Unlimited vs limited contract gratuity after the 2022 reform: what actually changed

Key Takeaways

• Unlimited employment contracts no longer exist in the UAE: Federal Decree-Law No. 33 of 2021, in force since 2 February 2022, abolished the unlimited contract entirely, leaving only fixed-term (limited) contracts.
• Employers had one year from the law's commencement to convert any existing unlimited contracts to fixed-term contracts.
• The initial fixed-term cap of three years, set when the law was first issued, was itself removed by Federal Decree-Law No. 14 of 2022, so a "limited" contract today can run for any agreed term, not just up to three years.
• The bigger gratuity change isn't the contract type at all: the new law removed the old reduction that applied when an employee (not the employer) ended an unlimited contract early, a penalty that used to cut the gratuity payout for resigning employees under certain conditions.

Businesses still asking "should we use a limited or unlimited contract for gratuity purposes" are asking about a distinction that hasn't existed in UAE law since February 2022. The reform that actually matters for gratuity isn't the contract-type question, it's a separate change buried inside the same law: the removal of a penalty that used to reduce gratuity for employees who resigned rather than being terminated.

The unlimited contract is gone, not just discouraged

Federal Decree-Law No. 33 of 2021, the New Labour Law, took effect on 2 February 2022 and abolished unlimited contracts completely, leaving only fixed-term contracts available to UAE employers (Mondaq, unlimited employment contract removed from Federal Labour Law No. 33, retrieved 2026-09-08). Employers were given one year from the law's commencement to convert any existing unlimited contracts into fixed-term ones, so by early 2023 the conversion window had already closed, and any UAE employment contract issued since is, by definition, a limited (fixed-term) contract.

The cap that used to define "limited" contracts no longer applies either

When the law was first issued, fixed-term contracts were capped at a maximum of three years. That cap was itself removed shortly after: Federal Decree-Law No. 14 of 2022, issued 15 September 2022, amended Article 3(8) of the New Labour Law by removing the specified three-year maximum, allowing fixed-term contracts of any agreed length (Mondaq, retrieved 2026-09-08). So a "limited" contract today doesn't actually mean a short or capped one, it can run indefinitely by agreement, and functionally resembles what an unlimited contract used to look like, just under a different legal label with different termination and gratuity mechanics.

The gratuity change that actually matters

Under the previous labour law, an employee who resigned from an unlimited contract before completing a set minimum tenure faced a reduced gratuity payout, a penalty structure specifically for employee-initiated early termination. The New Labour Law removed that reduction: departing from the earlier position, gratuity is no longer cut when the employment ends at the employee's own initiative rather than the employer's (HR SG Online, limited vs unlimited contract in UAE, retrieved 2026-09-08). This is the change with real financial consequence for both sides: an employee resigning today, under any current (necessarily fixed-term) contract, is no longer subject to the old penalty structure that used to make resigning early materially more expensive to the employee than being terminated.

For an employer, this closes off what used to be a modest natural disincentive against employee-initiated resignation and replaces it with a flatter, more predictable gratuity calculation that doesn't depend on who initiated the termination, only on tenure and salary, per the standard 21-day/30-day formula. Run any current employee's tenure and basic salary through the UAE gratuity calculator using the post-2022 rules, since a calculation built on the old employer/employee-initiated distinction will now overstate a reduction that no longer applies.

What this means for a business still running old-style contract logic

Any UAE business whose HR or payroll processes still distinguish between "limited" and "unlimited" contracts for gratuity purposes, or that still applies an early-resignation gratuity reduction, is running on rules that were superseded in 2022. The practical fix is straightforward: confirm that every active contract is correctly classified as fixed-term (since that's the only type that legally exists now), and confirm the gratuity calculation logic doesn't apply the old resignation penalty, regardless of what the contract itself may still say if it predates the reform and was never formally updated. Auditing that logic is easiest done inside the actual system running the calculations, so route the fix through payroll rather than treating it as a one-off manual correction.

Frequently asked questions

Can a UAE employer still offer an unlimited contract today?

No. Unlimited contracts were abolished by Federal Decree-Law No. 33 of 2021, effective 2 February 2022. All UAE employment contracts issued since are fixed-term (limited) contracts, regardless of their actual length.

Is there still a maximum length for a fixed-term contract?

No. The original three-year cap was removed by Federal Decree-Law No. 14 of 2022, so a fixed-term contract can now run for any length agreed between employer and employee.

Does an employee who resigns still get less gratuity than one who's terminated?

No, not under current law. The New Labour Law removed the previous reduction that used to apply when an unlimited contract was ended by the employee rather than the employer. Gratuity today is calculated the same way regardless of who initiated the termination, based purely on tenure and basic salary.

The bottom line

The unlimited-vs-limited contract distinction is a solved question, there's only one contract type now, and any old contract still labelled "unlimited" should have been converted years ago. The gratuity question worth actually checking is whether payroll logic still applies the pre-2022 resignation penalty, since that's the piece of the old system that's genuinely gone, not just renamed.

Figures were verified on 8 September 2026 against Federal Decree-Law No. 33 of 2021 and Federal Decree-Law No. 14 of 2022 as reported by UAE legal and HR advisory sources. Confirm current contract classifications and gratuity calculation logic against up-to-date MOHRE guidance or qualified UAE labour counsel before relying on this for a specific employee's payout.