With its promising career opportunities, strong economy, and tax-free environment, the UAE has become a popular destination for expats. The country hosts the highest number of expatriates in the GCC region, with 89% of its population being foreign nationals.

However, with the benefits of living and working in the UAE, one must have a valid employment contract, as required by the UAE Labor Law (unless you’re working in the  Dubai International Financial Centre “DIFC” zones).

In this article, we will explain the key differences between the two employment contracts in the UAE. Keep reading!

Types of Employment Contracts in UAE

As per the UAE Federal  No. 8 of 1980 (the Labour Law), there are two main types of employment contracts that an employer can issue to their employees – limited and unlimited term contracts.

These contracts are primarily differentiated based on entitlements and legal rights. Here is a laydown of both contracts:

1. Limited Contracts

A limited-term contract is a fixed-term contract with a defined start and end date. This contract is often linked to the duration of the concerned person’s UAE residency visa, hence, the maximum duration is four years.

In this contract, both parties agree upon a fixed employment period, which automatically gets canceled once the contract ends. Upon its expiration, the employer can either renew or terminate the contract based on mutual agreement between the employer and the employee.

The key features of this type of contract include:

• Duration: A clear start and end date are mentioned in the employment contract. A fixed-term duration cannot exceed four years.
• Salary: The salary of the employee is fixed for the duration of the contract and cannot be changed unless both parties mutually agree upon it. The amount of remuneration and benefits are also mentioned before the signing of the agreement.
• Benefits: Limited contracts are usually accompanied by benefits such as health insurance, annual leave, and end-of-service gratuity.
• Termination: An automatic termination of the contract at the end of its term. However, the contract can be terminated before its end date if there is a valid reason. Additionally, both parties must give a notice period as mentioned in the contract.
• The workplace and nature of work cannot be changed without the consent of both parties.
• Limited to a specific employer, meaning an employee cannot switch companies until the contract term ends or with mutual agreement between both parties.

This type of contract is typically suitable when employers need to engage employees for a specific project or when the project’s duration is known in advance.

2. Unlimited Contracts

As the name suggests, an unlimited-term contract is open-ended in nature. Simply put, it has a defined start date but no fixed end date, making it more flexible for both the employer and employee.

In this type of contract, the terms and conditions will remain in force until one or both parties decide to terminate the contract or if both parties sign an addendum.

The key features of an unlimited-term contract in the UAE include the following:

• Duration: No specified end date, making it an open-ended. The terms and conditions continue until the contract is terminated by one or both parties.
• Benefits:  The unlimited contract usually comes with benefits such as great job security, annual leave entitlement, overtime pay, sick leave, and end-of-service benefits, such as gratuity pay.
• Changes to employment terms: The employee has more flexibility to change jobs without having to wait for the contract term to end (with proper notice and mutual agreement with their current employer) as their residence visa is not tied to the contract. The employer can also change the terms of employment, including salary and benefits, after discussing it with the employee. However, these changes must be done in accordance with the UAE Labor Law.

This type of contract is recommended for those seeking a more fluid and flexible work arrangement. 

Differences Between Limited and Unlimited Contracts

Now that we have looked at the key features of both limited and unlimited contracts let’s understand the difference between the two in a more detailed manner. Here’s an overview:

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: Unlike a limited contract, an unlimited contract has no fixed duration. 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. 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 both parties. 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 per UAE Labor Law.
• Unlimited Contract: Since an unlimited contract has no fixed duration, there is no automatic requirement to renew it. However, if both parties wish to continue the employment relationship, they can sign an addendum with new terms and conditions.

3. Termination of Contract

• Limited Contract: For limited-term contracts, the termination of the contract is automatic with its expiry date. The termination can also occur before the end date if there is a valid reason, as per Article 120 of the UAE Labor Law, which states that an employer can dismiss an employee without notice or end-of-service gratuity in cases of:

(i) Any of the mentioned violations amounting to gross misconduct in Articles 120 and 88 of the UAE Labor Law

(ii) Failure to fulfill their obligation, as stated in Article 121 of the UAE Labour Law.

(iii) A valid reason for termination according to Article 117 of the UAE Labor Law with a minimum notice period of 30 days or a maximum of three months.

Like the employer, an employee cannot resign or terminate the contract before its end date unless, in exceptional circumstances, mentioned in Article 121 of the UAE Labor Law. For instance, you can leave your services without serving a notice period if:

(i) You have been assaulted by the employer or any of their legal representatives

(ii) Your employer has failed to fulfill their obligations as stated in the contract or by law.

It should be noted that failure to adhere to the terms and conditions of a limited contract can result in an automatic labor ban by the UAE for six months. The employer also has the right to ban you from working with other companies for six months for the same reasons. Limited contracts are non-transferable, meaning you cannot transfer them to another employer if you resign before the contract ends.

• Unlimited Contract: An unlimited contract can be terminated by either party via a mutual agreement with a minimum notice period of one month as set out under Article 177 of the Labor Law or as agreed upon in the employment contract. During the notice period, the employee is entitled to their full pay and benefits, and both parties must comply with their contractual duties and obligations. 

However,  this does not apply in cases where the employee is found liable under Articles 120 and 88 of the UAE Labor Law, in which case, the employer has the right to terminate without prior notice or end-of-service gratuity. The employee also has the right to resign without serving a notice period, as stated in Article 121 of the UAE Labor Law (explained earlier under limited contracts).  Even if the employer fails to offer the employee a chance to serve the notice period due to reasons beyond the scope of the conditions highlighted in Article 120 of the UAE Labor Law, the employee is still entitled to receive their full pay for 30 days. Unlike limited contracts, employees under an unlimited contract can transfer from one employer to another without facing any labor bans or restrictions.

4. Compensation

• Limited Contract:  In the event of termination or resignation from a limited contract, both parties are entitled to compensation. If the employer terminates the employee without any valid reason not mentioned in Article 120 of the UAE Labour Law or notice period, they must provide three months’ worth of salary or the remaining period of the contract, whichever is less. 

Similarly, if an employee resigns of their own free will or without notice period as per Article 121 of the UAE Labor Law, they must compensate their employer with 45 days’ worth of salary or the remaining period, whichever is less. In any case, if either party fails to serve the notice period as per the Employment Contract or has waived or reduced it, the other party automatically becomes liable to receive a compensation payment equivalent to the entire or reduced notice period, calculated based on the employee’s last salary.

• Unlimited Contract:  In an unlimited contract, if either party wishes to terminate the employment relationship without any valid reason or notice period, they must provide compensation equal to 30 days’ worth of salary. This rule applies even if the termination is based on mutual agreement and a 30-day notice period is given in advance.  In case of an employee being dismissed without any justification, they have the right to receive compensation equivalent to three months’ worth of salary.  It should be noted that getting compensated for damages in cases of unreasonable termination does not affect an employee’s entitlement to end-of-service gratuity or payments in lieu of notice.

5. End-of-Service Benefits (Gratuity)

Both limited and unlimited contract employees are entitled to end-of-service benefits, calculated based on the duration of their services and the most recent basic salary. Note that the basic salary does not include allowances, bonuses, or any other benefits that may come with a job. 

It is also important to mention that an employee who has yet to complete one year of continuous service is not eligible for end-of-service gratuity, regardless of their contract type. This rule applies equally to both limited and unlimited contracts. However, the gratuity calculation differs between the two contract types:

• Limited Contract: In a limited contract, an employee is entitled to an end-of-service gratuity for each year of service. For the first five years of employment, you will receive 21 days’ pay per year, and for every additional year after that, you will be paid 30 days’ worth of salary per year (both are calculated pro-rata for any additional days served).  Employees who resign or terminate the contract with less than five years of service will not receive any gratuity payment.
• Unlimited Contract: Just like a limited contract, an employee is entitled to a gratuity payment if they have completed one year of continuous service under an unlimited contract. However, the calculation differs in terms of how much gratuity is paid. For example:

(resignation/termination by the employee)

(i) If the employee has completed 1-3 years of service, they are entitled to one-third (1/3) of 21 days’ basic salary as gratuity pay.

(ii) If the employee has completed 3-5 years of service, they are entitled to two-thirds (2/3) of 21 days’ basic salary as gratuity pay.

(iii) If the employee has served more than five (5) years, they are entitled to the full 21 days’ basic salary as gratuity pay.

(termination by the employer)

(i) If the employee has served the company for more than one year but less than five years, they will receive 21 calendar days’ basic salary for each year of the first five years of work.

(ii) If the employee has completed more than five years of service, they will receive 30 calendar days’ basic salary for each additional year, as long as the total compensation does not exceed two years’ pay.

6. Use Cases

• Limited Contract: Limited contracts are commonly used in the UAE for temporary, seasonal, or project-based roles. For example, a manufacturing company may hire extra staff on limited contracts during the peak production season to meet increased demand and then let them go once the season ends. 
• Unlimited Contract: Unlimited contracts are more commonly used for permanent positions or long-term roles, as they offer more flexibility, job security, and career growth opportunities for employees. They are also beneficial for employers who want to retain talented and skilled workers without the risk of losing them due to limited contract restrictions.

7. Implications for Employees

• Limited Contract: The main implication of this type of contract is job security. That is, if the employer decides not to renew the contract after its expiry, the employee may have to find a new job. Moreover, if the employee decides to terminate the contract before its expiry, they are subjected to penalties and may also lose their end-of-service gratuity.
• Unlimited Contract: The main advantage of an unlimited contract is job security. Under this type of contract, employees have a certain level of protection against being dismissed without justification. It also means that the employee can continue working as long as they fulfill their contractual obligations and the employer is satisfied with their performance.

8. Implications for Employers

For both limited and unlimited contracts, there are certain implications that employers in the UAE need to be aware of.  Below are some of the key factors that employers should consider before hiring an employee on either type of contract:

• Notice Period: As mentioned earlier, both limited and unlimited contracts have specific notice periods that need to be observed if either party wishes to terminate the employment relationship. Notice periods for limited contracts are typically shorter than those for unlimited contracts. Employers must ensure that they comply with these notice periods in accordance with the UAE Labour Law. Failure to do so may result in penalties or legal action.

• Renewal/Extension: A limited contract has a fixed duration, after which the employer can decide to renew or extend the contract. On the other hand, unlimited contracts do not have a fixed term and will continue until either party chooses to terminate it. It is important for employers to be aware of the expiration dates of limited contracts and initiate appropriate action when necessary.
• End-of-service gratuity: Both limited and unlimited contracts require employers to pay end-of-service gratuity to their employees. However, the calculation for each contract type differs, as explained earlier. Employers must ensure they fulfill this obligation for all employees who have completed at least one year of service.

• Visa Cancellation: In the UAE, an employee’s visa is linked to their employment contract. Therefore, if a contract expires or is terminated, the employer must cancel the employee’s visa within a specific period. The process for canceling an employment visa varies for limited and unlimited contracts, and employers must follow the relevant procedures to avoid any legal complications.
• Litigation Risk: In the event of contract termination, employers must carefully follow the procedures outlined in the UAE Labour Law. Failure to do so may result in litigation from employees.

Frequently Asked Questions (FAQs)

Q: Can a limited contract be converted into an unlimited contract?

Yes, it is possible to convert a limited contract into an unlimited one or vice versa. However, both parties must agree to the conversion and follow the necessary procedures outlined in the UAE Labour Law.

Q: How do limited contracts differ from unlimited in the UAE?

Limited contracts have a fixed duration and specific notice periods, while unlimited contracts are open-ended with no set duration.

Q: Can an employee terminate a limited contract before its expiry date?

Yes, employees can terminate a limited contract before its expiry date; however, they may be subjected to penalties and may lose their end-of-service gratuity.  However, the employer can also terminate a limited contract before its expiry date under certain conditions outlined in the UAE Labour Law.

Q: Is it necessary to renew a limited contract after it expires?

No, it is not mandatory for employers to renew a limited contract after its expiry. Employers have the option to renew or extend the contract if they wish to do so.

Q: Can an employer dismiss an employee on a limited contract without a valid reason?

Employers cannot dismiss employees on unlimited contracts without a valid reason. The UAE Labour Law provides certain protections for employees under this type of contract. However, the employer can terminate the contract if the employee violates their contractual obligations or commits gross misconduct.