How to Calculate End of Service Gratuity for Employees in the UAE

The labor market in the UAE, like many other countries, can be quite volatile, and high employee turnover is not uncommon. Therefore, it is essential for employers and employees alike to have a good understanding of the UAE labor law, including the rules and regulations surrounding employment contracts, termination, and end-of-service payments.

In particular, calculating end-of-service payments or gratuity can be a somewhat confusing process, as it involves a number of variables, such as the length of an employee’s service, their salary, and whether they are leaving voluntarily or involuntarily. To help make sense of this process, Caterer Middle East has provided a helpful guide outlining the steps involved in calculating gratuity payments for employees in the UAE.

Update on Gratuity for 2023

In the UAE Labour Law, there are various types of employment contracts, but it recognizes two main types: limited-term contracts and unlimited-term contracts. The distinction between these contracts lies in their conditions for termination and end-of-service gratuity.

Limited-term Contracts

Limited-term contracts have a start and end date, and they automatically end when the specified period is over, unless the employer renews the contract. These contracts are usually used when the employer needs employees for a specific project or period.

Unlimited Term Contract

An unlimited term contract is a more flexible and commonly used type of contract in the UAE, as it has no fixed end date. It can be terminated by mutual consent or by providing a notice period of one to three months, during which both parties must fulfill their obligations.

How is Gratuity Calculated in the UAE?

When it comes to calculating gratuity pay in the UAE, the amount is based on the basic salary or wage paid to the employee, excluding any bonuses or allowances. To simplify this process, the Dubai Development Authority has created a user-friendly gratuity calculator that requires you to input your start and end dates of employment, along with your basic salary.

Who is not eligible for gratuity pay in the UAE?

If an employee voluntarily resigns before completing one year of service, they are not entitled to any gratuity pay. However, if the employee completes one year of continuous service, they can receive gratuity payment for the served fraction of the year.

End-of-service gratuity is calculated based on the employee’s last entitled wage, typically their basic salary. This amount does not include additional allowances such as housing, transportation, utilities, furniture, etc.

Employers have the right to deduct any outstanding amounts owed by the employee from their gratuity payment. It is important for employees to settle any outstanding debts with their employer before leaving to avoid deductions from their gratuity.

How is Gratuity Pay Calculated?

Limited contract

An employee who has served continuously for one year or more is eligible for end-of-service gratuity upon the termination of their employment. The period of absence from work without pay will not be considered while calculating the duration of service. The gratuity amount will be calculated based on the following formula:

Employees who have served for more than one year but less than five years are entitled to full gratuity pay based on 21 days’ salary for each year of work.
Employees who have served for more than five years are entitled to full gratuity pay of 30 days’ salary for each year of work following the first five years.

The gratuity amount, in any case, should not exceed the salary/wage of two years.

Unlimited Contract

If an unlimited contract is terminated by the employer, the gratuity calculation will follow the standard formula as outlined by the UAE Labour Law.

Employees who have served for more than one year but less than five years are entitled to 21 calendar days’ basic salary for each year of the first five years of work.
Employees who have served for more than five years are entitled to 30 calendar days’ basic salary for each additional year of work, subject to the condition that the total amount of gratuity does not exceed the equivalent of two years’ salary.

When Employee Chooses to Resign?

If an employee under an unlimited contract resigns, the gratuity calculation will follow the standard formula as per the UAE Labour Law.

An employee who resigns before completing one year of service is not entitled to any gratuity pay.
An employee who has served between one and three years is entitled to one-third (1/3) of 21 days’ basic salary as gratuity pay.
An employee who has served between three and five years is entitled to two-thirds (2/3) of 21 days’ basic salary as gratuity pay.
An employee who has served more than five years is entitled to full 21 days’ basic salary as gratuity pay.

A full-time employee in the private sector who has completed a year or more of continuous service is entitled to an end-of-service gratuity at the end of their service, however, unpaid leave days are not included in calculating the gratuity. #MoHRE #UAE pic.twitter.com/WdTu7bmTf8
— وزارة الموارد البشرية والتوطين (@MOHRE_UAE) January 10, 2023