Employment Contract & Gratuity in UAE: Latest Labour Law Changes

Starting a new job or business in the UAE can be exciting, but one document plays a key role in determining how secure and successful that journey will be — your employment contract. While more than 90% of employees in the UAE are entitled to gratuity benefits, many remain unaware of the recent updates to employment contracts and how these changes affect their end-of-service entitlements. In this guide, you’ll find everything you need to know about employment contracts and the new unified, standardised system introduced across the UAE.

An employment contract is a legally enforceable agreement between an employer and an employee that outlines the terms and conditions of employment. It is implemented across the UAE, though certain details may vary depending on the organisation or industry. While some specific clauses can differ, most employment contracts generally include the following common terms:

• Start Date
• End Date (if applicable)
• Probation Period
• Job Description
• Employer Details
• Employee Details
• Salary Package
• Working Hours
• Termination Conditions
• Compensation and Benefits
• Annual Leave Entitlement

These elements are included in the contract to ensure that both parties have a clear understanding of their obligations and expectations. Working without a formal employment contract in the UAE can be risky and may lead to disadvantages for both the employee and the employer.

According to UAE Labour Law No. 8 of 1980, there are two primary types of employment contracts: Limited Contracts and Unlimited Contracts. These apply to all employers across the UAE.

A limited contract, also known as a fixed-term contract, is an agreement where the duration of employment is predetermined and clearly stated, including the start and end dates. These contracts typically last for up to three years and automatically expire on the specified end date. However, they can be renewed if both the employer and employee mutually agree.

Job Type: Limited contracts are commonly used for roles that are project-based or where the demand for labor is required only for a specific period. Organisations often prefer this type of contract for short-term needs, while employees benefit by gaining valuable experience during the contract term.

Contract Duration: A limited contract specifies a fixed start and end date, which remain unchanged until the contract expires, unless both parties mutually agree to modify them.

Renewal Process: A limited contract automatically terminates once it reaches its end date but can be renewed with the mutual consent of both parties. The terms, conditions, and duration of the renewed contract may either remain the same or be modified, depending on the agreement. In most cases, renewal is influenced by the employee’s performance.

Termination Procedure: A limited contract is automatically terminated once it reaches its end date, but early termination is also possible under certain conditions. According to Article 120 of the UAE Labour Law, an employer may terminate the contract for any legally justified reason. Under Article 121, an employee has the right to end the contract prematurely in cases such as assault or failure of the employer to meet contractual obligations. The notice period for specific types of termination typically ranges from 30 days to three months.

Benefits: End-of-Service Gratuity under a Limited-Term Contract
Employees are entitled to end-of-service gratuity once they have completed at least one year of continuous service. The calculation is as follows:

• Service Years 1 to 5 Years: 21 days of basic salary for each year.
• Service Years Above 5 Years: 30 days of basic salary for each year.

Note: The total gratuity payment cannot exceed the equivalent of two years’ wages.

Provision of Compensation: Under a limited contract, if the employer terminates the agreement without a valid reason or notice, they are required to pay the employee either three months’ salary or the remaining salary for the contract period — whichever is less. On the other hand, if an employee resigns without providing notice, they are obligated to compensate the employer with an amount equal to 45 days of their wages.

An unlimited contract, also known as an open-ended contract, specifies a start date but does not include a defined end date. It offers employees a greater sense of stability and continuity, making it the preferred choice for long-term projects and permanent roles.

Job Type: In an unlimited contract, the nature of the job is usually ongoing or related to continuous operations. Since the contract does not have an expiration date, it fosters long-term professional relationships and provides a greater sense of security for both the employer and the employee.

Renewal Process: An unlimited contract does not require renewal since it is open-ended. The contract remains valid indefinitely and continues until either party decides to terminate it.

Termination Procedure: According to Article 117 of the UAE Labour Law, either party may terminate an unlimited contract by providing at least one month’s notice, during which the employee is entitled to receive full pay. Under Article 120, an employer may terminate the contract without notice if there are legally justified reasons. Conversely, Article 121 grants employees the right to resign without notice if the employer fails to meet contractual obligations or in cases of mistreatment.

Benefits: End-of-Service Gratuity under an Unlimited-Term Contract
Employees who have completed at least one year of continuous service are entitled to gratuity pay. If they leave their job through the appropriate termination process, the gratuity will be calculated using the same formula as for a limited contract.

Gratuity for Resignations under an Unlimited Contract:

• Resignation before 1 year: No gratuity entitlement.
• Resignation after 1–3 years: Entitled to one-third of 21 days’ basic salary for each year of service.
• Resignation after 3–5 years: Entitled to two-thirds of 21 days’ basic salary for each year of service.
• Resignation after 5 years: Entitled to 21 days’ basic salary for each of the first five years, and 30 days’ basic salary for each year thereafter.

Provision of Compensation: In an unlimited contract, if the contract is terminated without valid cause or notice, the employee is entitled to compensation equivalent to 30 days’ wages. This applies even when there is a mutual agreement or a standard 30-day notice period in place. In cases where the termination is unjustified and without cause, the employee may be entitled to compensation of up to three months’ salary.

Under the new Labour Law, Federal Decree-Law No. 33 of 2021, employment contracts have been standardised across the UAE, and gratuity entitlements are now applied uniformly to all employees.

The Phasing Out of Unlimited Contracts in the UAE

Unlimited contracts have been officially abolished under the new UAE Labour Law. All employees are now required to work under fixed-term contracts, and employers were instructed to convert existing unlimited contracts into limited contracts before February 1, 2023. While unlimited contracts offered a sense of stability, they often created confusion due to the differences in gratuity benefits between resignation and termination. The new law introduces a unified system of contracts and end-of-service benefits, ensuring consistency and fairness for all employees in the private sector.

UAE’s New Unified Gratuity System

Since all employment contracts in the UAE are now limited-term, gratuity and benefits are calculated using a standardised system as outlined for limited contracts.

Standard Calculation Formula:
Employees who have completed at least one year of continuous service are entitled to gratuity as follows,

• Service Years 1 to 5 Years: 21 days of basic salary for each year.
• Service Years Above 5 Years: 30 days of basic salary for each year.

Easily calculate your gratuity with a Free Online Gratuity Calculator, that provides an accurate estimate of your end-of-service benefits in just a few clicks. You can also print the results or export them to excel.

The only situation in which an employee may lose their right to gratuity is when they are dismissed for serious misconduct, as specified under Article 44 of the new UAE Labour Law. In all other cases of standard termination or resignation — provided the required notice is given — employees remain entitled to their full calculated gratuity after completing at least one year of service.

Refer to “New Employment Labour Law 2025″ for comprehensive details on all recent updates, including working hours, leave entitlements, overtime, and other key provisions.

The UAE’s shift to a unified employment contract system has simplified the legal framework for both employers and employees. By eliminating unlimited contracts and standardising gratuity calculations, the law ensures fairness, clarity, and consistency across the private sector. Employees now enjoy transparent end-of-service benefits, while employers benefit from reduced disputes and greater compliance.