Gratuity is a key part of end-of-service benefits in the UAE. It is an effective way to improve employee retention in organisations by encouraging them to stay with the company for longer. 

End-of-service gratuity is an HR requirement mandated by the UAE labour laws. It’s part of a broader global practice of providing lump-sum payments at the end of employment or upon termination. 

Whether you are an employee or employer, at some point, you will want to know how much gratuity you should get from your employer or how much an employee can claim from the company. 

This blog will provide an updated guide on how to calculate gratuity in the UAE while covering the basics of what it is, who it is eligible for, and the rules and formulas to be aware of. 

What is Gratuity?

Gratuity is a type of end-of-service benefit that employees are entitled to receive as per UAE labour law at the end of their employment or upon termination - provided that they meet the established conditions. It is like a token of money and appreciation offered to an employee to recognise their services offered to the company over a given period of time. 

The law states that any employee who has worked in a company for a specified period is entitled to gratuity. All end-of-service entitlements must be paid within 14 days from the contract’s end date.

Employees who are on a limited or unlimited contract are eligible for gratuity as long as they meet the other prerequisites. The exact amount an employee should receive as a gratuity is determined by many factors. 

Who is Eligible for Gratuity?

While gratuity is an attractive end-of-service benefit, it is not something every employee automatically receives, like a standard salary slip. There are many conditions an employee should meet to be eligible for gratuity as per the law. These conditions include: 

1. The employee should be under a limited or unlimited labour contract. 

2. The employee needs to have worked for at least/ one year continuously in the company. 

3. Even if an employee completes one year of service, they will not be entitled to gratuity if:

• They resign without completing the notice period 

• Resigns due to employer’s breach of contract but unable to prove it 

• Resigns citing misconduct but fails to provide evidence that they were assaulted by the employer or any of the employer’s representatives.

4. An employee is dismissed for gross misconduct, as defined under UAE Labour Law. Examples include theft, dishonesty, physical assault, working for another employer without permission, etc.

5. Any employee terminated under Article 120 of the UAE’s Labour Law. This covers non-compliance with any of the matters under the legislation, such as fraud, leaking trade secrets, and being intoxicated at work.

Factors that Affect Gratuity Calculation in the UAE 

The amount of gratuity an employee is entitled to relieve depends on three major factors: 

• Basic Salary

As per the UAE labour laws governing gratuity, the amount an employee is eligible to receive is derived from the last basic salary they received from the employer. Basic salary does not include any other additional benefits they have been receiving. 

For example, if an employee's total salary is AED 5,000 with a breakdown of AED 3,000 as basic salary and AED 2,000 for fuel allowance, accommodation, and transport, then only the AED 3,000 will be used for gratuity calculation. 

Any deductions made in the salary, such as for salary sacrifice schemes or similar adjustments, are not included in the basic salary for gratuity calculation either. 

• Resignation or Termination 

As mentioned in the eligibility criteria for gratuity, an employee is not entitled to gratuity if they are terminated under Article 120. 

On the other hand, the gratuity for employees working under an unlimited contract will depend on whether they resign or get terminated. 

• The Contract Type

The type of contract an employee signs for is also another key factor that affects gratuity payment. Both unlimited and limited employee contracts have similar rules for gratuity. The key difference between them is that limited contracts specify a starting and ending date, whereas an unlimited contract only mentions a start date. 

Other Factors That Affect Gratuity

The total gratuity payment cannot exceed the sum of an employee’s 2 years of complete salary. On the other hand if an employee owes money to their employer, the owed amount can be reduced and adjusted in the gratuity payment. 

In both limited and unlimited employment contracts, the gratuity payment an employee is entitled to depends on whether they resign or get terminated.  Here is a breakdown showing how to calculate gratuity based on limited, unlimited, and other types of employment contracts. 

How to Calculate Gratuity in the UAE in An Unlimited Contract 

Besides the employment contract, gratuity payment calculation in the UAE is broken down into 3 tiers: 

• 1-3 years of service

• 3-5 years of service

• 5 years and more of service

If an employee is terminated, then only 2 tiers are applicable: 

• 1-5 years of service

• 5 years or more of service

As an employee progresses through these tiers during their employment, the calculation of their gratuity payment changes. 

Upon Resignation

Gratuity payments for employees resigning under an unlimited contract are calculated based on their length of service as follows:

• 1-3 years of service - The gratuity consists of 1/3rd of an employee's basic salary of 21 days for each year of service.

Gratuity = (7 days X Basic Salary X Service Years)/30

• 3-5 years of service -The gratuity consists of 2/3rd of an employee’s basic salary of 21 days for each year of service.

Gratuity = (14 days X Basic Salary X Service Years)/30

• After 5 years or more of service - The gratuity consists of an employee’s complete basic salary of 21 days for each year of service.

Gratuity = (21 days X Basic Salary X Service Years)/30

Upon Termination

Gratuity for employees terminate under an unlimited contract is determined by their total years of service as outlined below:

•  1-5 years of service - The gratuity consists of the basic salary of 21 days for each year of service.

Gratuity = (21 days X Basic Salary X Service Years)/30

• More than 5 years of service - The gratuity consists of the basic salary of 21 days for up to their 5th year of service. For every year after their 5th year, 30 days’ basic salary is counted.

Gratuity = (30 days X Basic Salary X Service Years)/30

How to Calculate Gratuity in the UAE in A Limited Contract

Calculating gratuity for a limited contract in the UAE is more or less the same as an unlimited contract. The calculation depends on the number of service years, and the nature of employee termination. The payment tiers will be different as follows: 

• Completion of a contract with less than 5 years of service

• More than 5 years of service

If an employee is fired then the following tiers will apply to them:

• 1-5 years of service

• 5 years or more of service

Upon Resignation

• If  an employee has completed less than five years of service, the gratuity will include 21 days of basic salary for every year of service. 

Gratuity = (21 days X Basic Salary X Service Years)/30

• If an employee has worked for more than 5 years of service, then the gratuity calculation is done for 21 days for the first 5 years of service, and then 30 days of salary for every year after their 5th year. 

Gratuity = (30 days X Basic Salary X Service Years)/30

Upon Termination

• For employees that have worked for 1-5 years the gratuity will consist of 21 days of basic salary for each year of service. 

Gratuity = (21 days X Basic Salary X Service Years)/30

• Employees that have worked for more than 5 years will receive the gratuity based on the basic salary for 21 days for up to 5 years of service, and then 30 days of basic  salary for every year after their 5th year. 

Gratuity = (30 days X Basic Salary X Service Years)/30

How Gratuity is Calculated in Other Types of Employment Contracts 

Article 30 of  the Cabinet Resolution No. 1 of 2022 on the Implementation of the Regulation of Federal Decree Law No. 33 of 2021 Regarding the Regulation of Labour Relations, calculates the end of service benefits for workers in part-time or other types of employment contracts pursuant to the following:

• Determine the employee’s total annual working hours as per the part-time contract.

• Determine the total annual working hours of a full-time contract.

• Divide the part-time hours by the full-time hours and multiply the result by 100 to get the work percentage.

• Calculate the full-time end-of-service benefit based on applicable rules.

• Multiply the full-time benefit by the percentage from Step 3 to determine the part-time entitlement.

Part-time Gratuity = Actual Annual Working Hours / Full-time Working Hours * Full-time Gratuity