Do you doubt How to Calculate Gratuity in UAE? As rules differ for limited & unlimited contracts, it’s important to know the difference then to be entitled to the correct benefits. This ultimate guide will take you step by step through its criteria, calculation methods and the latest legal moves on gratuity payments in the UAE.
Understanding Gratuity in the UAE
The employer pays a lump-sum gratuity, or end-of-service benefit, to the employee upon termination of employment, provided the employee has completed one year of continuous service. The computation of gratuity depends with regard to the type of employment contract: limited or unlimited.
Key Factors Influencing Gratuity Calculation
The question of what determines gratuity calculations should be addressed before a discussion of specifics:
- Type of Contract: Limited or unlimited.
- Duration of Service: Total years of continuous employment.
- Basic Salary: Gratuity is calculated from the last drawn basic salary leaving out allowances and bonuses.
- Reason for Termination: Resignation, or termination, can affect eligibility and calculation.
Gratuity Calculation for Limited Contracts
A limited contract has a starting and an ending date. Gratuity under UAE Labour Law for limited contracts is calculated in this way:
Service Less Than One Year
Those employees that resign, or are retrenched before finishing one year period of service are not entitled to any gratuity.
Service in Between one and five years.
Employees qualify for 21 days’ basic salary, each year of service.
Example:
- Basic Salary: AED 10,000
- Years of Service: 3
- Daily Wage: 10,000 ÷ 30 = AED 333.33
- Gratuity: 333.33 × 21 × 3 = AED 21,000
Service Exceeding Five Years
Employees are entitled to:
- Salary of basic salary for the first five years each of 21 days.
- Basic salary for 30 days for every additional year over five years.
Example:
- Basic Salary: AED 10,000
- Years of Service: 7
- Daily Wage: 10,000 ÷ 30 = AED 333.33
- Gratuity:
- First 5 years: 333.33 × 21 × 5 = AED 35,000
- Next 2 years: 333.33 × 30 × 2 = AED 20,000
Gratuity Calculation for Unlimited Contracts
How to Calculate Gratuity in UAE, A contract that has unlimited duration doesn’t end at any date. The calculation of gratuity under unlimited contracts differ according to the reason for termination and period of service.
Termination by Employer
If the employer ends the contract, the following is payble to the employee;
- Service Less Than One Year: No gratuity.
- Service In One to Five Years: 21 days basic salary for every year of service.
- Service Exceeding Five Years: Basic salary for the next five years ’21 days and basic salary for an additional year ’30 days.
Example:
- Basic Salary: AED 10,000
- Years of Service: 6
- Daily Wage: 10,000 ÷ 30 = AED 333.33
- Gratuity:
- First 5 years: 333.33 × 21 × 5 = AED 35,000
- 6th year: 333.33 × 30 = AED 10,000
- Total Gratuity: AED 45,000
Resignation by Employee
On the basis of employee resignation, there are the following gratuity entitlements:
- Service Less Than One Year: No gratuity.
- Employee Turnaround Time Between One and Three Years: One-third of 21 days’ basic pay for each year.
- Service Three Year to Five Years: Two thirds of the 21 days’ basic salary for one year.
- Service Exceeding Five Years: Full 21 days basic salary for every year of service.
Example:
- Basic Salary: AED 10,000
- Years of Service: 4
- Daily Wage: 10,000 ÷ 30 = AED 333.33
- Full Gratuity: 333.33 × 21 × 4 = AED 28,000
- Entitled Gratuity (Two-thirds): 28,000 × 2/3 = AED 18,666.67
- Total Gratuity: AED 55,000
Important Considerations
- Maximum Gratuity Limit: The gratuity should not exceed two years’ wage of the employee.
- Unpaid Leaves: Service periods of unpaid leave are not counted into the total service period for gratuity purposes.
- Deductions: Any part of the dues outstanding from the employee to the employer can either be set-off from the gratuity amount or recovered by exercising the charge.
Recent Legal Updates
Starting on February 2, 2022, the UAE enacted a new Labour Law (Federal Decree-Law No. 33 of 2021), which requires all employment contracts to be of a limited-term contract. This change has a goal of uniformising employment practices as a nation. However, the current unlimited contracts still stand up to the renewal date or until 1st February 2023, whichever comes first.
Conclusion
How to Calculate Gratuity in UAE, Knowledge of gratuity calculations subtleties in the UAE is paramount for the employers and the employees. Familiarization with the differences between contracts of limited and unlimited contract as well as their impact in the duration of service and reasons for termination, allows you to compute your end of service benefits correctly. To know at all times what legal provisions apply to you and how they may have changed to affect your entitlements, always refer to new legal provisions or seek the advice of legal practitioners.
