How to Calculate Gratuity in the UAE: Rules, Formula, & Steps
End-of-service gratuity (EOSG) is a key component of an employee’s final settlement in the UAE. It is a legal requirement under UAE labour laws and a vital part of effective HR management. Beyond compliance, it encourages employee retention by rewarding service and fostering loyalty.
Whether you are an employee or an employer, understanding EOSG is essential. This guide explains who is eligible, how gratuity is calculated, and the rules and formulas to follow for a compliant and fair final settlement.
What is Gratuity?
Gratuity is an end-of-service benefit that employees are entitled to receive under UAE labour law at the end of their employment or upon termination, provided 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 on a limited or unlimited contract who has worked for a specified period at a company is entitled to gratuity.
All end-of-service entitlements must be paid within 14 days from the contract’s end date. The exact amount an employee should receive as a gratuity is determined by many factors.
Who is Eligible for It?
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:
The employee should be under a limited or unlimited labour contract.
The employee needs to have worked continuously for at least 1 year at the company.
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 the employer’s breach of contract, but is 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.
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.
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
Financial Planning and Compliance Considerations for EOSG
End-of-service gratuity represents a significant financial commitment for employers. Failure to plan for these payments can create cash flow challenges, particularly during mass resignations, terminations, or financial downturns.
Employers are advised to record regular accruals in their accounts and allocate sufficient funds to meet EOSG obligations. Proper planning mitigates financial risk, ensures adherence with UAE labour law, and safeguards employee trust.
A well-structured EOSG benefit is not only a legal requirement but also a strategic HR tool. Offering transparent and fair gratuity payments enhances employee confidence and loyalty, reduces turnover, and strengthens workforce stability.
By clearly communicating EOSG policies, employers can position themselves as organisations that value and reward long-term service, creating a positive work culture.
Factors that Affect Gratuity Calculation
The amount of gratuity an employee is entitled to receive 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
Under the current UAE labour law, there is no distinction between resignation and termination when calculating gratuity. Employees who complete at least one year of service are entitled to full end-of-service gratuity, regardless of how their employment ends.
However, employees dismissed for gross misconduct (as outlined under Article 44 of the UAE Labour Law, previously Article 120) remain ineligible for gratuity.
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 start and end date, whereas an unlimited contract specifies only a start date.
Other Influences
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.
For part-time or flexible contracts, the gratuity is pro-rated based on actual hours worked relative to full-time hours.
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?
The general formula for end-of-service gratuity is:
Gratuity= (Days of Salary per Year× Years of Service × Basic Salary) ÷30
Note: “Days of Salary per Year” is 21 for the first 5 years and 30 for each year beyond 5 years of service.
Unlimited Contracts
Up to 5 years of service: 21 days’ basic salary per year.
More than 5 years: 21 days per year for the first 5 years, then 30 days per year for each additional year.
Example 1:
Employee worked 4 years, basic salary AED 10,000:
Gratuity = (21 days × 4 years × 10,000) ÷ 30 = AED 28,000
Example 2:
Employee worked 7 years, basic salary AED 10,000:
First 5 years = (21 days × 5 × 10,000) ÷ 30 = AED 35,000
Next 2 years = (30 days × 2 × 10,000) ÷ 30 = AED 20,000
Total Gratuity = AED 55,000
Limited Contracts
Example:
Employee on a limited contract worked 6 years, basic salary AED 8,000:
First 5 years = (21 days × 5 × 8,000) ÷ 30 = AED 28,000
Next 1 year = (30 days × 1 × 8,000) ÷ 30 = AED 8,000
Total Gratuity = AED 36,000
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 = (Annual Hours Worked ÷ Full-time Annual Hours) × Full-time Gratuity
Example:
Employee works 20 hours/week (full-time = 40 hours), earned full-time gratuity AED 36,000:
Part-time Gratuity = (20 ÷ 40) × 36,000 = AED 18,000
What Is Included in the Final Settlement?
The final settlement encompasses all payments owed to an employee upon termination, resignation, or the end of the contract. Components typically include:
End-of-service gratuity (EOSG)
Any unpaid salary or allowances
Notice period pay (if applicable)
Unused leave or vacation pay
Repatriation ticket (if applicable)
Any additional contractual benefits or deductions
Formula:
Final Settlement=EOSG +Unpaid Salary/ Allowances+ Notice Period Pay +Unused Leave Pay+ Repatriation/Other
Example:
An employee resigns after 6 years with a basic salary of AED 10,000. They have 5 unused vacation days, are owed AED 3,000 in allowances, and must serve a 1-month notice period.
EOSG: 5 years × 21 days + 1 year × 30 days = AED 55,000
Unpaid salary & allowances: AED 3,000
Notice period pay: AED 10,000
Unused leave pay: 5 days ÷ 30 × 10,000 = AED 1,667
Total Final Settlement: AED 55,000 + 3,000 + 10,000 + 1,667 = AED 69,667
Optional End-of-Service Investment Scheme (Cabinet Decision No. 96 of 2023)
In addition to traditional lump-sum EOSG payments, the UAE introduced a voluntary End-of-Service Investment Scheme for non-GCC employees in certain free zones.
Under this scheme:
Employers make monthly contributions to a regulated investment fund on behalf of employees.
The accumulated contributions replace the standard lump-sum gratuity.
Participation is voluntary and designed to provide a secure, investment-based alternative for long-term benefits.
This modern approach offers flexibility and can help employers manage cash flow while still ensuring employee entitlements.
Simplifying EOSG and Final Settlement with Expert Payroll Support
Managing end-of-service gratuity (EOSG) and final settlement calculations can be both complex and time-consuming for organisations. Ensuring accuracy while remaining compliant with evolving UAE labour laws requires careful attention and expertise.
By leveraging outsourced payroll solutions, businesses can streamline this process with greater efficiency and confidence. Expert providers ensure that EOSG and final settlement calculations are accurate, compliant, and aligned with current regulations, while also reducing administrative burden and minimising the risk of errors.
With tailored payroll support and continuous updates on regulatory changes, businesses can focus on their core operations, knowing that their payroll responsibilities are handled professionally. Ultimately, this not only ensures legal conformity but also strengthens employee trust and improves overall functional efficiency.
Frequently asked questions
Does unpaid leave affect gratuity calculation in the UAE?
Can employers deduct amounts from gratuity payments?
Is salary calculated for 30 days or 31 days in the UAE?
Are free zone employees entitled to gratuity in the UAE?
Is gratuity applicable during probation periods?
How is gratuity handled in case of employee death?
