As an employer in the United Arab Emirates, understanding how to calculate gratuity is crucial. Also known as End-of-Service Benefits (EOSB), ESBs, or termination indemnities to employees, it is given to an employee in the UAE after their employment has been terminated, as a token of appreciation for the employee’s hard work and dedication to the company.
Accuracy in calculating gratuities is important for compliance with the local labour laws and to ensure fair treatment of all employees. Read on to see how to calculate gratuities and navigate this essential aspect of managing your workforce in the UAE.
What exactly is a Gratuity?
In a nutshell, gratuity is an end-of-service payment made to employees after completion of their employment contract. Expats as well as domestic workers are entitled to receive end-of-service benefits after working for an employer in the UAE.
It is a legal obligation for employers here, and also serves as a financial cushion for employees during their transition between jobs, or in case of a resignation or retirement.
What would be the currency?
End-of-service gratuity payments in the UAE will be paid in UAE dirhams, or in the employee’s chosen currency, as agreed upon in the employment contract.
Eligibility criteria
Technically, all employees qualify for gratuity. However, employees must also meet specific criteria depending on the job role, which includes completing a minimum of one year of continuous service with their employer.
If an employee resigns before completing one year, they cannot be entitled to gratuity. The UAE Labour Law mentions that if an employee is dismissed from work for any employment violation stated in Article 120 of UAE Federal Labour Law no. 8 of 1980 (as amended) (reasons include forging of documents, false identity, etc) or if they leave work without giving notice to their employer, they will not be entitled to any gratuity pay at the end of their employment.
It is important to note that the length of service, nature of contract (limited or unlimited), and labour regulations determine the exact eligibility requirements.
How is gratuity calculated?
As mentioned in Article 134 of the UAE Labour Law, the calculation of the end-of-service gratuity pay is on the basis of the last recorded basic salary or wage of the employee, in their most recent place of work. This does not include housing allowance, utilities, transport or and any other allowances that have not been explicitly mentioned in the employment contract, such as overtime pay, commissions, bonuses, or any variable components.
As long as the requisite one year of continuous service is completed, gratuity is calculated according to the number of working days (unpaid leave days are excluded), and the total gratuity should not exceed the wage of two years.
Maintaining accurate and consistent documentation of employees’ salary structure is the first step in ensuring precise gratuity calculations. Here’s a breakdown of the two methods of gratuity calculations, depending on the type of contract:
| Limited Contract | Unlimited Contract | |
|---|---|---|
| Fixed-term contract | Indefinite-term contract | |
| What is this? | A form of contract with fixed terms. For instance, you and your employer agreed to work for a specified period of time, such as 2 years. | A form of contract without fixed terms. There is no specified time when your employment will end. |
| If the employee resigns | If resignation is filed for before the contract date, the employer may impose a labour ban on the employee and ask for compensation in exchange for the damage caused. | If the employee resigns, they need to render 2-3 months of their notice period before the contract terminates. Or else, action can be taken against negligence. |
| How is gratuity calculated? |
|
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So under a limited contract, if someone’s basic salary is AED 15,000 and they have been in service for 5 years, their gratuity pay will be calculated like this:
AED 15,000 for 30 days
AED 15,000 x 5 years = AED 75,000 gratuity pay
Under an unlimited contract, let’s say a person has worked for 4 years with AED 15,000. Their gratuity pay will be calculated like this:
AED 15,000 / 30 days = AED 500 per day
AED 500 x 21 days = AED 10,500
AED 10,500 x 0.66 = AED 6930 gratuity pay
According to the latest amendment by MOHRE, from now on permanent or indefinite contracts will be limited and renewable after a fixed term of 1 year for all private sector employees.
If the employee resigns
In case of a resignation, the following rules will apply when calculating gratuity:
- Resignation before 1 year of service- The employee is not entitled to any gratuity.
- Resignation between 1 and 3 years of service- The employee is entitled to 7 days’ basic salary (one-third of 21 days) for each year as gratuity for the period of employment.
- Resignation between 3 and 5 years of service- The employee is entitled to two-thirds of 21 days’ basic salary for each year as gratuity for the period of employment.
- Resignation after 5 years of service- The employee is entitled to 21 days’ basic salary for the first 5 years of employment and 30 days’ basic salary for each additional year.
Conclusion
It is crucial for businesses to stay updated with the latest labour laws and any amendments related to gratuity calculations. Additionally, employers must ensure compliance with these regulations, as failure to do so can result in legal consequences. Seeking professional or legal advice can help ensure accurate and compliant gratuity calculations for your employees.
For more information related to your employees’ financial rights, WPS-compliant salary processing or payroll services in UAE, feel free to reach out to us on info.ae@edenred.com
