Gratuity is a form of compensation that employers pay to their employees for their service and loyalty. It is also known as end-of-service benefits UAE or severance pay. In the Arab nation, gratuity is governed by the Federal Law No. 8 of 1980. Which name is the Labour Law. In this legislation, we can also find what the country denominates as gratuity law UAE.

In this article, we will explain everything you need to know about gratuity law in UAE. Including the factors to consider for gratuity pay calculation. Also, the gratuity pay calculation for limited and unlimited contracts, and how to calculate gratuity when an employee resigns.

What are the Types of Contracts?

When it comes to contracts in the UAE, we have two types: limited and unlimited. A limited contract is a fixed-term contract that specifies the start and end date of employment. However, an unlimited contract is an open-ended contract that does not have a specific duration. Also, this one can terminate by either party with a notice period.

As an employee, you have to know what kind of contracts you provide in your business in Sharjah, Dubai or any other emirate. Therefore, you shall be aware about the gratuity rules in UAE properly.

Limited Contracts

This one is usually valid for two years and can come into renovation with mutual consent. If an employee resigns before completing one year of service, they have no right to any gratuity in UAE. However, if they resign after completing one year but less than three years of service, they have a right to one-third of the gratuity.

Moreover, if they resign after completing three years but less than five years of service, they can have two-thirds of the Dubai gratuity law. Nonetheless, if they resign after completing five years or more of service, they will have a right to the full gratuity law UAE.

When an employer terminates a limited contract before its expiry date without a valid reason, they have to:

• Pay the employee a compensation equivalent to three months’ salary or,
• the remaining period of the contract

Whichever is shorter. Therefore, this compensation is in addition to the gratuity.

Unlimited Contracts

This one can terminate by either party with a notice period of at least one month and not more than three months. The notice period can extend or reduce by mutual consent. If an employee resigns before completing one year of service, they have no right to any gratuity. However, if they resign after completing one year but less than three years of service, they have a right to one-third of the gratuity. If they resign after completing three years but less than five years of service, they can have to two-thirds of the gratuity. Finally, if they resign after completing five years or more of service, they have a right to the full gratuity.

If an employer terminates an unlimited contract without a valid reason, they have to pay the employee a compensation equivalent to one month’s salary or the notice period. Whichever is longer. Then again, this compensation is in addition to the gratuity and probably will not need any corporate tax added.

Factors to Consider for Gratuity Pay Calculation

The gratuity law UAE pay calculation depends on several factors, such as:

• Type of contract: limited or unlimited
• Duration of service: less than one year, one to five years, or more than five years
• Reason for termination: resignation, dismissal, mutual agreement, or death
• Basic salary: the fixed amount of money that an employee receives before any allowances or deductions
• Allowances: the additional payments that an employee receives for expenses such as housing, transport, or education
• Deductions: the amounts that an employer deducts from an employee’s salary for reasons such as loans, fines, or damages

According to the UAE labour Law gratuity, the pay comes into calculation upon the basic salary only. Excluding any allowances or deductions. However, some employers may include allowances in the gratuity calculation in UAE as a gesture of goodwill or as per their company policy.

Gratuity Pay Calculation for Limited Contracts

If an employee works under this type of contract, the gratuity law UAE pay calculation depends on the duration of service and the reason for termination.

If an employee completes the term of the contract or renews it with the same employer, the gratuity law UAE pay has its calculation as follows:

• 21 days of basic salary for each year of service for the first five years
• 30 days of basic salary for each additional year of service beyond five years

If an employee resigns before completing the term of the contract, the gratuity law UAE pay, they can calculate as follows:

• No gratuity pay if the service is less than one year
• One-third of 21 days of basic salary for each year of service if the service is more than one year. However, less than three years
• Two-thirds of 21 days of basic salary for each year of service if the service is more than three years. Whatsoever, less than five years
• Full 21 days of basic salary for each year of service if the service is more than five years

If an employer terminates an employee before completing the term of the contract without a valid reason, they can calculate their gratuity law UAE pay as follows:

• Full 21 days of basic salary for each year of service for the first five years
• 30 days full of basic salary for each additional year of service beyond five years
• Compensation equivalent to the remaining period of the contract or three months’ salary, whichever is lower

Steps to Calculate Gratuity for Limited Contracts

The first step is to determine the basic salary of the employee. The basic salary is the amount that the employee receives before any allowances, bonuses, or deductions. The basic salary is usually very specific in the employment contract or the pay slip.

Then, determine the number of years of service of the employee. The number of years of service calculates from the date of joining the company until the date of termination or resignation. The number of years of service should be rounded up to the nearest whole number.

Consequently, apply the formula according to the UAE Labour Law gratuity. The new UAE Labour Law gratuity calculation formula for this type of contracts is as follows:

• The employee has no right to any gratuity if they have less than one year of service
• If the employee has been working for more than one year but less than five years of service, they have a right to 21 days of basic salary for each year of service.
• The employee has a right to 30 days of basic salary for each year of service if they have more than five years working.

Furthermore, multiply the basic salary by the number of days according to the formula. For example, if an employee has a basic salary of 10,000 AED and has been working three years of service.

The fifth step is to apply any deductions or limits to the gratuity amount.

The final step is to pay the gratuity amount to the employee within 14 days of their termination or resignation. However, the employer should also provide a certificate of service that states the duration and nature of employment, as well as the reason for termination or resignation.

Gratuity Pay Calculations for Unlimited Contracts

It has its basis on the average salary of the last 12 months of employment rather than the basic salary. This means that employees who receive allowances or bonuses can benefit from a higher gratuity amount. You can calculate gratuity pay UAE as follows:

• For the first five years of service, the employee has a right to 21 days of salary for each year of service.
• Each additional year of service, the employee has a right to 30 days of salary for each year of service.
• The total gratuity amount cannot exceed two years of salary.

Gratuity pay is not mandatory and depends on the agreement between the employer and the employee. Some employers may choose to apply the traditional method of calculating gratuity on the basic salary. Which is usually lower than the average salary. Therefore, employees should check their contracts and negotiate with their employers before signing an unlimited contract in the UAE.

Steps to Calculate Gratuity for Unlimited Contracts

An unlimited contract is a contract that has no fixed term and no expiry date. It can terminate by decision of either party with a notice period of at least one month and not more than three months. If an employee works under an unlimited contract, the gratuity pay calculation depends on the duration of service and the reason for termination.

If an employee resigns from an unlimited contract, they can calculate their gratuity pay as follows:

• No gratuity pay if the service is less than one year
• One-third of 21 days of basic salary for each year of service if the service is more than one year but less than three years
• Two-thirds of 21 days of basic salary for each year of service if the service is more than three years but less than five years
• Full 21 days of basic salary for each year of service if the service is more than five years

However, if an employer terminates an employee from an unlimited contract without a valid reason, the pay is calculated as follows:

• 21 days of basic salary for each year of service for the first five years
• 30 days of basic salary for each additional year of service beyond five years

How to Calculate Gratuity When Employee Resigns

To calculate gratuity when an employee resigns, you need to follow these steps:

• Determine the type of contract: limited or unlimited
• Settle the duration of service: less than one year, one to five years, or more than five years
• Determine the basic salary: the fixed amount of money that an employee receives before any allowances or deductions
• Apply the relevant formula based on the type of contract and the duration of service
• Multiply the result by the basic salary
• Round off the final amount to the nearest dirham

For example, suppose an employee resigns from an unlimited contract after working for four years and six months. The employee’s basic salary is AED 10,000 per month. The gratuity pay calculation is as follows:

• Type of contract is unlimited
• Duration of service is more than three years but less than five years
• Basic salary is AED 10,000 per month
• Relevant formula is two-thirds of 21 days of basic salary for each year of service
• The result is (2/3) x 21 x 4.5 = 63 days of basic salary
• The final amount is 63 x 10,000 = AED 630,000

The employee’s gratuity pay is AED 630,000.

However, for more accurate solutions, you can always contact business consultants or an expert on this subject.

Conclusion

Gratuity is a form of compensation that employers pay to their employees when the final settlement UAE Labour Law comes. It is based on the duration of service, the type of contract, and the salary of the employee. The UAE Labour Law gratuity regulates the payment of gratuity for employees who work in the private sector.

To calculate gratuity law UAE for different types of contracts, you need to know:

• the basic salary,
• the length of service,
• and the type of contract.

You can use the information we are providing in this article to estimate your gratuity amount. Nonetheless, you should always consult your employer or a legal expert for the exact calculation and payment of your gratuity. However, do not forget you can contact us for further information.