Gratuity, also known as end-of-service benefits or termination benefits, is a fundamental component of employment in the United Arab Emirates (UAE). It’s a mandatory payment made by employers to employees when they leave their job, whether due to resignation, termination, or retirement. Calculating gratuity in the UAE involves a specific formula outlined in the UAE Labour Law, which ensures that employees receive a fair amount based on their service duration.
Understanding Gratuity in the UAE:
Gratuity is designed to reward employees for their commitment and loyalty to their employer over the years. It is a significant financial benefit that helps individuals transition smoothly to new job opportunities or retirement. The amount of gratuity an employee is entitled to depends on several factors, primarily their length of service and final basic salary.
The UAE Labour Law specifies a gratuity formula based on the type of employment contract:
Limited Contract: For employees on a limited contract, gratuity is calculated as follows:
21 days’ basic salary for each year of service for the first five years.
30 days’ basic salary for each additional year beyond the first five years.
For example, if an employee has worked for seven years on a limited contract with a monthly basic salary of AED 5,000, the gratuity calculation would be as follows:
5 years x 21 days x AED 5,000 = AED 525,000
2 years x 30 days x AED 5,000 = AED 300,000
Total Gratuity = AED 825,000
Unlimited Contract: For employees on an unlimited contract, gratuity is calculated as follows:
30 days’ basic salary for each year of service.
Using the same example as above, the gratuity calculation for an employee on an unlimited contract would be:
7 years x 30 days x AED 5,000 = AED 1,050,000
Important Points to Note:
The basic salary considered for gratuity calculation does not include allowances, bonuses, or other benefits.
If an employee resigns before completing one year of service, they are not entitled to gratuity.
If an employee is terminated for misconduct, they may not receive gratuity.
The UAE Labour Law may be subject to updates and changes, so it’s essential to consult the latest regulations or seek legal advice if needed.
Gratuity in the UAE is a critical aspect of employment that provides financial security to employees who have contributed to their organization. Understanding how to calculate gratuity according to the UAE Labour Law is essential for both employers and employees. As it plays a significant role in financial planning, it’s crucial to be aware of your entitlements and rights regarding gratuity when working in the UAE.