UAE Gratuity Calculation for Limited Contracts (Fixed-Term)

If you're working in the UAE under a limited (fixed-term) contract, knowing exactly how your end-of-service gratuity is calculated can save you from a nasty surprise when your contract ends. Since the UAE's labour reforms phased out unlimited contracts in favour of fixed-term agreements, the calculation rules have become more standardized — but they're still widely misunderstood. This guide breaks down eligibility, the exact formula, worked examples, the legal payout cap, and the most common mistakes employees make.

What Is a Limited (Fixed-Term) Contract?

A limited contract is an employment agreement with a defined start and end date that can be renewed by agreement, under current UAE Labour Law (Federal Decree-Law No. 33 of 2021). The law required employers to convert previously unlimited contracts into fixed-term contracts within a year of it taking effect in February 2022 (the Minister may extend that period), so the vast majority of private-sector employees in the UAE are now on limited contracts, regardless of what their older paperwork says.

Am I Eligible for Gratuity?

Under a limited contract, you become eligible for gratuity once you complete at least one full year (365 days) of continuous service with the same employer. A few points worth knowing:

• Less than 1 year of service: No gratuity is payable, regardless of whether you resigned or were terminated.
• Basic salary only: Gratuity is calculated strictly on your last drawn basic salary — allowances like housing, transport, and medical are excluded from the calculation entirely.
• Unpaid leave deductions: Any days taken as unpaid leave during your service are deducted from your total days of service before the calculation is made.
• Resignation no longer reduces your gratuity. Under the current law, resigning after completing at least one year of service entitles you to your full gratuity calculation — the older rule that reduced payouts for resigning employees under unlimited contracts no longer applies. See our detailed guide on Resignation vs. Termination and Your Gratuity Payout for more on this.

The Gratuity Formula for Limited Contracts

The calculation depends on how many total years you've worked. For a simpler walkthrough of the same formula, see our guide on How UAE Gratuity Is Calculated.

For Service Between 1 and 5 Years

You're entitled to 21 days of basic salary for each year of service:

Gratuity = (Basic Salary / 30) × 21 × Years of Service

For Service Beyond 5 Years

You're entitled to 21 days of basic salary per year for the first 5 years, and 30 days of basic salary for every additional year beyond that:

Gratuity = ((Basic Salary / 30) × 21 × 5) + ((Basic Salary / 30) × 30 × (Total Years − 5))

Worked Examples

Example 1 — 3 years of service: An employee with a basic salary of AED 6,000 who completes exactly 3 years of service:

Gratuity = (6,000 / 30) × 21 × 3 = 200 × 21 × 3 = AED 12,600

Example 2 — 8 years of service: An employee with a basic salary of AED 8,000 who completes 8 years of service:

First 5 years: (8,000 / 30) × 21 × 5 = 266.67 × 21 × 5 = AED 28,000
Remaining 3 years: (8,000 / 30) × 30 × 3 = 266.67 × 30 × 3 = AED 24,000
Total Gratuity = AED 28,000 + AED 24,000 = AED 52,000

Important Legal Cap

⚠️ Total Payout Limit: Regardless of how the formula works out, your total gratuity payout cannot exceed the equivalent of two years' wage. Very long-tenured employees are the ones most likely to actually hit this cap in practice. Note that the law defines "wage" to include allowances, while your gratuity itself is calculated on your basic wage.

Limited vs. Unlimited Contracts: Does It Still Matter?

Under the current law, the gratuity formula is the same for everyone: 21 days of basic salary per year for the first five years and 30 days after that. The main practical differences between contract types relate to notice periods, early termination compensation, and contract renewal terms. However, Article 68 of the law allows an employer, when adjusting an old unlimited contract, to calculate end-of-service benefits under the old law's provisions. So if your contract is a legacy unlimited contract, ask HR in writing how your service is being calculated, and confirm with MOHRE if you disagree. Our guide on gratuity for unlimited contracts explains this in more detail.

Common Mistakes Employees Make

• Including allowances in the calculation. Housing and transport allowances feel like part of your "real" salary, but they're legally excluded from the gratuity formula.
• Forgetting to deduct unpaid leave days. If you took extended unpaid leave at any point, your total qualifying service days shrink accordingly.
• Assuming the cap doesn't apply to them. Long-service employees with high basic salaries sometimes expect a bigger number than the two-year cap actually allows.
• Not checking whether their final basic salary was used. Gratuity is based on your last drawn basic salary, not an average across your years of service — a recent promotion or salary cut changes your entire calculation.

What to Do Before You Sign Your Final Settlement

Before accepting your final settlement figure, calculate your own expected gratuity using the formula above so you can compare it against what your employer offers. Our UAE Gratuity Calculator does this instantly — just enter your basic salary and your first and last working day to get an estimate. If the numbers don't match what your employer is offering, don't sign until you've raised the discrepancy, and if it isn't resolved, you can escalate the matter through MOHRE. See our guide on What to Do If Your Employer Doesn't Pay Your UAE Gratuity for the exact process to follow.

It's also worth knowing your rights don't disappear the moment you leave the company — but they aren't unlimited either. If your employer is going through financial difficulty, see our guide on UAE Gratuity and Company Bankruptcy to understand how insolvency affects your payout.

Frequently Asked Questions

Do I need to complete a full year to get any gratuity under a limited contract?

Yes. If you leave or are terminated before completing 365 days of continuous service, no gratuity is payable, regardless of the reason for leaving.

Does resigning reduce my gratuity under a limited contract?

No. Under the current UAE Labour Law, resigning after completing at least one year of service entitles you to your full gratuity calculation. The older reduced-payout rule for resignation no longer applies.

Are housing and transport allowances included in the gratuity calculation?

No. Gratuity is calculated solely on your last drawn basic salary. Allowances and bonuses mentioned in your labour contract are excluded from the final calculation.

Is there a maximum amount of gratuity I can receive?

Yes. Total gratuity payable cannot exceed the equivalent of two years' wage.

Can my employer legally withhold my gratuity?

The law allows an employer to deduct from end-of-service benefits amounts payable under the law or a court judgment, under the conditions set by the Implementing Regulation. For how misconduct dismissals are treated, see our Article 44 guide.

How is gratuity different between limited and unlimited contracts today?

Under the current law the formula is the same for both. Differences mostly relate to notice periods and early termination terms. However, Article 68 allows an employer to calculate under the old law's provisions for legacy unlimited contracts, so confirm with HR which calculation applies to you.

Disclaimer: This article is for general informational purposes and reflects UAE Labour Law as of 2026. It is not legal advice — for large or disputed settlements, confirm current rules directly with MOHRE or a licensed UAE labour lawyer.