Calculation of gratuity amounts may be difficult and complicated. To help you to simplify the process, we’ve produced a guide on how to calculate gratuity in the UAE.
It is inevitable for employees to leave their jobs at some point. Reasons for leaving could include retirement, moving, or just the desire to take on new challenges and possibilities. According to UAE labor legislation, businesses must give employees an end-of-service gratuity when their employment contract ends, regardless of the reason.
What is Gratuity?
A gratuity is money that an employer is legally required to provide for an employee when they leave the company. Gratuity is also known as end-of-service benefits. In short, it’s an act of appreciation for all the work they performed while they worked for the company.
The employee’s monthly basic pay determines how much of a gratuity is due. It is typically given out at retirement, although depending on the terms and conditions of the organization, it may be claimed prior to that time. According to the UAE Labor legislation, if an employee fulfills all the requirements specified in the legislation, they are eligible for a gratuity after working for a company.
Who is Eligible for Gratuity in UAE?
Not every employee is eligible to receive gratuity payments under UAE labor law. Gratuity benefits are only applicable if the following requirements are fulfilled:
- A labor contract, either unlimited or limited, should be in effect for employment.
- The worker needs to have been employed by the same company for a minimum of one year.
- If an employee with an unlimited contract quits before the notice period has expired, cannot produce documentation of the employer’s breach of legal obligations, or cannot establish that the employer or its agents assaulted them, they may not be eligible for the end-of-service benefit.
- Both expatriates and UAE nationals are eligible for gratuity.
- One may not be eligible for the gratuity payment if an employee is fired under Article 120 of the UAE Labour Law, specifically for failing to comply with the provisions of the Article.
Factors to Consider for Gratuity Pay Calculation
Type of Contract
In the UAE, limited and unlimited employment contracts are the two most common forms. While the two contracts are identical, there are differences in the guidelines for determining gratuities for each form of contract, which we shall go into more depth about below.
- Limited Contract
Contracts with a defined term or duration, known as limited-term or fixed contracts, are commonly used by employers to engage workers for projects or times. The beginning and ending dates of the job term are expressly stated in this kind of contract.
Unless it is consciously renewed, the contract is automatically terminated when it expires. For example, employees recruited specifically for a project would leave the workplace after the project is finished.
- Unlimited Contracts
An unlimited-term contract, in contrast to a limited contract, is more flexible and open-ended, with no set number of years that the employee must be employed by the organization.
It can be dissolved with mutual consent or a notice period of one to three months from either party. It is often the more commonly used form of contract in the UAE. All parties involved are expected to fulfill their obligations during the notice period.
Duration of Employment
Employees who have worked for the company for a minimum of a year are eligible to receive a gratuity payment under the UAE Labour Law.
Extended leaves, like sabbaticals, are not included in the tenure calculation, which is based on the actual number of days worked. This is because the gratuity calculation assumes that employees will work continuously from the first to the last working day.
According to the UAE Ministry of Human Resources and Emiratization (MoHRE), an employee’s one-year work term cannot include any unpaid breaks or holidays.
Last Basic Salary
Only the last basic wage an employee received before their contract was terminated is considered when determining end-of-service benefits in the United Arab Emirates. Any additional benefits or allowances that an employee may have received are not included in the base salary.
Additionally, the basic pay does not include any additional deductions from one’s salary, such as salary sacrifice plans.
Gratuity Calculation for Limited Contracts
An expat employee who resigned or got terminated after working less than a year on their employment contract will not be entitled to any gratuity compensation. Consequently, the payment tiers are divided into:
- 1 to 5 years of employment
- Over 5 years of employment
If you resign or get terminated before one year of service, you are not eligible for gratuity payments.
Employees who have worked for 1 to 5 years are entitled to a gratuity based on 21 days’ basic salary for each year of service.
Gratuity = (21 days X Basic Salary X Service Years) / 30
Workers with 5 years or more of service are eligible for a gratuity that is based on 21 days of basic salary for the first 5 years and an additional 30 days of salary for each year beyond the five-year mark.
Gratuity = (30 days X Basic Salary X Service Years) / 30
Note: Regardless of length of service, in all previously described cases, the total gratuity an employee receives should not exceed two years of their entire income, based on the basic salary.
Gratuity Calculations for Unlimited Contracts
The amount of the gratuity for workers with unlimited contracts varies based on whether they are resigned or terminated for misbehavior or underperformed. Here, too, the tiers are determined by the length of service:
- 1 to 3 years of service
- 3 to 5 years of service
- 5 or more years of service
If an employee is terminated, then following 2 tiers are applied:
- 1 to 5 years of service
- 5 or more years of service
There is a slight difference in the formulas used to calculate gratuities for limited and unlimited contracts when an employee under an unlimited contract resigns or terminates.
As previously stated, based on the length of their service, they are only eligible for ⅓ or ⅔ of the gratuity payouts.
For 1-3 years of service, the gratuity consists of 1/3rd of their basic salary of 21 days for each year of service.
Gratuity = (7 days X Basic Salary X Service Years) / 30
For 3-5 years of service, the gratuity consists of 2/3rd of their basic salary of 21 days for each year of service.
Gratuity = (14 days X Basic Salary X Service Years) / 30
After 5 years or more of service, the gratuity consists of their complete basic salary of 21 days for each year of service.
Gratuity = (21 days X Basic Salary X Service Years) / 30
For employees who have worked for more than 5 years, their gratuity consists of their basic salary of 21 days for up to their 5th year of service. For every year after their 5th year, 30 days’ basic salary is counted.
Gratuity = (30 days X Basic Salary X Service Years) / 30
Contract lengths are now restricted to five years as per the latest UAE Labor Law. A 21-day salary is considered for every year of service, and the gratuity is calculated based on the employee’s basic pay. But if a worker has worked for more than five years, the gratuity is computed using thirty days of the person’s basic pay for each additional year.
Use the UAE Gratuity Calculator launched by Dubai Development Authority (DDA) to calculate your gratuity as per the prevailing laws in UAE.
The UAE’s dedication to assisting its workers and guaranteeing equitable pay practices is seen in the provision of gratuity services. The UAE can continue to retain talent and raise employee satisfaction by making improvements to the legal framework and upholding open procedures, which will ultimately help the country’s economy as a whole. If you have any queries regarding Gratuity and it’s calculation, get in touch with TCA Worldwide.
