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How Gratuity is Computed in UAE

As per UAE labour law, employees who have at least one year of continuous service are eligible for gratuity. Gratuity is determined by the period they have worked for the company. Each employee’s monthly salary is used to pay their gratuities, which are credited to their accounts after termination. It is an appreciation for employees as a favour for providing their consistent service to the company.

Gratuity is determined by 4 factors:

  • Type of contract
  • Total years worked for the company
  • Reason for contract termination
  • Basic wage
In UAE, there are two distinct contract types:

Limited or fixed contract – the employee commits to staying with the business for a set period.

Unlimited contract – has no expiration date and doesn’t place a time limit on how long the employee can work under it.

For Limited Contracts

Less than 1 year of service – Under UAE labour law, an employee who leaves their position before 1 year is not eligible for gratuity pay.

1 year to 5 years of service – Based on 21 days of salary for each year of service, an employee who has worked for the company for more than 1 year but less than 5 years is entitled to full gratuity pay.

5 or more years of service – If an employee has worked for more than 5 years, they are eligible for a full gratuity of 30 days’ salary for every additional year of employment.

If the employment contract is terminated due to the employee’s death. The company is responsible for paying the end-of-service gratuity to employee beneficiaries in the event of a worker’s death.

For Unlimited Contracts

Less than 1 year of service – Not eligible for gratuity pay.

1 to 3 years of service – The employee is entitled to a gratuity of one-third of the basic salary for 21 days.

3 to 5 years of service – The employee is entitled to two-thirds of the basic salary for 21 days.

More than 5 years of service – The employee is entitled to the entire gratuity of the basic salary for 21 days.

If an employee quits the job voluntarily before the contract end. They are not entitled to any gratuity unless they have been working consistently for more than five years.

How gratuity is calculated?

1) DAILY WAGE = BASIC SALARY ÷ 30

2) ONE YEAR GRATUITY = DAILY WAGE × 21 (depending on years of service for that company)

or

3) ONE YEAR GRATUITY = DAILY WAGE × 30 (depending on years of service for that company)

4) TOTAL GRATUITY = ONE YEAR GRATUITY × YEARS OF SERVICE

Example for Limited Contract:

Let an employee’s basic salary is 20,000 AED and has 4 years of service.

Daily wage = 20,000 ÷ 30 = 666.66

One year Gratuity = 666.66 × 21 = 13,999.86

Total Gratuity = 13,999.86 × 4 = 55,999.44

Suppose an employee’s basic salary is 20,000 AED and has 5 years of service.

Daily wage = 20,000 ÷ 30 = 666.66

One year Gratuity = 666.66 ×30 = 20,000

Total Gratuity = 20,000 × 5 = 1,00,000

Example for Unlimited Contract:

Let an employee’s basic salary is 20,000 AED and has 2 years of service.

Daily wage = 20,000 ÷ 30 = 666.66

One year Gratuity = 666.66 × 21 = 13,999.86

Total Gratuity = 13,999.86 ÷1/3 = 4,666.62

If the employee worked between 3 to 5 years, only 2/3 is payable.

Therefore, Total Gratuity = 13,999.86 ÷2/3 = 9333.24

If the employee completed five years, the entire gratuity of 13,999.86 is payable.

Reference:

U.A.E. LABOUR LAW

FEDERAL LAW NO. (8) OF 1980

LABOUR LAW AND ITS AMENDMENTS 2001