Are You Accurately Calculating UAE End of Service Gratuity?

What is End of Service or Gratuity  

Under the UAE Labor Law, the end-of-service gratuity provides for financial security or retirement benefits due to employees upon leaving their employers and satisfying certain conditions prescribed in the law. It is usually offered when an employee leaves a company after completing at least one year of service.   

As stipulated in Article 51 of the UAE Labour Law, the Ministry of Human Resources & Emiratisation (MoHRE) provides employees’ rights and protection through end-of-service entitlement. Gratuity is an excellent strategy to increase employee retention and motivate workers to work for extended periods of time in an organisation.  

Regardless of their profession and whether they are in government, semi-government or private, foreign workers in the UAE are entitled to gratuity based on specific guidelines specified in the UAE Labour Law.  

Both employers and employees must understand the relevant labour laws and company policies surrounding gratuity payments. Employers must ensure that it is effectively managed, calculated, and received.  

In this article, we will compare the old and new gratuity calculations.  

Old Law and New Law Gratuity Calculation Difference  

Old Law  

The calculation was different before the enactment of the new Labour Law. Previously, two types of contracts were taken into consideration when calculating gratuity:  

1. Limited-term contract.  
2. Unlimited term contract. 

In general, limited-term contracts mention the start & the end dates of the employment period. Unless the contract is renewed, it is automatically cancelled when it expires. Under this type of contract, an employee who has spent one year or more of continuous service shall be entitled to a gratuity upon the termination of their employment.   

Unpaid leave days will be taken off from the calculation of the period of service, & the gratuity calculation shall be as follows:  

•  The employment period is more than one year but less than five years: full gratuity pay based on 21 days’ salary for each year of work.  
•  The employment period is more than five years: a total gratuity of 30 days’ salary for each year of work following the first five years.  

On the other hand, an unlimited-term contract is open-ended, more flexible, and previously used in the UAE. An unlimited contract has no end date.   

Under this type of contract, in the event of contract termination by the employer, gratuity calculation will be as follows:  

• The employment period is between one to three years; the employee is entitled to one-third (1/3) of 21 days’ basic salary each year.  
• The employment period is three to five years: the employee is entitled to two-thirds (2/3) of 21 days’ basic salary each year.  
• The employment period is over five years: the employee is entitled to 21 days’ basic salary for the first five years and 30 days’ basic salary for each additional year.  

In the event of employee resignation, gratuity calculation will be as follows:  

• The employment period is more than one year but less than five years: the employee is entitled to 21 days’ basic salary for each year of the first five years of work.  
• The employment period is over five years, and the employee is entitled to 30 days’ basic salary for each additional year.  

In all cases, an employee who served for less than one year of service shall forfeit his gratuity entitlement, and that total gratuity should not exceed the wage of two years.  

New Law  

The regulations of Federal Decree-Law No. 33 of 2021 Concerning the Regulation of Labour Relations (Labour Law), including EOS gratuity calculation, came into effect on 2 February 2022. Under the new UAE Labour Law, there is now only one type of recognised employment contract: the limited contract, renewable for a maximum of three years.  

Removing unlimited contracts from the UAE’s employment framework aims to simplify and unify end-of-service benefits irrespective of the type of employment contract.  

In common with the old law, a foreign worker shall be entitled to severance pay for the fractions of the year in proportion to the service period, provided that the employee has completed one year of continuous service.  

Gratuity is calculated based on the worker’s basic salary (not including allowances such as housing, conveyance, utilities, furniture, etc.). and years of service to their employer as follows:  

• Less than one year: not entitled to any gratuity pay;  
• One to five years: 21 days of basic salary for each year of work;  
• More than five years: a full gratuity of 30 days’ salary for each year of employment. 

Further Illustration 

Under the new law, the total gratuity shall still be, at most, the wage of two years and all entitlements must be paid within 14 days from the employee’s end date.  

New Gratuity-Related Benefits for Flexible Work Patterns  

Under Article 30 of Cabinet Resolution No. 1 of 2022 on implementing Federal Decree-Law No. 33 of 2021, MoHRE (Ministry of Human Resources and Emiratisation) has created three work contracts to enhance job satisfaction and family life balance: temporary, part-time, and flexible work.  

A worker who opts for one of these work contracts and outlines 48 hours a week or eight hours a day shall be deemed a full-time worker. The end-of-service gratuity calculation should be based on the number of hours of employment divided by the number of hours of a full-time employee in a similar role with the same employer multiplied by 100.  

Who is not Eligible for Gratuity?  

• At most one year of service, the employee is not entitled to gratuity pay.  
• Depending on the employer’s discretion, if an employee did not give the legal notice period before leaving the job, the employee is not eligible for gratuity.  
• Absences for 7 days continuously or 21 days per year without notice to the employer will forfeit gratuity entitlement.  
• If an employee is terminated for gross misconduct 

How We Help 

SimplySolved provides a complete Back Office Accounting, Corporate Tax, Employee Management and payroll outsourcing service for Business. Our service is all-inclusive and scalable to operate your company’s financial, Tax, HRM, and payroll operations, including state-of-the-art cloud UAE FTA & MOHRE compliant platforms.  

Our comprehensive and cost effective advisory and support services manage routine HR (Human Resources) administrative tasks and support clients by generating payroll reports, pay slips, and end-of-service gratuity calculations. 

About SimplySolved

At SimplySolved, we save your time, resources, and costs. Whether you need help with Outsourced Accounting, Finance, VAT, Corporate Tax, Employee Management & Payroll and ERP & Zoho Implementation. we have the expertise and solutions to help.

Subscribe to mailing list