Properly calculating end-of-service benefits is a legal requirement for all employers in the UAE. Understanding the gratuity calculation is crucial for maintaining compliance with the UAE Labour Law and ensuring a fair and smooth offboarding process for your employees. This guide provides a clear breakdown for employers.
Disclaimer: This article provides general guidance and is not a substitute for professional legal advice. Employers should consult a legal expert to ensure compliance with the latest UAE Labour Laws.
What is End-of-Service Gratuity?
End-of-service gratuity is a lump-sum payment that employers in the UAE are legally required to pay an employee at the end of their employment contract. It is essentially a "thank you" payment for the employee's service and is calculated based on their length of service and basic salary.
Who is Eligible for Gratuity?
To be eligible for end-of-service gratuity, an employee must:
- Be employed under the UAE Labour Law.
- Have completed at least one full year of continuous service.
- Not have been terminated for reasons of gross misconduct as outlined in Article 120 of the UAE Labour Law.
How to Calculate Gratuity: The Formula
The gratuity calculation is based on the employee's **last-paid basic salary**, excluding any allowances (such as housing, transport, etc.). The formula varies based on the total period of service:
Gratuity Calculation Rules
- First 5 Years of Service: The employee is entitled to 21 days' basic salary for each year of service.
- Beyond 5 Years of Service: The employee is entitled to 30 days' basic salary for each additional year of service.
- Total Gratuity Cap: The total gratuity payment cannot exceed the employee's two years' total salary (basic + allowances).
Example Gratuity Calculations
Let's assume an employee's final basic monthly salary is AED 5,000.
Scenario 1: 3 Years of Service
- Daily Basic Salary: AED 5,000 / 30 = AED 166.67
- Gratuity for each year: 21 days × AED 166.67 = AED 3,500.07
- Total Gratuity: 3 years × AED 3,500.07 = AED 10,500.21
Scenario 2: 7 Years of Service
- Gratuity for the first 5 years: 5 years × 21 days' basic salary = 105 days' pay
- Gratuity for the next 2 years: 2 years × 30 days' basic salary = 60 days' pay
- Total days' pay: 105 + 60 = 165 days
- Daily Basic Salary: AED 5,000 / 30 = AED 166.67
- Total Gratuity: 165 days × AED 166.67 = AED 27,500.55
For official calculations, you can also use the resources provided by the Ministry of Human Resources & Emiratisation (MOHRE).
When is Gratuity Not Payable?
An employer may not be required to pay gratuity if an employee is terminated for reasons of gross misconduct under Article 120 of the UAE Labour Law. These reasons include acts such as assault, revealing company secrets, or being absent from work without a valid reason for extended periods. This must be formally documented and proven.
Conclusion
Correctly calculating and paying end-of-service gratuity is a fundamental responsibility for employers in the UAE. By understanding the rules and using the correct basic salary for calculations, you can ensure a compliant and fair process. Integrating your payroll with a system like Zolmi's payroll software can help manage employee data and salary information accurately, making these calculations easier when the time comes.