Legal Disclaimer: This article provides general information about UAE contract types and gratuity as of November 2025. It is not legal advice. For personal cases, consult MOHRE or a qualified employment lawyer.

Limited vs Unlimited Contracts: UAE Gratuity Differences (2025 Update)

As of 2 February 2022, UAE eliminated unlimited contracts entirely. All new employment contracts must be limited-term (fixed-term) with maximum 3-year duration, renewable. However, employees hired before 2 February 2022 may still have unlimited contracts until termination or mutual conversion. The key difference for gratuity: resignation penalties apply differently depending on contract type and resignation circumstances.

For gratuity calculation formula, both contract types use the same basic structure: 21 days per year for first 5 years, 30 days per year thereafter. The main variance is in penalty application when YOU resign.

Quick Comparison: 2025 Contract Types

The 2022 Contract Reform: What Changed

Before 2 February 2022

Two contract types existed:

1. Limited (Fixed-Term): Set duration (1-3 years), defined end date
2. Unlimited: No end date, indefinite employment

Different gratuity rules applied based on contract type and resignation circumstances.

After 2 February 2022

Only one contract type: Limited (fixed-term), maximum 3 years, renewable.

Gratuity standardized: Same calculation and resignation penalty structure for all employees (unless hired pre-2022 with unlimited contract).

Why the change?

• Increase labor market flexibility
• Align with international standards
• Reduce employer-employee disputes
• Clarify termination and resignation rules

Gratuity Calculation: Same Formula, Different Application

The Core Formula (Applies to Both)

Step 1: Calculate daily wage

Daily Wage = Basic Salary ÷ 30 days

Step 2: Apply tiered formula

Years 1-5: Daily Wage × 21 days × years
Years 5+: Daily Wage × 30 days × years beyond 5

Step 3: Apply resignation penalty if employee resigns

1-3 years service: Receive 33.33% (one-third)
3-5 years service: Receive 66.67% (two-thirds)
5+ years service: Receive 100% (full amount)

Key Difference: Resignation Penalties

When Resignation Penalty Applies

Applies when: ✅ Employee voluntarily resigns
✅ Service < 5 years
✅ No Article 44 employer violations (gross misconduct by employer)

Does NOT apply when: ❌ Employer terminates employee
❌ Mutual agreement to terminate
❌ Service ≥ 5 years
❌ Employee resigns due to employer Article 44 violations
❌ Contract expires naturally (limited contracts only)

Resignation Penalty Chart

Contract Expiry vs. Resignation: Critical Distinction

Limited Contracts: Natural Expiry

Scenario: Your 3-year contract ends on 31 December 2025. Neither party renews.

Gratuity treatment:

• Classified as contract expiry, NOT resignation
• You receive 100% gratuity regardless of service length
• No resignation penalty applies

Example:

• Worked 2 years 11 months (under 3 years)
• Contract expires naturally
• Receive: Full gratuity (not one-third penalty)

Limited Contracts: Early Resignation

Scenario: You resign before contract end date.

Gratuity treatment:

• Classified as voluntary resignation
• Resignation penalty applies based on service years
• Must give 30-day notice

Example:

• Contract: 2023-2026 (3 years)
• You resign in 2025 (2 years into contract)
• Receive: One-third gratuity (33.33%)

Unlimited Contracts (Legacy): Resignation

Scenario: You resign from unlimited contract signed in 2020.

Gratuity treatment:

• Same resignation penalties apply
• No "natural expiry" concept (indefinite contract)
• Penalty based on service years

Contract Renewal and Service Aggregation

Automatic Renewal Impact

Question: If my 3-year limited contract auto-renews for another 3 years, do my service years reset?

Answer: No. Service years aggregate across consecutive contracts.

Example:

• Contract 1: 2020-2023 (3 years)
• Contract 2: 2023-2026 (3 years, renewed immediately)
• Total service in 2026: 6 years (not 3)

Gratuity calculation uses:

• First 5 years: 21 days per year
• Year 6: 30 days
• No service reset

Gap Between Contracts

Question: What if there's a gap between contracts?

Answer: Depends on gap duration and circumstances.

MOHRE guidance:

• Short gap (1-30 days): Typically aggregates if same employer
• Long gap (> 30 days): May be treated as separate employment
• With gratuity settlement between: Separate employment (resets)

Example:

• Contract 1: 2020-2023 (employer settles gratuity)
• Gap: 2 months
• Contract 2: 2023-2026 (new contract)
• Service for Contract 2: Starts from 0 (not 3 years)

Historical Context: Pre-2022 Unlimited Contracts

For Employees Still on Unlimited Contracts

If you were hired before 2 February 2022 on unlimited contract:

• Your contract remains valid until termination or conversion
• Same gratuity formula applies
• Same resignation penalties apply
• You can request conversion to limited contract

Conversion process:

• Either party can request conversion to limited (fixed-term)
• Both must agree
• Sign new contract (starts as new 3-year term)
• Service years typically aggregate (unless gratuity settled)

Why Keep Unlimited Contract?

Advantages:

• No fixed end date (indefinite security)
• Longer notice periods (30-90 days, often higher for senior roles)
• Perceived job stability

Disadvantages:

• Less flexibility to change employers
• Same resignation penalties as limited contracts
• Considered "legacy" contract type in UAE

Most employees: Unlimited contracts will phase out naturally as employees resign or convert.

Real-World Scenarios

Scenario 1: Contract Ends, Employer Doesn't Renew

Profile:

• Limited contract: 3 years
• Employer chooses not to renew
• Service: 3 years

Gratuity:

• Classified as employer termination (not renewal = termination)
• Receive 100% gratuity with no penalty
• Formula: (Salary ÷ 30) × 21 × 3

Scenario 2: Employee Resigns Mid-Contract

Profile:

• Limited contract: 2023-2026 (3 years)
• Employee resigns July 2025 (2.5 years in)
• Basic: AED 12,000

Gratuity:

• Voluntary resignation, 2.5 years service
• Falls in 1-3 year bracket = 33.33% entitlement
• Gross: (12,000 ÷ 30) × 21 × 2.5 = AED 21,000
• Final: AED 21,000 × 33.33% = AED 7,000

Scenario 3: Contract Expires, Employee Declines Renewal

Profile:

• Contract expires 31 Dec 2025
• Employer offers renewal
• Employee declines and leaves

Gratuity:

• Debated: Is this resignation or contract expiry?

MOHRE interpretation (2025):

• If employer offers renewal and employee declines = voluntary resignation
• Resignation penalties apply
• However, if contract simply expires and no renewal offered by either party = expiry, 100% gratuity

Recommendation: If in this situation, clarify with employer/MOHRE in writing before declining renewal.

Scenario 4: Unlimited Contract, 6 Years, Employee Resigns

Profile:

• Unlimited contract signed 2018 (pre-reform)
• Resigns 2025 (7 years service)
• Basic: AED 8,000

Gratuity:

• 7 years service = 5+ years bracket
• No resignation penalty (100% gratuity)
• Years 1-5: (8,000 ÷ 30) × 21 × 5 = AED 28,000
• Years 6-7: (8,000 ÷ 30) × 30 × 2 = AED 16,000
• Total: AED 44,000

When Resignation Penalty Does NOT Apply

Even if you resign voluntarily, penalty may not apply if:

1. Employer committed Article 44 violation:

   • Failed to pay salary on time (> 15 days delay)
   • Subjected employee to violence or harassment
   • Didn't provide safe working conditions
   • Breached contract terms materially

2. Mutual agreement:

   • Both parties agree to terminate
   • Documented as "mutual separation"
   • Not classified as employee resignation

3. Constructive dismissal:

   • Employer created hostile environment forcing resignation
   • MOHRE may rule as employer termination, not resignation
   • Requires evidence

How to Check Your Contract Type

Step 1: Review Contract

Look for:

• "Limited Contract" or "Fixed-Term Contract": Limited
• "Unlimited Contract" or "Indefinite Term": Unlimited (legacy)
• End date specified: Limited
• No end date: Unlimited

Step 2: Check MOHRE Portal

• Log in to mohre.gov.ae
• Navigate to "My Services" → "Employment Contract"
• Contract type displayed clearly

Step 3: Verify Contract Registration

All UAE contracts must be registered with MOHRE. Unregistered contracts are invalid.

Common Mistakes

Mistake 1: Assuming all contracts are now limited
Reality: Pre-2022 unlimited contracts still exist

Mistake 2: Thinking contract type changes gratuity formula
Reality: Formula is same; only resignation penalty application differs

Mistake 3: Resigning 1 day before contract expires to "avoid penalty"
Reality: Resignation = penalty applies; wait for natural expiry = 100%

Mistake 4: Believing renewal = new employment
Reality: Service years aggregate across renewals

Frequently Asked Questions

1. Can I still get an unlimited contract in 2025?

No. All new contracts since 2 February 2022 must be limited (fixed-term), maximum 3 years.

2. If I have unlimited contract from 2019, can I keep it?

Yes. Your contract remains valid until termination or you agree to convert to limited contract.

3. Do limited contracts mean less job security?

Not necessarily. Contracts can be renewed indefinitely. The 3-year term is just the maximum duration before renewal required.

4. If my contract says "2 years" but I work 5 years through renewals, what's my service?

5 years total (service aggregates across consecutive renewals).

5. Can employer refuse to renew my limited contract?

Yes. Non-renewal is legal and doesn't require cause. However, you receive 100% gratuity (treated as employer termination).

6. What if contract is silent on gratuity details?

Federal Decree-Law No. 33 of 2021 applies by default. Contract cannot reduce statutory gratuity minimums.

Official Legal References

Primary sources:

• Federal Decree-Law No. 33 of 2021 - Articles 51-52 (Gratuity) & Article 10 (Contract Types)
• Cabinet Resolution No. 1 of 2022 - Implementation Regulations
• MOHRE Ministerial Resolution No. 279 of 2022 - Contract Standards

For questions:

• MOHRE Hotline: 600590000
• MOHRE Website: mohre.gov.ae

Related Resources

• How to Calculate Gratuity in UAE: Complete 2025 Guide
• Resignation vs Termination: UAE Gratuity Differences
• Service Years Calculation: How It Affects Your Gratuity
• UAE Labour Law 2025: Gratuity Entitlement Breakdown
• MOHRE Updates 2025: New Gratuity Rules Explained

For an instant end-of-service estimate, use our online gratuity calculator UAE.

Final Disclaimer: This article reflects UAE labour law as of November 2025 and is for informational purposes. It is not legal advice. For contract-specific questions, consult MOHRE or a qualified employment lawyer.