When it comes to end-of-service payments or gratuity, the process is pretty straightforward. This is a detailed article on how to calculate employee gratuity in the UAE.
Types of contracts taken into consideration
According to the UAE Labour Law, they take two types of contracts into consideration. These include a limited-term contract and an unlimited-term contract.
The difference lies in the conditions for the end of service gratuity and termination.
In general, limited-term contracts mention the start and end dates of the employment period. Unless the contract is renewed, it is automatically cancelled when it expires. These contracts are adopted where an employer needs to engage employees for specific projects or specific duration.
An unlimited term contract is open-ended, more flexible and commonly used in the UAE. It can be terminated with mutual consent or by giving a notice of one to three months. The parties involved must honour their obligations throughout the notice period. An unlimited contract has no end date.
Table of Contents
How to calculate employee gratuity in the UAE
How is gratuity calculated?
Gratuity pay is calculated based on the basic wage/salary paid into the employee account without additional allowances or bonuses.
The Dubai Development authority has made an easy-to-use gratuity calculator, which requires you to fill in your start and end dates, as well as the basic salary.
UAE Employee gratuity Eligibility?
If an employee resigns of their own free will before completing one full year of work, then they will not be entitled to any gratuity pay.
The worker is entitled to a gratuity for the served fraction of a year, provided that he or she completes one year of continuous service.
The end-of-service gratuity is calculated on basis of the last wage to which the employee was entitled, namely the basic salary. Hence, it will not include allowances such as housing, conveyance, utilities, furniture etc.
If the employee owes any money to the employer, the employer may deduct the amount from the employee’s gratuity.
Calculations for gratuity pay
Under a limited contract
An employee who has spent one year or more in continuous service shall be entitled to an end-of-service gratuity upon the termination of their service. The days of absence from work without pay shall not be included in the calculation of the period of service and the gratuity shall be calculated as follows:
- If an employee has served for more than one year but less than five years, he is entitled to full gratuity pay based on 21 days’ salary for each year of work.
- If an employee has served more than five years, he is entitled to full gratuity of 30 days’ salary for each year of work following the first five years.
In all cases, the total gratuity should not exceed the wage of two years.
Under unlimited Contract
In the event that the employer terminates an unlimited contract, the calculation will be as follows:
- If an employee has served more than one year but less than five years, they are entitled to 21 calendar days’ basic salary for each year of the first five years of work.
- If an employee has served more than five years, they are entitled to 30 calendar days’ basic salary for each additional year, provided the entire compensation does not exceed two years’ pay.
During Employee Resignation
In the event that the employee under an unlimited contract resigns, the calculation will be as follows:
- If an employee resigns before completing one year of service, they are not entitled to any gratuity pay.
- If an employee has served between one and three years, they are entitled to one-third (1/3) of 21 days’ basic salary as gratuity pay.
- If an employee has served between three and five years, they are entitled to two-thirds (2/3) of 21 days’ basic salary as gratuity pay.
- If an employee has served more than five years, they are entitled to the full 21 days’ basic salary as gratuity pay.
Example 01: Limited Contract – Gratuity Pay Calculator UAE
Duration of Service
Less than 1 year of service
If you leave work before you complete one year of service, you are not entitled to any gratuity pay or final settlement.
1 year – 5 years of service
The employee will receive full gratuity based on 21 days of salary
5 or more years of service
Employees are entitled to full gratuity pay based on 30 days’ salary for every year of work.
Example:
Basic salary example: AED 10,000
- Identify your daily wage = 10,000 ÷ 30 = 333.30. Your daily wage is AED 333.30
- Multiply daily wage by 21 or 30 (depending on the duration of service in the company) = 333.30 x 21 = 6,999.30. So 21-day salary is AED 6,999.30 will be received for every year of service.
- For those who have rendered more than 5 years of service, gratuity entitlement for each year of service is acceptable as long as the total figure does not exceed two years’ total salary figure.
Example 02: Unlimited Contract – Gratuity Pay Calculator UAE
Duration of Service
Less than 1 year of service
Not entitled to any gratuity pay.
1 year – 3 years of service
Employees are entitled to one-third (1/3) of the 21-day gratuity pay.
3 years – 5 years of service
Employees are entitled to two-thirds (2/3) of the 21-day gratuity pay.
5 or more years of service
Employee is entitled to full 21-day gratuity pay.
Example:
Basic salary example: AED 10,000
- Identify your daily wage = 10,000 ÷ 30 = 333.30. Your daily wage is AED 333.30
- Multiply it by 21 = AED 333.30 x 21 = 6,999.30. So 21-day salary is AED 6,999.30
- Get 1/3 of this figure (1-3 years); 2/3 of the figure (3-5 years) to get the total gratuity pay.
- For those who have worked 5 years or more, the full AED 6,999.30 is payable for each year if you have completed 5 years or more.
