Gratuity, also known as the end-of-service benefit, is a lump sum paid to employees when they leave a company after a certain period of employment. In the UAE, gratuity is regulated by the Federal Law No. 8 of 1980 (UAE Labour Law), and it serves as a financial reward for employees’ dedication and service. This guide will walk you through the process of calculating gratuity in the UAE and address common questions regarding this benefit.
Calculating Gratuity: The Basics
Gratuity is calculated based on an employee’s last drawn basic salary and the duration of service. The calculation method varies depending on the nature of the employment contract (limited or unlimited) and the reason for termination.
1. For Limited Contracts:
A limited contract has a specific start and end date. Here’s how to calculate gratuity for limited contracts:
- Completion of Contract:
- Less than 1 year of service: No gratuity is payable.
- 1 to 5 years of service: 21 days of basic salary for each year of service.
- More than 5 years of service: 21 days of basic salary for each of the first five years, and 30 days of basic salary for each subsequent year.
- Early Termination by Employee:
- The employee might not be entitled to gratuity, or the gratuity can be reduced based on the terms of the contract and the reason for early termination.
- Termination by Employer:
- If terminated for a valid reason (as per Article 120 of the Labour Law), the employee is not entitled to gratuity. Otherwise, the standard gratuity calculation applies.
2. For Unlimited Contracts:
An unlimited contract has no defined end date. The gratuity calculation for unlimited contracts is as follows:
- Resignation:
- Less than 1 year of service: No gratuity is payable.
- 1 to 3 years of service: 1/3 of 21 days of basic salary for each year of service.
- 3 to 5 years of service: 2/3 of 21 days of basic salary for each year of service.
- More than 5 years of service: 21 days of basic salary for each of the first five years, and 30 days of basic salary for each subsequent year.
- Termination by Employer:
- Standard gratuity calculation applies unless termination is for a valid reason under Article 120.
Step-by-Step Gratuity Calculation
- Determine the Basic Salary:
- Identify the employee’s last drawn basic salary (excluding allowances and bonuses).
- Calculate the Gratuity for Each Year:
- For the first 5 years: (Basic Salary / 30) * 21
- For subsequent years: (Basic Salary / 30) * 30
- Apply Pro-Rata for Partial Years:
- If the employee has worked for partial years, calculate the gratuity proportionately.
- Sum Up the Amounts:
- Add up the gratuity amounts for all years of service.
Link: Gratuity calculator for companies
Link: Gratuity calculator for Free Zone Companies
Example Calculation
Let’s say an employee with a basic salary of AED 10,000 has worked for 7 years:
- For the first 5 years:
- Gratuity per year = (10,000 / 30) * 21 = AED 7,000
- Total for 5 years = 7,000 * 5 = AED 35,000
- For the next 2 years:
- Gratuity per year = (10,000 / 30) * 30 = AED 10,000
- Total for 2 years = 10,000 * 2 = AED 20,000
- Total Gratuity:
- AED 35,000 + AED 20,000 = AED 55,000
FAQs About Gratuity in the UAE
Q1. Can gratuity be forfeited?
- Yes, gratuity can be forfeited if an employee is terminated for valid reasons under Article 120 of the UAE Labour Law.
Q2. Are allowances included in the basic salary for gratuity calculation?
- No, gratuity is calculated based on the basic salary only, excluding allowances and bonuses.
Q3. Is gratuity calculated differently for domestic workers?
- Yes, domestic workers are subject to different regulations under the Domestic Workers Law.
Q4. What happens if the employer does not pay gratuity?
- Employees can file a complaint with the Ministry of Human Resources and Emiratisation (MOHRE) to resolve disputes regarding gratuity payments.
Q5. Can an employee receive gratuity if they resign before completing a year?
- No, employees are not entitled to gratuity if they resign before completing one year of service.
Q6. Is gratuity affected by unpaid leave?
- Unpaid leave does not count towards the service period for gratuity calculation.
Understanding how to calculate gratuity ensures that employees receive their rightful end-of-service benefits and helps employers comply with UAE Labour Law regulations. For specific cases and further assistance, consulting with a legal expert or the MOHRE is recommended.
