Unlimited Contract (UAE)
A UAE employment contract with no fixed end date that continues until either the employer or employee terminates it with proper notice, formerly the default contract type under the old UAE Labour Law before Federal Decree-Law No. 33 of 2021 replaced it with fixed-term contracts.
- What Is an Unlimited Contract in the UAE?
- Unlimited vs Limited Contract: Key Differences Under the Old Law
- End-of-Service Gratuity Under Unlimited Contracts
- Termination Rules for Unlimited Contracts
- Transition from Unlimited to Fixed-Term Contracts
- Why the UAE Abolished Unlimited Contracts
- UAE Employment Contract Statistics [2026]
- Common Mistakes with Unlimited Contract Conversions
- Frequently Asked Questions About Unlimited Contracts in the UAE
What Is an Unlimited Contract in the UAE?
Key Takeaways
- ✓An unlimited contract was a UAE employment agreement with no fixed end date, running indefinitely until either party terminated it with the required notice period.
- ✓Under the old UAE Labour Law (Federal Law No. 8 of 1980), unlimited contracts were the default for most private-sector employees and offered different gratuity calculations and termination rules than limited (fixed-term) contracts.
- ✓Federal Decree-Law No. 33 of 2021, effective February 2, 2022, eliminated unlimited contracts entirely. All new hires must now be on fixed-term contracts of up to 3 years.
- ✓Existing unlimited contracts had to be converted to fixed-term contracts by February 1, 2023. Employers who didn't convert face penalties from MOHRE.
- ✓Understanding the unlimited contract framework remains relevant because many current employees started under one, and legacy disputes and gratuity calculations still reference the old rules.
An unlimited contract in the UAE was an open-ended employment agreement. It didn't have an expiration date. The employee kept working until either side decided to end the relationship, provided they gave proper notice. For decades, this was the standard contract type in the UAE's private sector. Most companies defaulted to unlimited contracts because they were simpler: no renewal paperwork, no fixed end dates to track, and no early termination penalties. The employee showed up, did the work, and the arrangement continued until someone said otherwise. The old UAE Labour Law (Federal Law No. 8 of 1980) treated unlimited and limited contracts differently in two critical areas: how end-of-service gratuity was calculated and what happened when either side terminated the contract. These differences drove real financial consequences for both employers and employees. Then everything changed. Federal Decree-Law No. 33 of 2021, which took effect on February 2, 2022, abolished unlimited contracts completely. The UAE moved to a fixed-term-only model. Every employment relationship now operates under a contract with a defined start date, end date, and maximum duration of three years. But the unlimited contract isn't just a historical footnote. Thousands of employees who started on unlimited contracts before February 2022 still work in the UAE. Their gratuity entitlements, notice period obligations, and termination rights remain partially governed by the rules that applied when their contract was originally signed.
Unlimited vs Limited Contract: Key Differences Under the Old Law
Before 2022, the choice between unlimited and limited contracts had real consequences for termination rights and gratuity payouts.
| Dimension | Unlimited Contract | Limited Contract |
|---|---|---|
| Duration | No fixed end date | Fixed term (typically 1-3 years) |
| Termination by employer | Permitted with 30-day minimum notice and a valid reason | Permitted only at contract end or for cause during the term |
| Termination by employee (resignation) | Permitted with 30-day minimum notice | Permitted only at contract end, or employee pays early termination compensation |
| Gratuity on resignation (1-3 years) | 1/3 of 21 days' pay per year | Full 21 days' pay per year |
| Gratuity on resignation (3-5 years) | 2/3 of 21 days' pay per year | Full 21 days' pay per year |
| Gratuity on resignation (5+ years) | Full 21 days' pay per year | Full 21 days' pay per year |
| Gratuity on termination by employer | Full entitlement (21 days for first 5 years, 30 days thereafter) | Full entitlement (same formula) |
| Arbitrary dismissal claim | Available if terminated without valid reason | Not applicable (contract had a defined end) |
End-of-Service Gratuity Under Unlimited Contracts
Gratuity was the most financially significant difference between unlimited and limited contracts. The calculation method depended on who initiated termination.
Gratuity when the employer terminated
If the employer ended the unlimited contract (without cause), the employee received full gratuity: 21 days of basic salary for each of the first five years, plus 30 days of basic salary for each additional year beyond five. The total gratuity couldn't exceed two years' worth of salary. Basic salary excluded housing allowance, transportation allowance, and any other benefits. Only the base pay counted.
Gratuity when the employee resigned
This is where unlimited contracts penalized employees. If an employee on an unlimited contract resigned before completing five years, the gratuity was reduced. Less than one year of service meant zero gratuity. Between one and three years, the employee received only one-third of the standard 21 days per year. Between three and five years, two-thirds. Only after five full years did a resigning employee receive the full 21-day-per-year calculation. This sliding scale was designed to discourage job-hopping.
Gratuity under the new law
Federal Decree-Law No. 33 of 2021 simplified gratuity. Under the new fixed-term system, the calculation doesn't change based on who terminates the contract. Every employee who completes one year of service receives 21 days of basic salary for each of the first five years and 30 days for each year thereafter, regardless of whether they resign or are terminated. The two-year cap on total gratuity still applies.
Termination Rules for Unlimited Contracts
Terminating an unlimited contract required following specific procedural steps. Getting any step wrong could result in compensation claims.
Notice period requirements
Both employers and employees had to give at least 30 days' written notice. Many employment contracts specified longer periods, commonly 60 or 90 days. During the notice period, the employee continued working and receiving full pay. If the employer wanted the employee to leave immediately, they could pay salary in lieu of notice. If the employee walked out without serving notice, the employer could deduct the notice period salary from the final settlement.
Valid reasons for employer-initiated termination
The old law required the employer to have a legitimate reason for termination. Valid reasons included poor performance (documented over time with warnings), misconduct, redundancy due to business restructuring, and inability to perform job duties. Terminating without a valid reason exposed the employer to an arbitrary dismissal claim, where the employee could claim compensation of up to three months' salary on top of the notice period and gratuity.
Termination for cause (Article 120)
In cases of gross misconduct (assault, fraud, theft, habitual absence, disclosure of trade secrets), the employer could terminate immediately without notice and without paying gratuity. The misconduct had to be documented, and the employer had to take action within a specific timeframe. Delayed termination for cause could be challenged as arbitrary dismissal.
Transition from Unlimited to Fixed-Term Contracts
The shift from unlimited to fixed-term contracts was the most significant change in UAE employment law in four decades. Here's how the transition worked.
Timeline and compliance deadlines
Federal Decree-Law No. 33 of 2021 was issued in November 2021 and took effect on February 2, 2022. From that date forward, all new employment contracts had to be fixed-term, with a maximum duration of three years. Existing unlimited contracts were given a one-year grace period. By February 1, 2023, every employer in the UAE private sector had to convert all remaining unlimited contracts to fixed-term agreements.
What employers had to do
Employers needed to issue new fixed-term contracts to every employee still on an unlimited agreement. This wasn't just a relabeling exercise. The new contract had to specify a clear start date, end date (maximum three years), job title, salary, and other terms compliant with the new law. Many companies used this transition as an opportunity to update outdated employment terms, standardize contract templates, and align with other changes introduced by the decree.
Impact on employee entitlements
The conversion didn't reset employee tenure. An employee who had worked under an unlimited contract for seven years and then switched to a fixed-term contract retained their seven years of service for gratuity calculation purposes. Accrued leave balances, benefits, and seniority carried over. The conversion changed the contractual framework going forward, not the historical entitlements.
Why the UAE Abolished Unlimited Contracts
The UAE government didn't eliminate unlimited contracts on a whim. Several factors drove the change.
- Labor market flexibility: Fixed-term contracts give both parties defined windows to renegotiate terms or part ways, creating a more dynamic employment market.
- Alignment with international practices: Most GCC countries already used fixed-term contracts as the default. The UAE was the outlier.
- Reduced litigation: Unlimited contracts generated a disproportionate number of arbitrary dismissal claims in UAE labor courts. Fixed-term contracts have clearer termination rules.
- Attracting foreign investment: International companies found the dual-contract system confusing. A single, standardized contract type simplifies doing business in the UAE.
- Worker protection: Under the new law, employees on fixed-term contracts receive full gratuity regardless of whether they resign or are terminated, eliminating the resignation penalty that existed under unlimited contracts.
- Ease of enforcement: MOHRE can track and enforce compliance more effectively when every contract has a defined term and renewal date.
UAE Employment Contract Statistics [2026]
Key data points reflecting the UAE's employment contract transition and labor market.
Common Mistakes with Unlimited Contract Conversions
Even after the transition deadline, HR teams continue to encounter problems related to the old unlimited contract system.
- Failing to issue new written contracts: Some employers verbally told employees they were now on fixed-term contracts without issuing updated paperwork. MOHRE requires a signed, written contract registered on their system.
- Resetting the service start date: The conversion to fixed-term doesn't restart the employment clock. Employees retain their original start date for all entitlement calculations.
- Using the wrong gratuity formula: For employees who served under both contract types, the gratuity calculation must apply the old formula for the unlimited contract period and the new formula for the fixed-term period.
- Ignoring the 3-year cap: Fixed-term contracts can't exceed three years. Some employers issued five-year contracts during conversion, which aren't compliant.
- Not updating internal HR systems: HRIS platforms, payroll software, and leave management systems all need to reflect the new contract type. Running old unlimited-contract logic on new fixed-term employees creates calculation errors.
Frequently Asked Questions
Can I still be on an unlimited contract in the UAE?
Does converting to a fixed-term contract affect my gratuity?
What happens when my fixed-term contract expires and neither party takes action?
Can my employer change my salary or benefits during the conversion from unlimited to fixed-term?
How is the notice period different under the new law compared to unlimited contracts?
Written by Adithyan RK