How to Calculate Gratuity in the UAE

The United Arab Emirates (UAE) provides a statutory end-of-service gratuity for private sector employees, acting as a financial benefit upon the completion of their service. This system ensures employees receive a lump sum payment. This gratuity is a legal right, not a discretionary bonus, and is governed by specific provisions within the UAE Labour Law. It serves as a financial cushion, particularly for expatriates who may not have access to long-term social security benefits within the country.

Eligibility for Gratuity

To qualify for end-of-service gratuity under UAE labor law, an employee must complete at least one year of continuous service with the same employer. If an employee resigns or is terminated before reaching this one-year mark, they are generally not entitled to gratuity.

The type of employment contract held by an employee, whether limited or unlimited, influences eligibility and the calculation of gratuity upon resignation or termination. Under the current Federal Decree-Law No. 33 of 2021, an employee who has completed one year or more of continuous service is entitled to the full amount of gratuity, regardless of whether they resign or are terminated, provided there is no gross misconduct.

However, certain circumstances can lead to the forfeiture of gratuity. Employees dismissed for gross misconduct, as defined by the UAE Labour Law, lose their entitlement to gratuity. Examples of gross misconduct include theft, violence, serious breaches of confidentiality, or repeated policy violations after warnings. Additionally, periods of absence from work without pay are not included when calculating the period of service.

Components of Gratuity Calculation

The calculation of end-of-service gratuity is based on elements defined by the labor law. The most significant component is the employee’s basic salary. Gratuity is calculated solely on this basic salary, excluding allowances such as housing, transportation, utilities, commissions, or bonuses. The basic salary refers to the base amount stipulated in the employment contract.

Another factor is the period of service, which is determined from the employee’s start date to their end date. The law considers continuous service, and partial years are calculated proportionally. For instance, if an employee has served for a fraction of a year beyond a full year, that fraction will be included in the calculation.

While Federal Decree-Law No. 33 of 2021 has standardized many aspects, the previous distinction between limited and unlimited contracts historically influenced the rate of gratuity accrual or the amount payable upon specific termination events. However, the specific formulas applied for different service periods remain a key aspect of the calculation process.

Specific Calculation Scenarios

The general formula for gratuity calculation involves a tiered approach based on the length of service. For the first five years of service, an employee is entitled to 21 days’ basic salary for each year. For any subsequent years beyond the initial five, the entitlement increases to 30 days’ basic salary for each additional year. It is important to note that the total gratuity payment cannot exceed two years’ worth of the employee’s basic salary.

For employees on unlimited contracts, if termination is initiated by the employer without cause, the employee is entitled to the full gratuity based on the general formula. If an employee resigns under an unlimited contract, the gratuity entitlement traditionally varied: one-third of the full gratuity for service between one and three years, two-thirds for service between three and five years, and full gratuity after five years of service. However, recent updates emphasize that after one year of continuous service, the employee is entitled to the full amount regardless of resignation or termination, unless for gross misconduct.

For limited contracts, if the employer terminates the contract, the employee is entitled to full gratuity based on the standard calculation. If an employee resigns from a limited contract before its completion, they may not be entitled to gratuity unless their service exceeds five years, in which case they would receive full gratuity.

Consider an example: an employee with a basic salary of AED 10,000 is terminated by the employer after 6 years of service.
For the first 5 years: (AED 10,000 / 30 days) 21 days 5 years = AED 35,000.
For the 6th year: (AED 10,000 / 30 days) 30 days 1 year = AED 10,000.
The total gratuity would be AED 35,000 + AED 10,000 = AED 45,000.

In another scenario, an employee with a basic salary of AED 8,000 resigns after 2 years of service under an unlimited contract. Under the updated law, if eligible, the calculation would be:
(AED 8,000 / 30 days) 21 days 2 years = AED 11,200. This reflects the standard 21 days’ pay per year for service under five years.

Payment and Deductions

Upon the termination of an employment contract, the end-of-service gratuity and all other final entitlements must be paid to the employee within 14 days of their last working day. This timeframe is a legal requirement. Failure to adhere to this payment timeline can lead to legal action against the employer.

Employers are permitted to make deductions from the gratuity amount. These deductions include outstanding loans or advances the employee owes to the company, or compensation for damages caused to company property. Any such deductions must be legally permissible and properly documented to ensure transparency and compliance with labor regulations.

The gratuity payment forms part of the employee’s broader final settlement. This settlement usually includes unpaid salaries, accrued but unused annual leave pay, and other financial dues as per the employment contract and labor law. The process ensures complete financial closure for the employee.