How to Calculate Gratuity in UAE: A Complete Guide

When working in the United Arab Emirates (UAE), one of the most crucial aspects of an employee’s financial benefits is gratuity. Gratuity is a lump-sum payment given to employees at the end of their employment. This post will explain how to calculate gratuity in the UAE, breaking down the process for both limited and unlimited contract holders.

What Is Gratuity in UAE?

Gratuity is a form of severance pay that an employee is entitled to receive upon the termination of their employment contract. It serves as a reward for the years of service an individual has dedicated to their employer.

According to the UAE’s Labour Law, gratuity is calculated based on the employee’s final salary and the duration of their employment. This benefit is designed to offer financial support as a form of appreciation for an employee’s hard work and commitment.

Key Rules for Gratuity Calculation

Before diving into the formula, let’s take a look at some important points to note:

1. Eligibility: Employees who have completed at least one year of continuous service are entitled to receive gratuity. Employees with less than one year of service are not entitled to gratuity.
2. Type of Contract:
   • Limited Contract: This is a contract with a fixed duration. If an employee with a limited contract resigns after more than a year, they are entitled to gratuity.
   • Unlimited Contract: This is a contract with no fixed end date. If an employee resigns after completing one year of service, they are entitled to gratuity.
3. Calculation Timeframe: Gratuity is typically calculated from the date of joining until the last working day.
4. Proportional Gratuity: Employees who leave before completing a full year of service may still be entitled to a proportional gratuity payment for the months worked.

Formula for Gratuity Calculation

The method for calculating gratuity varies depending on whether the employee is on a limited or unlimited contract and the duration of their service. Below is a step-by-step breakdown of the gratuity calculation process for both types of contracts:

1. Limited Contract Employees:

• Less than 1 Year of Service: Employees who have not completed a full year of service are not entitled to gratuity.
• More than 1 Year of Service:
  • For the first five years of service, the employee is entitled to 21 days’ salary for each year of service.
  • After five years, for any additional years worked, the employee is entitled to 30 days’ salary for each additional year.

Example:

• If an employee with a limited contract has worked for 4 years and earns AED 10,000 per month, the gratuity would be:
  • 21 days * 4 years = 84 days
  • Gratuity = (10,000 / 30) * 84 = AED 28,000

2. Unlimited Contract Employees:

• Less than 1 Year of Service: Employees are not entitled to gratuity if they leave before completing one full year of service.
• More than 1 Year of Service:
  • For the first five years, the employee is entitled to 21 days’ salary for each year.
  • For service beyond five years, the employee is entitled to 30 days’ salary for each additional year.

Example:

• If an employee with an unlimited contract has worked for 6 years and earns AED 12,000 per month, the gratuity would be:
  • 21 days for the first 5 years = (12,000 / 30) * 21 * 5 = AED 42,000
  • 30 days for the next year = (12,000 / 30) * 30 = AED 12,000
  • Total gratuity = AED 42,000 + AED 12,000 = AED 54,000

Important Considerations

1. Salary Calculation: Gratuity is calculated based on your basic salary, excluding allowances such as housing, transportation, and bonuses.
2. Resignation vs. Termination: If you resign voluntarily, the gratuity may be reduced depending on the reason for resignation. For example, if an employee resigns within the first 5 years, they may receive only half of their entitled gratuity. If the employer terminates the contract without cause, the employee is entitled to full gratuity.
3. End of Service Benefits: In addition to gratuity, you may also be eligible for other end-of-service benefits, depending on your contract and the employer’s policies.
4. Unpaid Leave: Time spent on unpaid leave will not be counted towards the calculation of your gratuity.
5. Death or Disability: In the unfortunate event of death or permanent disability, the employee or their family is entitled to full gratuity payment, regardless of the length of service.

Conclusion

Gratuity is a valuable entitlement for employees in the UAE and serves as a financial cushion when transitioning between jobs. By understanding the rules and calculations, employees can plan their finances better and ensure they receive the full benefits they are entitled to upon the end of their employment.