As an employee, it’s inevitable to leave your job at some point in time. This could be due to relocation, retirement, or perhaps simply seeking new challenges and opportunities.
Regardless of the reasons, employers are obliged to pay employees an end-of-service gratuity payment as per UAE labor law upon completion of their employment contract.
However, calculating the gratuity amounts can be quite tricky and complex. To help simplify the process, we’ve compiled a guide on how to accurately calculate your gratuity in the UAE.
On top of that, we’ll walk you through the;
Ready? Let’s get started!
Reference Link : Gratuity Calculator of MoHRE
Gratuity, or end-of-service benefits, is a payment legally awarded to an employee by the employer upon leaving the organization. Simply put, it is a token of appreciation for the services they rendered during their term with the company.
The UAE Labor Law dictates that any employee who has worked for a company is entitled to gratuity, provided they meet all the prerequisites outlined in the law.
The amount of gratuity payable depends on the employee’s monthly basic salary. Usually, it is paid during retirement, but it is possible to claim it before that, although it depends on the organization’s terms and conditions.
Under the UAE labor law, not every employee is entitled to gratuity payments. The following conditions need to be met for gratuity benefits to be applicable:
There are two main types of employment contracts in UAE: limited and unlimited. Both contracts are similar, but the rules for calculating gratuity differ under each type of contract, which we will discuss in detail below.
When calculating end-of-service benefits in UAE, only the last basic salary that the employee received prior to the termination of their contract is considered. The basic salary does not include any additional benefits or allowances that an employee was receiving.
For instance, if an employee receives a salary package of AED 4,000, inclusive of fuel allowance, housing, or overtime, only AED 4,000 is considered as their basic salary.
Also, any additional deductions from one’s salary, such as salary sacrifice schemes, are not included in the basic salary either.
Under the UAE Labour Law, the gratuity payment is provided to employees who have been with the organization for at least one year.
The tenure is based on the actual number of days worked and does not include extended periods of leave such as sabbaticals. This is because the gratuity calculator assumes continuous service between the first and last working day.
The UAE Ministry of Human Resources and Emiratisation (MoHRE) specifies that a one-year employment period must not include any unpaid breaks or holidays during the employee’s service.
Before calculating your gratuity, you should be aware of the types of contracts that you had with your former employer. According to the UAE Labour Law, there are two types of contracts — limited or unlimited. The difference between these two lies in the terms for the end of service benefits and termination.
Limited-term or fixed contracts are contracts with a set term or time period that are typically adopted when an employer needs to engage an employee for a specific project or duration. This type of contract clearly states the start and end dates of the employment period.
When the contract expires, it gets automatically canceled unless it is purposefully renewed. For instance, project workers who are hired for a particular project would leave the workplace once the project is completed.
In other words, limited or fixed contact means:
Unlike the limited contract, an unlimited-term contract is open-ended and more flexible with no specified period of years the employee has to work with the company.
Generally, it is the one more commonly used in the UAE and can be terminated with mutual consent or a notice period of one to three months from either side. During the notice period, all parties involved are supposed to honor their obligations.
In a nutshell:
In both types of contracts, your gratuity calculation is broken down into various tiers based on whether you resign or get fired.
For employees on limited contracts, gratuity calculations are also based on the length of service and the nature of the termination. Thus, the payment tiers are broken down into:
If you, as an employee, are fired under a limited contract, the tiers change into:
In all cases, the total figure should not exceed two years’ total salary wage.
Let’s assume your basic salary is AED 15,000, and you’ve worked in the company for 4 years. Here is a simplified step-by-step guide to calculating your gratuity pay:
For employees on unlimited contracts, the gratuity is calculated differently depending on the nature of termination — resignation or termination because of misconduct or poor performance. Again, the tiers apply here based on the duration of service:
However, only two tiers are applicable, suppose the employee is terminated. As a result, the gratuity calculation rules change as the employee moves from one tier to another. These tiers are:
If an employee under an unlimited contract resigns, their gratuity calculation will be as follows:
Suppose the employer terminates an employee under an unlimited contract, the gratuity calculation rules will be as follows:
Just like in the case of fixed-term contracts, the rules of gratuity calculation for unlimited contracts are more or less the same. For example, let’s assume your basic salary is AED 15, 000 and you worked in the company for 4 years. You can simply use the formula below to calculate your gratuity payouts.
So the total gratuity payable at the end of the service for a 4 year service under an unlimited contract is AED 28,000
While the formulas for gratuity calculation for unlimited and limited contracts are almost similar, there is a slight difference when the employee under an unlimited contract resigns.
As mentioned, they are only entitled to ⅓ or ⅔ of the gratuity payouts depending on their service period.
For example, assuming your basic salary is 20,000, and you worked with the company for 3 years, you can use these formulas when calculating your total gratuity payable:
Employees who have served 1-3 years in the UAE are entitled to full gratuity pay of 21 days’ salary per year. Those who have served more than 3 years or between 3-5 years are entitled to two-thirds of their basic salary as gratuity pay. To calculate gratuity, multiply the daily wage by 21 (or 30 for tenure over 5 years).
In the UAE, end-of-service benefits or gratuity are calculated based on the employee’s last drawn salary. Only the most recent basic salary is considered, excluding any allowances or perks.
As per the new UAE Labor Law, contracts are now limited to a duration of five years. Gratuity calculation is based on the employee’s basic salary, with a 21-day salary considered for each year of service. However, if an employee’s service period exceeds five years, the gratuity is calculated based on 30 days of their basic salary for each year beyond the five-year mark.
A gratuity is a form of employee benefit that is granted based on their length of service, but it is not included in their regular monthly salary.
As per UAE labor law, if an employee resigns before completing one full year of service, they aren’t entitled to gratuity pay. If the employee owes any outstanding debts to the employer, the employer can deduct the amount from the gratuity.