Understanding how to compute your UAE gratuity entitlement is important. The law ensures expat workers will have a safety net after their contract ends. Here is an easy guide to help you make sense of your UAE gratuity calculation in 2024.
Things you need to know
According to Article 51 of the UAE Labor Law, expat workers in the UAE private sector can receive gratuity pay. This is based on the period of service rendered and contract types, among other guidelines. The following are some essential provisions of the UAE labor law regarding gratuity pay:
- Employees who have completed at least one year of continuous service can receive gratuity pay.
- The last basic salary of the worker is the basis of the end-of-service gratuity calculation. Note that gratuity pay covers only the basic salary and does not include allowances, such as transportation and accommodation.
- The employer may deduct from the gratuity pay any amount an employee legitimately owes the company.
- Employers must settle all end-of-service entitlements payable within 14 days from the end date of the employment.
Understanding gratuity in UAE
Gratuity, also known as end-of-service benefit, is a crucial payment made to employees upon the termination of their employment contract in the UAE. This benefit is mandated by the UAE labor law, ensuring that employees receive a financial cushion when their employment ends. The gratuity amount is calculated based on the employee’s last basic salary, explicitly excluding any allowances or bonuses. Regardless of the reason for termination, whether it’s resignation, contract completion, or dismissal, employees are entitled to this benefit, providing them with financial support during their transition period.
Eligibility for gratuity in UAE
To be eligible for gratuity in the UAE, an employee must have completed a minimum of one year of continuous service with their employer. This requirement applies to both limited and unlimited contracts, ensuring that employees who have dedicated a significant period to their job are rewarded. According to the UAE Labour Law, continuous service is a key factor in determining gratuity eligibility. It’s important to note that UAE nationals are not eligible for gratuity payments as they are covered under mandatory National Pension Plans. Understanding these eligibility criteria is crucial for employees to ensure they receive the end-of-service benefits they are entitled to.
Types of employment contracts
In the UAE, employment contracts are categorized into two main types: limited and unlimited. A limited contract specifies a fixed term or duration, with clear start and end dates. This type of contract automatically terminates upon expiration unless renewed. On the other hand, an unlimited contract is open-ended, offering more flexibility as it does not have a predetermined end date. It can be terminated by mutual consent or by serving a notice period, typically ranging from one to three months. The type of contract significantly impacts gratuity calculations, with different rules and formulas applying to each. Understanding whether you have a limited or unlimited contract is essential for accurate gratuity calculations and ensuring you receive the correct end-of-service benefits.
Types of employment contract
The Dubai Development Authority has made it easier for expat workers to compute their gratuity pay using this calculator. However, it always helps to have a deeper understanding of your gratuity calculation, for your own peace of mind and protection.
Before knowing how to calculate gratuity in UAE, the employee must determine whether he or she has a limited or unlimited contract.
1. Limited contract
A limited contract mentions the start and end dates of the employment period. This is automatically canceled upon expiration.
2. Unlimited contract
An unlimited contract, on the other hand, is open-ended, more flexible and common in the UAE. This can be terminated with mutual consent or by serving a notice period of anywhere from one to three months.
Read: Lost your job? No problem. Still get paid
Gratuity calculation for those with limited contracts
An expat employee who worked less than a year of their government-approved contract, whether he resigned or got terminated, will not receive any gratuity pay.
If an employee provided anywhere from 1 to 5 years of service, then he or she will receive full gratuity pay based on 21 days of basic salary for every year of service rendered.
If an employee has completed over 5 years of service, he will receive full gratuity based on 30 days of basic salary for each year of work.
Here’s how to compute:
- Identify the daily rate by dividing the monthly wage by 30
- Multiply the daily rate by 21 or 30
- The result is the amount the employee will receive for each year of service
Example:
If the monthly wage is AED10,000 and the employee has rendered 4 years of service. Given the formula, “(Monthly wage ÷ 30) x 21,” the amount the employee will receive for each year of service is AED6,999.30.
Please note that in all scenarios previously mentioned, the total gratuity an employee will receive should not exceed 2 years of his or her total wages, based on the basic salary, regardless of length of service.
Gratuity calculation for those with unlimited contracts
As in the case of workers with limited contracts, those who have not completed a year of service are not eligible to receive gratuity.
Those who have completed anywhere from 1 to 3 years will receive total gratuity that is one-third (1/3) of 21 days’ worth of salary. The formula for total gratuity is “Daily rate x 21 days x 1/3”. The daily rate is the monthly wage divided by 30.
For those who completed employment of between 3 to 5 years, the calculation of gratuity pay is two-thirds (2/3) of 21 days’ salary. In this case, total gratuity pay’s formula is “Daily rate x 21 days x 2/3”.
For those whose service ended after five years, full gratuity pay will be based on a 21-day salary multiplied by the number of years of work. Hence, gratuity pay computation is “Daily rate x 21 days x service period.”
Example:
Assuming a monthly wage of AED10,000, an employee who rendered 4 years of employment can compute his gratuity using the formula, “(Monthly wage ÷ 30) x 21 days x 2/3”. His gratuity pay will be equivalent to AED4,666.20 for each year of his service
Gratuity payment rules
The UAE labor law outlines specific rules for calculating gratuity, which hinge on the duration of the employee’s service. For employees who have completed between one to five years of service, the gratuity is calculated by multiplying the employee’s last basic salary by the number of years of service. For those who have served more than five years, the calculation changes slightly, with the gratuity being based on the employee’s last basic wage multiplied by 30 days for each year of service. This structured approach ensures that longer-serving employees receive a proportionately higher gratuity, reflecting their extended contribution to the company.
Exclusions from gratuity calculation
When calculating gratuity, it’s essential to note that certain components of an employee’s compensation are excluded. These exclusions include:
- Allowances and bonuses
- Overtime pay
- Leave pay
- Any other benefits or allowances not included in the basic wage
By excluding these elements, the calculation focuses solely on the basic wage, ensuring a fair and standardized gratuity amount.
No gratuity payment eligibility
Article 139 of the UAE Labour Law states that an employee may not get gratuity payment if:
- He or she gets dismissed from service for any of the reasons outlined in Article 120. Or, if the employee quits only to avoid being dismissed in accordance with the article.
- He or she resigns without notice in cases other than the ones set in Article 121 (if an employer breaches contract or in case of assault), and such with regards to unlimited contracts; or before the completion of five years of continuous service in limited contracts.
New gratuity law in UAE 2023
The new UAE Labour Law introduced in 2023 has brought significant changes to employment contracts and gratuity calculations. Under the new law, all employment contracts are now limited to a maximum duration of five years. This change aims to provide a more streamlined and fair process for calculating gratuity. The gratuity calculation is based on the employee’s basic salary, with 21 days’ salary considered for each year of service. For employees whose service period exceeds five years, the gratuity is calculated based on 30 days of their basic salary for each year beyond the five-year mark. This updated approach ensures that employees are fairly compensated for their extended service, reflecting their contribution to the company over a longer period. Understanding these changes is crucial for both employers and employees to ensure compliance with the new legal framework and accurate gratuity calculations.
Gratuity calculator
A gratuity calculator is an invaluable tool for both employers and employees, simplifying the process of determining the correct gratuity payment. By inputting the employee’s last basic salary and the number of years of service, the calculator provides an accurate gratuity amount. This tool is applicable for both limited and unlimited contracts, ensuring consistency and accuracy in the calculations. Using a reliable gratuity calculator helps avoid errors and ensures that employees receive the correct end-of-service benefits they are entitled to.
Common mistakes to avoid
Accurate gratuity calculation is crucial, and there are common mistakes that both employers and employees should avoid:
- Including allowances and bonuses in the gratuity calculation
- Failing to base the calculation on the employee’s last basic salary
- Overlooking the number of years of service in the calculation
- Not using a reliable and accurate gratuity calculator
By steering clear of these errors, employers can ensure they are making the correct gratuity payments, and employees can be confident they are receiving the benefits they deserve upon the termination of their employment contract.
Get your gratuity benefits
Make sure that you understand the benefits you are entitled to, whether you resign or lose your job under any other circumstances. Your gratuity pay can help during your job search or as a means to support you during retirement.
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