually aligns with the employee’s UAE residency visa. This is typically two or three years, depending on the employer’s location. The contract automatically ends when the term is up unless renewed or terminated earlier.

When Should You Choose a Limited Term Contract?

Limited term contracts are ideal for project-based roles or jobs with a set duration. If the length of a project is known, this type of contract provides clarity on both sides about when the work will end.

Terminating a Limited Term Contract

In general, limited contracts don’t include a notice period and end on the specified date. However, early termination can happen under certain conditions:

  • Employer termination: The employer can dismiss an employee for any of the 11 reasons listed under Articles 88 and 120 of the UAE Labour Law.
  • Employee resignation: Employees can resign early, following the conditions of Article 121 of the law.

Renewing a Limited Term Contract

If both parties agree, a limited term contract can be renewed or even converted into an unlimited term contract.

Early Termination by Employer

If an employer terminates the contract before its end date, the employee is entitled to a minimum of three month’s salary as early termination compensation.

Early Termination by Employee

If an employee leaves early, they may have to pay half of three month’s salary or compensation for the remaining period, whichever is shorter.

End of Service Gratuity for Limited Term Contracts

Employees are eligible for end-of-service gratuity after completing at least one year of continuous service. Gratuity is calculated as:

  • 21 days of basic pay for each year of service (up to 5 years).
  • 30 days basic pay for every year beyond 5 years. If the employer terminates the employee for gross misconduct, no gratuity is due.

Checklist for a Limited Term Contract

Ensure the contract includes:

  • Start date
  • Job description
  • Workplace location
  • Salary details
  • Duration of the contract

Unlimited Term Contracts

What is an Unlimited Term Contract?

An unlimited term contract doesn’t have a set end date. It can be terminated by either the employer or employee with notice, making it more flexible.

When is an Unlimited Term Contract Appropriate?

Unlimited term contracts are more suitable for permanent positions, where the job doesn’t have a pre-determined end date. These are common for employees not tied to specific projects.

Terminating an Unlimited Term Contract

  • Employer termination: An employer can terminate the contract by providing a minimum of 30 days’ notice for valid reasons, such as poor performance. Termination for gross misconduct is immediate, without notice.
  • Employee resignation: Employees can resign with a minimum 30-day notice unless specified otherwise in the contract. They can also resign without notice under Article 121.

End of Service Gratuity for Unlimited Term Contracts

Employees who complete at least one year of service are entitled to gratuity based on the following:

  • 21 days’ basic pay for the first 5 years.
  • 30 days’ basic pay for each additional year. If the employee is terminated for gross misconduct, they won’t receive gratuity.

Resignation and Gratuity for Unlimited Term Contracts

If an employee resigns:

  • 1-3 years of service: 2/3 reduction in gratuity.
  • 3-5 years of service: 1/3 reduction in gratuity.
  • More than 5 years of service: No reduction, full gratuity applies.

Checklist for an Unlimited Term Contract

Like limited term contracts, an unlimited term contract should include:

  • Date of contract conclusion
  • Start date of employment
  • Job role and responsibilities
  • Work location
  • Salary details

Conclusion

Choosing the right type of employment contract in the UAE depends on the nature of the job and the length of the commitment. Limited term contracts are ideal for project-based or time-specific work, while unlimited term contracts offer more flexibility for permanent positions. Both contracts come with specific rules regarding end-of-service gratuity and early termination, so it’s essential to know your rights and obligations under the UAE Labour Law.

By understanding these differences, both employers and employees can make informed decisions that protect their interests.