Under Article 29 of Federal Decree-Law No. 33 of 2021, full-time private sector employees are entitled to the following annual leave:

30 calendar days of fully paid annual leave for each completed year of service.

2 calendar days per month for employees who have completed more than six months but less than one year of continuous service.

Pro-rated leave for the final year if employment ends before a full year is completed — the employee receives leave (or payment in lieu) proportional to the period worked.

Part-time employees are entitled to annual leave proportional to their actual working hours, calculated in accordance with Article 18 of Cabinet Resolution No. 1 of 2022. The statutory minimum for part-time annual leave is five working days per year.

Three points that employers consistently overlook:

Calendar days, not working days. The 30-day entitlement is expressed in calendar days. This matters when calculating balances and settlements: a month of leave uses 30 days of the calendar, not 22 working days.

Public holidays falling within annual leave. If an official public holiday falls during an employee’s annual leave period, that day counts as part of the leave. The employee is entitled to an additional compensatory day only if the employment contract or company regulations provide for more favourable terms.

Probation-period leave. Employers may grant leave from an employee’s annual balance during probation. If the employee does not pass probation, they retain the right to be compensated for any unused balance from that period.

 

Can Unused Leave Be Carried Forward? The 50% Rule Explained

Yes — but there is a hard cap, and it is lower than most employers and employees realise.

Under Article 19(1) of Cabinet Resolution No. 1 of 2022, an employee may carry forward no more than 50% of their annual leave entitlement to the following year. For a standard 30-day entitlement, this means a maximum of 15 days can be rolled over.

The remaining balance — the days that exceed the 50% threshold — must either be taken before the end of the leave year, encashed at the employee’s request (subject to employer agreement), or settled at termination.

Three conditions govern the carry-forward:

Employer agreement is required. Carry-forward is not automatic. It requires the employer’s agreement and must be in accordance with the company’s internal leave policy. An employee cannot unilaterally roll leave over.

The two-year employer obligation. Article 29(8) of Federal Decree-Law No. 33 of 2021 is unambiguous: an employer may not prevent an employee from taking their accrued annual leave for more than two consecutive years — unless the employee themselves chooses to carry it forward or receive a cash allowance in lieu. This is a protection for the employee, not a licence for the employer. Systematically deferring leave for operational reasons, without either scheduling it or formalising a documented arrangement, places the employer in breach.

Written documentation matters enormously. A verbal agreement to carry leave forward is not documentation. As the 2025 Court of Cassation ruling confirmed, the burden of proof in any dispute lies with the employer. If a carry-forward arrangement exists, it needs to be in writing.

What this means in practice: if an employee has 30 days of accrued leave and the employer agrees to a carry-forward, no more than 15 of those days can move to the following year. The other 15 must be resolved in the current year. A company that informally allows unlimited carry-forward — without written agreement and within the 50% legal cap — is creating unmanaged, undocumented, and likely underestimated leave liabilities.

 

Can Unused Leave Be Encashed During Employment?

Yes, but only under specific conditions and only for the portion of leave that exceeds what the employee takes.

Under Article 19(1) of Cabinet Resolution No. 1 of 2022, an employee may agree with the employer to receive a cash allowance for unused annual leave instead of carrying it forward. This is the in-employment encashment option.

The key conditions:

Employer agreement is required. Encashment during employment is not a unilateral employee right. It must be agreed with the employer and must be in line with company policy.

The calculation basis is the wage at the time of entitlement. The regulation specifies encashment is calculated on “the wage he receives at the time of his entitlement to the leave” — meaning the applicable salary at the time the leave is encashed, not historical salary rates.

This is an exception, not a routine option. The default expectation of the law — reflected in the UAE government’s own guidance — is that leave is taken in the year it is due. Encashment during employment is a mechanism for resolving balances that cannot be taken, not a substitute for giving employees their leave.

What salary is used? During employment, the law refers to “the wage” — which in practice means basic salary plus any fixed allowances specified in the employment contract. This is distinct from the end-of-service encashment rule, where only basic salary applies (see Section 9 below). Employers who use only basic salary for in-employment encashment when fixed allowances should be included risk underpaying entitlements and creating claims at termination.

What about employees who want to encash but the employer refuses? The law does not give employees an absolute right to demand encashment during employment. The employer can decline. In that case, the leave must be scheduled and taken. An employer who neither grants the encashment nor schedules the leave is accumulating a compliance exposure. 

 

What Happens to Unused Leave at End of Service?

When employment ends — whether through resignation, termination, non-renewal, or any other reason — the rules change materially.

Under Article 29(9) of Federal Decree-Law No. 33 of 2021 and Article 19(2) of Cabinet Resolution No. 1 of 2022, an employee who leaves employment before using their accrued annual leave is entitled to receive full cash payment for all outstanding days. This applies:

– Regardless of the number of days accrued

– Regardless of how long the leave has been accumulating

– Regardless of whether the employee resigned or was terminated

– Regardless of whether the employee ever requested to take the leave

This is a statutory entitlement that cannot be contracted away. Company policies that purport to forfeit unused annual leave at resignation, or that cap end-of-service leave settlement at a fixed number of days, are unenforceable against this provision.

The settlement must cover:

– All accrued annual leave for completed years of service

– Pro-rated leave for the fraction of the final year worked

– Any carried-forward balance that has not been taken or previously encashed

The calculation for end-of-service leave payment is on basic salary only — covered in detail in Section 9.

The 14-day settlement requirement. Final settlement — including unused annual leave payment — must be completed within 14 days of the end of the employment relationship. Delay in settling end-of-service entitlements, including leave, can attract MOHRE complaints and regulatory consequences.

 

Can Unused Annual Leave Be Forfeited? The Two-Year Rule — and Its Limits

This is the question that generates the most confusion — and where the legal position is more nuanced than most guides acknowledge.

Forfeiture during employment: effectively no. An employer cannot unilaterally forfeit an employee’s accrued annual leave balance. As Article 29(8) makes clear, the maximum an employer can do is prevent the employee from taking leave for two years — and even that is only permissible if the employee voluntarily chooses to carry it forward or accept encashment. Systematic prevention of leave without a documented employee-agreed arrangement is a breach of statutory obligation.

Forfeiture after departure: the two-year limitation window. 

Article 54(9) of Federal Decree-Law No. 33 of 2021, as amended by Federal Decree-Law No. 9 of 2024, sets a two-year limitation period for claims: litigation concerning any rights accrued under the Labour Law may not be considered after two years from the date of termination of employment.

This is the provision most commonly cited as the basis for leave forfeiture. 

The practical implication: an employee who leaves employment and does not claim compensation for unused annual leave within two years of departure loses the right to pursue that claim through the courts.

But — and this is the critical nuance — the 2025 Abu Dhabi Court of Cassation ruling has complicated the assumption that this two-year window limits the quantum of the claim itself. See Section 8 for the full analysis.

What this means for employers: The two-year limitation period is a procedural rule about when a claim can be filed — not a substantive rule that automatically extinguishes the entitlement after two years of employment. Companies that have been treating the “two-year rule” as an implicit cap on their leave liability — assuming they will only ever owe two years of unused leave — may be carrying a significantly larger unrecorded exposure than they realise.

 

The Landmark 2025 Court Ruling That Changed Everything

In what may prove to be the most significant UAE employment law development of 2025, the Abu Dhabi Court of Cassation issued a ruling in Cassation No. 73/2024 (decided December 2024, publicised widely from mid-2025) that departed sharply from the conventional interpretation of the two-year leave rule.

The facts: An employee worked for the same employer from 2009 until the termination of his contract in June 2022 — a period of 13 years. Upon departure, he claimed he had not taken any of his statutory annual leave throughout his tenure and sought full compensation.

What the lower courts did: Both the Court of First Instance and the Court of Appeal capped the compensation at two years of unused leave — consistent with the traditional judicial interpretation of Article 29(8) as an implicit ceiling on leave liability.

What the Court of Cassation did: The court overturned both lower court decisions and awarded the employee compensation for his full 13-year period of service — a total award of AED 59,290, calculated on his final basic salary.

The legal basis: The Court of Cassation interpreted Article 29(8) not as a cap on employer liability, but as a measure of the employer’s obligation. The provision prohibits employers from preventing employees from taking leave for more than two years. In this case, the employer was unable to produce any documentation — no leave approvals, no usage logs, no records of cash payments in lieu — to demonstrate that leave had ever been granted or settled. The absence of evidence was treated as evidence of absence: the court assumed the full 13-year entitlement remained outstanding.

The significance: As confirmed by Dr Habib Al Mulla, founder of Habib Al Mulla and Partners: the ruling “establishes a significant precedent” in labour disputes related to unused leave in the UAE. The Abu Dhabi Court of Cassation is the highest appeal court in the Emirate and is persuasive on lower courts within Abu Dhabi.

What it means for employers across the GCC:

The burden of proof in any leave dispute lies with the employer — not the employee. Without clear, contemporaneous documentation that leave was taken, approved, or paid out, the courts may assume the full entitlement remains outstanding for the entire employment period. The two-year limit previously applied by lower courts as an implied cap on liability may no longer be reliable — at least in Abu Dhabi, and potentially across the UAE as the ruling’s influence spreads.

A question that remains open: As legal commentators at Mondaq and Morgan Lewis have noted, the implications for Dubai courts are not yet settled. The ruling is authoritative in Abu Dhabi; it is persuasive but not binding in other emirates. Whether Dubai courts adopt the same expansive interpretation under the updated Labour Law remains to be seen. But the directional signal is clear: the judiciary is moving toward stronger employee protections on leave entitlement, and the cost of poor documentation is rising.

 

The Salary Calculation Question Most Employers Get Wrong

There are two different salary benchmarks that apply to annual leave, and confusing them is one of the most common errors in UAE payroll practice.

During employment (taking leave or in-employment encashment): Leave salary is calculated on the employee’s full wage, which in practice means basic salary plus any fixed monthly allowances identified in the employment contract — housing, transport, mobile, and similar components. Many employers, and their contracts, explicitly include fixed allowances in the leave salary calculation. This is the rate applied when calculating what an employee receives during a period of actual leave.

At end of service (settlement of unused leave on departure): Cash compensation for unused annual leave is calculated on basic salary only. Article 19(2) of Cabinet Resolution No. 1 of 2022 is explicit: the settlement is based on “the basic wage.” Allowances are excluded.

The formula most commonly applied is: Daily basic salary rate = Monthly basic salary ÷ 30 Settlement value = Daily basic salary rate × Number of unused leave days

The practical consequence for employers: A company that has been calculating end-of-service leave settlement using total salary — rather than basic salary — has been systematically overpaying. Conversely, a company that has been using a basic salary figure in its WPS (Wage Protection System) Salary Information File that differs from the basic salary recorded in the MOHRE employment contract — a common situation where salary structures have been adjusted without updating MOHRE records — faces a settlement claim based on the higher contractual figure.

The gratuity link. Both end-of-service gratuity and unused annual leave settlement are calculated on basic salary. This means that a company with incorrectly structured salary data carries errors in both calculations simultaneously. A payroll audit that finds a basic salary discrepancy will typically find it in the gratuity liability and the leave settlement liability at the same time.

For a 200-person company with an average basic salary of AED 8,000 and an average unrecorded leave balance of 20 days per employee, the undisclosed settlement exposure runs to more than AED 1 million — before any court proceedings or penalties.

 

What Free Zone Employers Need to Know

The operative question for any free zone employer is not which free zone the company is licensed in. It is what type of work permit the employees carry.

MOHRE-issued labour cards: Employees holding MOHRE-issued work permits — which covers the majority of commercial free zones, including JAFZA, DMCC, IFZA, Dubai South, and RAK free zones — are subject to the full annual leave framework of Federal Decree-Law No. 33 of 2021. All the rules in this guide apply to them in full.

DIFC (Dubai International Financial Centre): Employees holding DIFC-issued employment permits are governed by DIFC Employment Law No. 2 of 2019. Annual leave entitlements under DIFC law broadly mirror the federal framework — 20 to 30 days depending on service length — but the rules on carry-forward, encashment, and calculation differ in detail. DIFC employers also operate the DEWS (Dubai Employee Workplace Savings) plan, which replaces the traditional gratuity model and interacts differently with end-of-service settlement.

ADGM (Abu Dhabi Global Market): Employees under ADGM permits are governed by ADGM Employment Regulations 2019. The GCEN scheme replaces the traditional gratuity model. Annual leave rules are substantively similar but operate under a distinct regulatory framework.

The practical test: If your employees carry MOHRE labour cards, the federal annual leave framework applies regardless of your free zone location. If you are uncertain about which framework governs a specific employee cohort, verify with your free zone authority before the next payroll or settlement cycle. Assuming the wrong framework creates the same exposure as misapplying the correct one. 

 

Where HRMS Systems Fail — and What Good Leave Management Looks Like

The Abu Dhabi Court of Cassation ruling was decided, in large part, on documentation. The employer in Cassation No. 73/2024 could not produce leave approvals, usage logs, or records of cash payouts. The court drew the only available inference: that the entitlement had never been settled.

Most HRMS failures in UAE leave management are not failures of intent. They are failures of system design, data discipline, and process ownership. These are the gaps that appear most consistently:

Leave system and payroll system operating on different data. The HR system shows one balance; the payroll system calculates settlement on different figures; neither has been reconciled to the MOHRE employment contract. When a dispute arises, the employer cannot produce a single authoritative record.

Informal leave approval without system entry. A manager approves leave verbally or by message. The employee is off work. No entry is made in the HRMS. The balance does not reduce. Repeat this across 50 employees over three years, and the unrecorded liability is material.

No carry-forward documentation. A company allows employees to accumulate balances without formal annual carry-forward agreements signed by both parties. When the accumulated balance becomes the subject of a dispute, the employer has no documented basis for the arrangement.

Basic salary in the HRMS differs from the MOHRE contract. The employment contract on MOHRE’s system shows a different basic salary than the HR system uses for leave settlement calculations. The enforceable figure is the contractual one.

No proactive balance monitoring. No process exists to flag employees whose leave balance exceeds a threshold, or who have not taken any leave in 12 months. The obligation to schedule leave proactively — with at least one month’s notice under the Labour Law — is never exercised.

What good leave management looks like in an HRMS context:

A compliant leave management system for UAE employers should track accrual in calendar days, enforce the 50% carry-forward cap automatically, generate written carry-forward or encashment records for each agreement, reconcile leave balances with payroll records at each cycle, flag employees exceeding accumulation thresholds, and maintain a complete, timestamped audit trail of every leave event — approval, cancellation, encashment, and settlement.

The system should not require an HR manager to remember the carry-forward rules or manually calculate proportional entitlements for leavers. These are compliance-critical calculations that need to be automated, auditable, and aligned to the correct salary data.

 

Annual Leave Compliance Checklist for UAE Employers

Use this to audit your current leave management setup against UAE legal requirements.

Entitlement and Accrual 

☐ All employees registered with correct service start dates and contractual basic salary in the HRMS 

☐ Leave accrual set at 2 calendar days per month for months 7–12 of service; 30 calendar days per year from completion of Year 1 

☐ Part-time employee leave calculated proportionally on actual contracted working hours 

☐ Probation-period leave tracked separately and reflected in records on departure

Carry-Forward 

☐ Carry-forward capped at 50% (maximum 15 days from a 30-day entitlement) per leave year 

☐ Every carry-forward arrangement documented in writing, signed by both employer and employee 

☐ No employee prevented from taking annual leave for more than two consecutive years without a documented, employee-initiated deferral agreement 

☐ Leave scheduling communicated to employees at least one month in advance where employer is determining the dates

Encashment During Employment 

☐ In-employment encashment agreed in writing and calculated on basic salary plus applicable fixed allowances 

☐ Encashment treated as an exception, not a substitute for granting leave 

☐ No in-employment encashment at a rate below the employee’s current applicable wage

End-of-Service Settlement 

☐ All unused annual leave settled within 14 days of termination of employment 

☐ Settlement calculated on basic salary only — allowances excluded 

☐ Settlement covers all accrued years, including carried-forward balances not previously settled 

☐ Pro-rated leave for the final partial year calculated correctly on calendar days worked

Documentation and Systems 

☐ Leave balances in HRMS reconciled with payroll records — same figure in both systems 

☐ Basic salary in HRMS leave module matches basic salary in MOHRE employment contract 

☐ Complete audit trail of every leave approval, cancellation, and settlement maintained in the system 

☐ Employees with balances exceeding 20 days flagged for proactive scheduling review 

☐ Employees who have not taken any leave in 12 months flagged for mandatory scheduling 

☐ Written records retained for a minimum period consistent with the two-year claims limitation window (practical recommendation: retain for at least three years post-departure)

 Free Zone-Specific 

☐ Work permit type confirmed — MOHRE-issued or free zone authority-issued — for all employee cohorts 

☐ DIFC/ADGM employers: annual leave framework confirmed under applicable local employment law 

☐ DEWS or GCEN contributions confirmed current where applicable

How GulfHR Can Help

Managing annual leave is not just about tracking balances anymore. Poor leave records, undocumented carry-forward arrangements, and incorrect calculations can create costly compliance risks for employers.

With GulfHR, organisations can automate leave management, maintain accurate employee records, streamline approvals, and align leave data with payroll and end-of-service calculations—all from a single HRMS platform.

Ready to Simplify Leave Compliance?

Whether you are reviewing your leave policies, improving payroll accuracy, or reducing compliance risk, GulfHR can help.

Book a free demo today and discover how GulfHR simplifies HR, payroll, leave management, and compliance across the GCC.

📧 sales@gulfhr.ae
🌐 www.gulfhr.ae

 

Frequently Asked Questions

Q: How many days of annual leave is an employee entitled to in the UAE? 

Private sector employees registered with MOHRE are entitled to a minimum of 30 calendar days of fully paid annual leave per completed year of service under Article 29 of Federal Decree-Law No. 33 of 2021. Employees who have completed more than six months but less than one full year earn two calendar days per month of service.

Q: How much unused leave can be carried forward in the UAE? 

Under Article 19(1) of Cabinet Resolution No. 1 of 2022, an employee may carry forward a maximum of 50% of their annual leave — up to 15 days from a standard 30-day entitlement. Carry-forward requires employer agreement and must be in writing. The employer may not prevent the employee from taking their leave for more than two consecutive years.

Q: Can annual leave be encashed during employment in the UAE? 

Yes, but only with employer agreement and subject to company policy. Encashment during employment is calculated on the wage at the time of entitlement — which includes basic salary and fixed monthly allowances. It is not a unilateral employee right.

Q: What salary is used to calculate unused annual leave settlement at end of service? 

End-of-service settlement for unused annual leave is calculated on basic salary only, as specified in Article 19(2) of Cabinet Resolution No. 1 of 2022. Allowances — housing, transport, mobile, and similar components — are excluded from the end-of-service calculation.

Q: Can unused annual leave be forfeited in the UAE? 

Not during employment. An employer cannot unilaterally forfeit accrued annual leave. After termination, Article 54(9) of Federal Decree-Law No. 33 of 2021 (as amended) sets a two-year limitation period for pursuing a claim — but as the 2025 Abu Dhabi Court of Cassation ruling confirmed, the burden of proof lies with the employer to demonstrate that leave was taken or settled. Without documentation, courts may award full compensation for the entire employment period.

Q: Who bears the burden of proof in an annual leave dispute? 

The employer. This was confirmed by the Abu Dhabi Court of Cassation in Cassation No. 73/2024. If the employer cannot document that leave was taken, approved, or paid out, the court may assume the full entitlement remains outstanding. This applies regardless of the length of service.

Q: What was the Abu Dhabi Court of Cassation’s ruling on 13 years of unused leave? 

In Cassation No. 73/2024, decided December 2024, the Abu Dhabi Court of Cassation ruled that a former employee was entitled to compensation for 13 years of unused annual leave — overturning lower courts that had capped the award at two years. The ruling was based on the employer’s failure to produce any documentation of leave taken or paid out. The total award was AED 59,290. Legal experts including Dr Habib Al Mulla have confirmed this sets a significant precedent, at minimum in Abu Dhabi.

Q: Does the annual leave framework apply to free zone employees? 

It depends on the work permit type. MOHRE-issued labour card holders in commercial free zones (JAFZA, DMCC, IFZA, and others) are subject to the full federal annual leave framework. Employees holding permits from DIFC or ADGM are governed by those authorities’ own employment legislation.

Q: What is the deadline for settling unused leave at end of employment? 

Final settlement — including unused annual leave — must be completed within 14 days of the end of the employment relationship. Delays can attract MOHRE complaints and regulatory consequences.

Q: Does an HRMS system help with annual leave compliance in the UAE? 

Yes — but only if it is correctly configured. A compliant HRMS should enforce the 50% carry-forward cap, generate written carry-forward records, reconcile leave balances with payroll data, maintain a complete audit trail, and flag accumulation risks proactively. Systems that require manual override for these calculations, or that do not produce auditable leave records, create compliance exposure rather than resolving it. 

 

References:

1. Federal Decree-Law No. 33 of 2021 on the Regulation of Labour Relations — Primary legislation governing UAE private sector annual leave. Articles 29 (annual leave entitlement, carry-forward, employer obligations) and 54(9) (two-year limitation period). Available at: uaelegislation.gov.ae

2. Cabinet Resolution No. 1 of 2022 — Executive Regulations of Federal Decree-Law No. 33 of 2021. Article 18 (part-time leave) and Article 19 (carry-forward and encashment rules). Available at: uaelegislation.gov.ae

3. UAE Official Government Portal — Annual Leave guidance: u.ae/en/information-and-services/jobs/employment-in-the-private-sector/types-of-leaves-and-entitlements-in-the-private-sector/annual-leave

4. MOHRE Guidance and Awareness Portal: mohre.gov.ae/en/guidance-and-awareness-portal-new/employee-companies/dear-worker-know-your-rights

6. Abu Dhabi Court of Cassation — Cassation No. 73/2024 (Labour): Reported by Morgan Lewis (August 2025): “Abu Dhabi Court of Cassation Ruling: A Significant Shift in Annual Leave Rights” — morganlewis.com/blogs/shiftingsandsoflaborlaw

7. Emirates 24|7 — UAE Annual Leave Rules: Can Unused Leave Be Carried Forward, Encashed or Forfeited? (June 2026): emirates247.com

8. Khaleej Times — UAE: Can I Carry Forward 45 Days of Annual Leave Accumulated Over 3 Years? (September 2023, Ashish Mehta & Associates): khaleejtimes.com

9. Gulf News — UAE Labour Law’s Two-Year Rule Under Spotlight in Commission Case (October 2025): gulfnews.com/uae/ask-the-law