Limited vs Unlimited Contracts in UAE

According to the UAE Federal Law No. 8 of 1980 (the Labour Law), there are two primary kinds of employment contracts that an employer can provide to their workers, which are mentioned below:

1. Limited Term
2. Unlimited Term

As specified in the UAE Labour Law, DIFC zones are excluded. Each contract type comes with its own rules regarding

• Duration
• Termination
• End-of-service benefits

It is paramount for both employers and employees to have a clear understanding of what constitutes a limited and unlimited contract so that both parties remain within the legal boundaries of the contract and avoid disputes.

Tax-free salaries and a strong economy with endless job opportunities have kept the UAE as the most favorite expatriate destination, with more than 89% of its total population being expatriates.

This blog will break down limited vs unlimited contracts to help you make informed employment decisions.

What are Limited Contracts in the UAE?

The limited-term employment contracts or fixed-term contracts in the UAE imply a fixed length of employment with decided dates of commencement and termination.

Key Characteristics of Limited-Term Contracts

• Duration: Clearly defined starting and ending dates with a maximum term of three years.
• Termination: Simply put, the contract comes to an end by expiration. Either party may terminate the agreement early, for reasons recognized as valid under the relevant contract, typically requiring notice as stipulated.
• Renewal: The parties must mutually agree to an extension; otherwise, the employment relationship shall cease.

Compensation for Early Termination

By Employer

If an employer can justify it, they should enroll the employee in a three-month compensation cut short or otherwise provide payment for the remaining period of the contract.

By Employee

An employee wanting to terminate their contract may in turn be bound to compensate an employer with half of three months’ remuneration or half of that in the residual period if the contract is for less than three months.

End-of-Service Gratuity in Limited Contract

The gratuity is payable upon termination of service, provided that the employee has had uninterrupted service of a minimum of one year. Gratuity will be calculated at the rate of 21 days’ basic salary for the first five years and 30 days’ basic salary for each subsequent year, not exceeding a cumulative of two years’ salary.

What are Unlimited Contracts in the UAE?

An unlimited contract is an open-ended labor contract, where no specific termination date is specified, and hence, employment continues until terminated by mutual consent or unless the employer unilaterally discharges.

Termination by Employer

Employers may terminate the contract for a valid reason after providing written notice of between 30 and 90 days, as specified in the contract. Immediate termination without notice is permissible only in specific situations, for example, gross misconduct.

Termination by Employee

A resigning employee typically serves a notice period of 30, 60, or, in certain circumstances, 90 days, while immediate resignation under the conditions prescribed in Article 121 of the UAE Labour Law is allowed.

End-of-Service Gratuity in Unlimited Contract

Gratuity would be applicable for employees who complete more than a year of continuous service and will be credited at 21 calendar days of basic pay for five years and 30 calendar days of basic pay for each additional year but with two years’ total income as a maximum.

Pros and Cons of Limited and Unlimited Contracts

Each category offers its advantages and disadvantages to employers and employees alike throughout the UAE.

Limited-Term Contracts Pros

Project-Oriented: Best suited for employment linked to a project or temporary assignment, ensuring that the duration of employment aligns with the project timeline.

Fixed Employment Period: Clearly defines the duration of the work, enabling employees to plan their careers and personal lives accordingly.

Limited-Term Contracts Cons

Job Insecurity: These sorts of contracts undermine the possibility of long-term job security, creating uncertainty regarding future employment prospects.

Early Termination Risks: The risk of incurring penalties if the employee chooses to leave before completing the agreed-upon period or forfeiting their end-of-service benefits.

Unlimited-Term Contracts Pros

Job Security: Their open-ended nature provides a sense of job security and attracts workers who seek long-term employment.

Flexibility for Employers: This allows employers to adjust their workforce numbers relatively freely according to fluctuations in business requirements.

Unlimited-Term Contracts Cons

Termination Challenges: Implementing just procedures for terminating employees can hinder the proper management and administration of the workforce.

Limited Project Alignment: Less suitable for roles associated with specific projects that have defined timelines and deadlines.

Important Note!

Be aware that recent reforms to labor law in the UAE are transferring unlimited contracts into limited-term contracts to stipulate precise terms of employment and further flexibility in the labor market structure.

Limited vs Unlimited Contracts in the UAE! Key Differences Explained

When deciding between a limited or unlimited contract, it’s essential to understand the unique features and implications of each. Here’s a breakdown of the key differences:

1. Contract Duration

Limited Contract: A limited contract is a fixed-term agreement with a specified start and end date and a maximum duration of four years. The contract automatically terminates at its expiration unless both parties agree to extend or renew it. Limited contracts are suitable for jobs that are temporary or project-based.

Unlimited Contract: The unlimited contract lacks a definite duration, continuing to exist until one of the parties terminates it. This is the better option for employees seeking long-term job security and career advancement.

2. Contract Renewal

Limited Contract: The contract automatically ends at the expiration date unless both parties decide to renew it. Renewal terms can be negotiated; however, if the employer opts not to renew, a notice period is required under UAE Labor Law.

Unlimited Contract: Automatic renewal is not needed as this agreement does not have a certain tenure. If both parties wish to continue, they can agree to an addendum with new terms.

3. Contract Termination

Limited Contract: Ends automatically when the term concludes but can be terminated early under certain circumstances defined in the UAE Labor Law, such as gross misconduct or failure to uphold contractual responsibilities. Both parties shall comply with the terms and conditions of the contract, and any violations may result in penalties, including a labor ban.

Unlimited Contract: Either party may terminate this contract by providing at least 30 days’ written notice of termination unless the relevant party has breached the UAE Labor Law. Unlike limited contracts, under this type of contract, employees are free to transfer to other employers without being banned.

4. Compensation

Limited Contract: If any of the parties terminate an agreement without adhering to proper channels (like serving notice), the other is entitled to compensation. Employees resigning without due notice or unlawfully terminating contracts assume the responsibility of compensating the contractor through either settlement of wages after notice or as highlighted in the remaining term of the contract.

Unlimited Contract: Termination by either party is invalid unless without cause or notice. Compensation must be given; dismissal without cause entitles the employee to receive a month’s salary while unjust dismissal entitles the employee to three salary months.

5. End-of-Service Benefits

Limited Contract: Employees are entitled to receive a gratuity at the end of their service depending on how long they have worked. For the first five years, they are entitled to 21 days of salary for each completed year of service. For every additional year after that, they are entitled to receive a full month’s salary for each completed year of service.

Unlimited Contract: Once an employee completes one year of service, he/she earns the right to a gratuity upon cancellation of employment. Gratuity is calculated based on the number of completed years of service and is differentiated into three parts: The first three years, the subsequent two years, and beyond that.

6. Use Cases

Limited Contract: Typically used for temporary, seasonal, or project-based roles that have a clear start and end date, such as in manufacturing during peak seasons.

Unlimited Contract: More common for long-term, permanent roles where employees are seeking stability and career advancement. It allows employers to retain valuable talent over time.

7. Implications for Employees

Limited Contract: Job security may be less certain, as renewal may not be offered at the end of the contract. Employees are also likely to incur penalties and sanctions if they elect to terminate their employment early.

Unlimited Contract: Provides greater job security as employees have more protection against unjust dismissal. It offers long-term stability and career growth opportunities, provided both parties fulfill their contractual duties.

8. Implications for Employers

Limited Contract: Employers must ensure they follow proper renewal procedures and respect notice periods. Limited contracts are ideal for specific tasks or short-term projects but may limit long-term workforce flexibility.

Unlimited Contract: Employers have greater flexibility to retain skilled employees in the long term, without the constraints of fixed-term contracts. However, they must handle terminations carefully to avoid legal complications.

Table: Summary of the Difference Between Limited & Unlimited Contract

Aspect	Limited Contract	Unlimited Contract
Duration	Fixed-term contract with defined start and end dates, typically lasting up to 4 years.	Open-ended, no fixed termination date.
Contract Renewal	Requires mutual agreement to renew after expiration.	No automatic renewal; however, it can be extended with mutual agreement.
Termination	Ends upon expiration but can be terminated early for valid reasons (e.g., gross misconduct). Penalties for early termination may apply.	Can be terminated with 30-90 days’ notice or immediately for valid reasons, such as misconduct.
Compensation	An employer may compensate for early termination, and the employee may be compensated for resignation before the contract ends.	30 days’ salary compensation for termination without cause, or up to 3 months’ salary if terminated unjustly.
End-of-Service Benefits	21 days’ salary per year for the first 5 years, then 30 days per year thereafter (max 2 years’ salary).	Like limited contracts, but calculated differently based on years of service.
Use Cases	Temporary, seasonal, or project-based roles.	Long-term, permanent positions with job stability.
Job Security	Uncertainty after the contract ends. May face penalties for early resignation.	Higher job security with protection against unjust dismissal.
Employer Flexibility	Less flexibility for long-term retention.	Greater flexibility to retain employees long-term.
Renewal Process	Must be explicitly renewed by both parties.	No renewal is required; it continues until terminated.
Implications for Employees	Limited job security and potential penalties for early termination.	More stability and career growth opportunities.
Implications for Employers	Clear project-based contracts with less flexibility for long-term roles.	Easier long-term retention of skilled employees, but requires adherence to termination rules.

Frequently asked questions about Limited vs Unlimited Contracts in the UAE