Limited vs Unlimited Contracts in UAE [Calculate Gratuity]

Limited vs Unlimited Contracts in UAE

The foreign workers get a job in UAE under either a limited contract or an unlimited contract. The UAE Labour Law has defined these two terms clearly yet many expats still do not know the difference between limited and unlimited contracts in the United Arab Emirates.

The limited contract has a fixed period of service, while the unlimited contract has starting date only but it does not have the service end date.

2023 Update: Unlimited Contracts are Abolished

The UAE Federal Decree Law No.(20) of 2023 has amended several provisions of Federal Decree Law No.(33) of 2021. According to this update, the employers can now hire an employee under a limited contract only.

The New Labour Law does not allow the employers to hire any worker/employee under an unlimited contract. Moreover, the employers have received instructions to convert all unlimited contracts into limited contracts by February 2023.

So, there are no more unlimited contracts exist in UAE after February 2023. All the foreign workers (expats) in UAE are currently working under limited contracts.

What is a Limited Contract?

A limited contract is a fixed term contract with a clear mention of starting date and ending date of the employment. The service period of a limited contract in UAE is linked with the validity of respective worker’s residence visa.

A limited contract expires on its last date and the employer can renew the contract if both the parties i.e. the employer and the worker/employee agree for the renewal. The contract period can be either 1 year, 2 years, 3 years or 4 years.

What is an Unlimited Contract?

An unlimited contract is the opposite of a limited contract. An unlimited contract does have a starting date but it does not have an ending date. That’s why, it is also called an open-ended contract because it does not have an expiry date.

An unlimited contract offers flexibility and freedom to both parties. The employer and the worker/employee can continue with the same contract as long as they want. If one or both the parties want to end the contract, they can end it.

Difference between Limited Contract and Unlimited Contract in UAE

There are mainly two types of employment contracts in the UAE i.e. limited contracts and unlimited contracts. The employers/companies can offer either a limited contract or an unlimited contract to a worker/employee at the time of hiring.

For every worker in the UAE, it is important to understand both contract types as well as the difference between limited and unlimited contracts in duration, resignation, termination, renewal, end-of-service benefits like gratuity and others.

Sr. No.FeatureLimited ContractUnlimited Contract
1.Contract DurationIt has a fixed duration of minimum 1 year and maximum 4 years. The limited contract expiry date often coincides with the worker’s residence visa expiry date.It does not have a fixed duration as the contract end/expiry date is not specified.
2.RenewalThe employer and employee can agree to renew the contract on expiry if they want.There is no need to renew because the unlimited contract does not have an expiry date.
3.Termination by EmployerIt gets terminated automatically on the contract end date. The employer can terminate the contract with either a valid reason (Article 120) or a notice period as the case may be.It does not get terminated automatically. The employer and the employee can mutually decide to terminate the contract.
4.Notice Period on TerminationThe employer does not need to provide a notice period but s/he has to pay compensation to the employee if the termination is without a valid reason given in Article 120.The employer has to provide a notice period of minimum 30 days (1 month) or compensation if s/he terminates the contract by dismissing the employee without a valid reason given in Article 120.
5.Resignation by EmployeeThe employee can resign before the contract expiry with a valid reason as per Article 121.The employee can resign anytime with a valid reason as per Article 121.
6.Notice Period on ResignationArticle 121: The employee does not need to provide/serve any notice period if s/he resigns for being assaulted or the employer fails to fulfill his obligations towards the employee as stated in the employment contract.If the employee resigns for a reason other than Article 121, s/he has to provide a written notice for a notice period of 30 days (1 month) to 3 months or pay compensation to the employer.Article 121: The employee does not need to provide/serve any notice period if s/he resigns due to being assaulted by the employer or his representative or employer’s inability to fulfill the obligations mentioned in the contract.If the employee resigns for a reason other than Article 121, s/he has to provide a written notice for a notice period of 30 days or pay compensation to the employer.
7.Compensation by Employee to EmployerIf the employee resigns without a valid reason (Article 121) and a prior notice, s/he has to pay the compensation to the employer as ½ of his wage/salary for 3 months or for the remaining contract period, whichever is shorter.If the employee resigns without a valid reason (Article 121) and a prior notice, s/he has to pay the compensation to the employer as his one month’s salary/wage and other borrowings, if any.
8.Compensation by Employer to EmployeeIf the employer terminates the employee without a valid reason (Article 120) or a prior notice, s/he has to pay full salary as compensation to the employee for 3 months or for the remaining contract period, whichever is shorter.If the employer terminates the employee without a valid reason (Article 120) or a prior notice, s/he has to pay the employee’s 3 month’s gross salary and other pending benefits/payments.
9.End-of-Service Benefits: Gratuity CalculationOn Resignation or Termination:Less than 1 Year:No GratuityFor 1 to 5 Years:21 Days Basic Salary for Each Completed Year of ServiceAfter 5 Years:21 Days Basic Salary Per Year for First 5 Years andFrom 6th Year: 30 Days Basic Salary for Each Subsequent Year On Resignation:Less than 1 Year:No GratuityFor 1 to 3 Years:1/3rd of 21 Days Basic Salary for Each Completed Year of ServiceFor 3 to 5 Years:2/3rd of 21 Days Basic Salary for Each Completed Year of ServiceAfter 5 Years:21 Days Basic Salary Per Year for First 5 Years andFrom 6th Year, 30 Days Basic Salary for Each Subsequent YearOn Termination:Less than 1 Year:No GratuityFor 1 to 5 Years:21 Days Basic Salary for Each Completed Year of ServiceAfter 5 Years:21 Days Basic Salary Per Year for First 5 Years andFrom 6th Year: 30 Days Basic Salary for Each Subsequent Year

How to Calculate Gratuity for Limited Contracts

You can calculate gratuity for limited contracts by using the Online Gratuity Calculator UAE or manually by using the gratuity formula given below;

For First 5 Years:

Gratuity = [Last Basic Salary x 21 Days x Completed Years of Service] ÷ 30

After 5 Years:

Gratuity = [Last Basic Salary x 30 Days x Completed Years of Service from 6th Year] ÷ 30

How to Calculate Gratuity for Unlimited Contracts

You can calculate gratuity for unlimited contracts with help of Online UAE Gratuity Calculator or use the gratuity formula mentioned below;

On Resignation

1 to 3 Years:

Gratuity = [Last Basic Salary x 21 Days x 1/3 x Completed Years of Service] ÷ 30

3 to 5 Years:

Gratuity = [Last Basic Salary x 21 Days x 2/3 x Completed Years of Service] ÷ 30

After 5 Years:

First 5 Years: Gratuity = [Last Basic Salary x 21 Days x Completed Years of Service] ÷ 30

After 5 Years: Gratuity = [Last Basic Salary x 30 Days x Completed Years of Service from 6th Year] ÷ 30

On Termination

For First 5 Years:

Gratuity = [Last Basic Salary x 21 Days x Completed Years of Service] ÷ 30

After 5 Years:

Gratuity = [Last Basic Salary x 30 Days x Completed Years of Service from 6th Year] ÷ 30

Conclusion:

The limited contracts come with a fixed term (period) which can be renewed if both the parties (employer and employee) agree for that. If one or both parties disagree, the employee can join any other company in the UAE.

On the other hand, the unlimited contracts do not have the end/expiry date which allow the employer and employee to continue working together as long as they want.

The UAE Labour Law has abolished Unlimited Contract Rule, so there are no workers/employees in UAE under unlimited contracts after February 2023.

FAQs

What is the difference between a limited and an unlimited contract?

The main difference between a limited and unlimited contract is the contract period. A limited contract has a fixed period (end date) while an unlimited contract does not have an end date.

Can an employee choose the contract type?

Can a limited contract get renewed on expiry?

Are unlimited contracts valid in UAE?

What is minimum service period for gratuity benefit?

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