How to Calculate Gratuity in UAE in 2024: Easy Steps to Follow
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What is Gratuity in the UAE?
Under the UAE labour laws, every employee who completes one year of continuous service is eligible for gratuity. The amount of gratuity payable depends on the employee's basic salary and the service period. Although the gratuity is paid when the employee retires or leaves the organization, it can be paid earlier in certain situations.
How is the Gratuity Calculated in the UAE?
1) Basic Salary
The last basic (monthly) salary paid to the employee is considered for the computation of gratuity. The basic salary does not include any additional benefits.
2) Type of Contract
There are two major types of employment contracts in the UAE, i.e. limited-term and unlimited-term. While a limited contract is a fixed-term contract, an unlimited contract does not specify any end date
3) Service Period
The gratuity is payable only to employees who have completed at least one year of continuous service with the same organization. The service period excludes any unpaid breaks or holidays. The higher the duration of employment, the greater the amount of gratuity payable to an employee
Eligibility Criteria for Gratuity in the UAE
There should be a valid contract of employment, either limited or unlimited
The employee should have completed at least one year of continuous service with the same organization.
An employee terminated under Article 120 of the UAE Labor Law (for non-compliance with matters stated in the article) is not eligible to receive gratuity.
An employee under an unlimited contract may not be eligible to receive gratuity if he/she resigns without serving the notice period, is not able to prove the non-fulfilment of obligations by the employer, or fails to provide evidence of assault by the employer.
Both UAE citizens and resident expatriates are eligible to receive gratuity.
What are the Types of Employment Contracts in the UAE?
Limited-Term Contracts
A limited-term contract is a fixed-term contract with a specific start date and end date. These contracts are ideal when the employer decides to hire employees for a specific project or time duration. Unless the contract is renewed upon expiry, it is automatically cancelled on the last day.
The employees commit to serving the organization for a specified period under limited-term contracts. Hence, an early resignation may result in a labour ban, loss of labour rights, or payment of compensation to the employer.
Unlimited-Term Contracts
An unlimited-term contract is an open-ended contract with a start date but no end date. There is no fixed duration of employment for the employees. These types of contracts can be terminated through mutual consent or by serving a notice period of one to three months from either side. Both parties are required to honour their commitments during the notice period.
How to Calculate Gratuity in the UAE for an Unlimited-Term Contract?
Resignation
Less than 1 year of service: The employee is not entitled to receive any gratuity
1 to 3 years of service: The employees are entitled to receive 1/3rd of their 21-day gratuity pay for each year of service
More than 5 years of service: The employees are entitled to receive full 21-day gratuity pay for each year of service
Termination
If the services of an employee working under an unlimited-term contract are terminated by the employer, the computation of gratuity is as follows:
Less than 1 year of service: The employee is not entitled to receive any gratuity
1 to 5 years of service: The employees are entitled to receive a gratuity of 21 days’ basic salary for each year of service
More than 5 years of service: The gratuity increases to 30 days’ basic salary for every additional year
Note: In any case, the amount of gratuity payable in the UAE cannot exceed the maximum limit of the employee’s total salary for two years.
Illustrations
1) If the basic salary is assumed to be AED 12,000 per month and the employee resigns, the calculation of gratuity under an unlimited contract is as follows:
Calculate the daily wage: 12,000/30 = AED 400
Multiply the daily wage by 21 to get the 21-days’ salary = 400 * 21 = AED 8,400
For 1 to 3 years of service, gratuity = ⅓ * 8,400 * number of years of service
For 3 to 5 years of service, gratuity = ⅔ * 8,400 * number of years of service
For more than 5 years of service, gratuity = 1 * 8,400 * number of years of service
2) If the basic salary is assumed to be AED 12,000 per month and the employee's services are terminated, the calculation of gratuity under an unlimited contract is as follows:
Calculate the daily wage: 12,000/30 = AED 400
Multiply the daily wage by 21 to get the 21-days’ salary = 400 * 21 = AED 8,400
For 1 to 5 years of service, gratuity = 8,400 * number of years of service
For more than 5 years of service, gratuity = (8,400 * 5) + (12,000 * additional years of service beyond 5 years)
How to Calculate Gratuity in the UAE for a Limited-Term Contract?
Completion of a contract with less than or equal to 5 years of service
Completion of a contract with more than 5 years of service
For employees terminated under a limited-term contract, the tiers are as follows:
1 to 5 years of service
More than 5 years of service
Resignation
An employee is not entitled to receive any gratuity if he/she resigns before completing one year of service.
Employees who serve more than one year but less than five years of service are eligible to receive a gratuity of 21 days’ basic salary for each year.
Employees who have served more than five years receive a gratuity of 21 days’ basic salary for the first five years and 30 days’ basic salary for every additional year beyond five years.
Termination
Gratuity for employees who have worked for 1 to 5 years consists of 21 days’ basic salary for each year of service.
Gratuity for employees who have worked for more than five years consists of 21 days’ basic salary for the first five years and 30 days’ basic salary for every additional year beyond five years.
Note: In any case, the amount of gratuity payable in the UAE cannot exceed the maximum limit of the employee’s total salary for two years.
Illustration
If the basic salary is assumed to be AED 12,000 per month and the employee has worked for 3 years, the calculation of gratuity under a limited-term contract is as follows:
Calculate the daily wage: 12,000/30 = AED 400
Multiply the daily wage by 21 to get the 21-days’ salary = 400*21 = AED 8,400
As the employee has worked for 3 years, the gratuity amount payable = 8,400*3 = AED 25,200
If the employee has worked for more than 5 years (say 7 years), the gratuity amount payable = (8,400*5) + (12,000*2) = AED 66,000
What are the UAE Gratuity Rules 2024?
Under the new UAE labour laws, contracts are limited to a duration of five years. The gratuity is calculated based on the employee's 21 days' basic salary for each year of service. If an employee's service exceeds five years, the gratuity is calculated as 30 days' basic salary for every additional year beyond five years.
Further, there is no difference in the calculation of gratuity based on whether an employee resigns or his services are terminated.
Frequently Asked Questions on Gratuity Calculation in the UAE
What are the key factors that affect my gratuity calculation in the UAE?
The gratuity calculation in the UAE is based on three important factors i.e. type of contract, duration of service, and the last basic salary.
How does the length of service impact the gratuity amount in the UAE?
The impact of the service period on the gratuity amount is as follows:
- Employees with less than one year of service are not eligible to receive any gratuity in the UAE.
- Employees with 1 to 3 years of service receive 1/3rd of their 21-day basic salary for every year of service.
- Those with 3 to 5 years of service receive 2/3rd of their 21-day basic salary for every year of service.
- For employees with more than 5 years of service, the gratuity amount increases to 30 days’ basic salary for every additional year beyond 5 years.
What happens to gratuity if an employee resigns before completing one year of service?
An employee who resigns before completing one year of service is not entitled to receive any gratuity from the employer.
How do allowances and bonuses affect the gratuity calculation?
The gratuity calculation in the UAE considers only the last basic salary of the employee. Hence, allowances and bonuses have no impact on the gratuity amount.
How is the basic salary calculated in the UAE?
The basic salary is the fixed amount an employee receives as per the employment contract. It does not include allowances, bonuses, perquisites, and other benefits. So basic salary can be calculated by deducting these values from your gross salary.
Can I get my gratuity in advance in the UAE?
Gratuity is an end-of-service benefit payable when the employee retires or leaves the organization. It is generally not payable in advance. However, it may be possible to claim the gratuity before based on the employer’s policies and terms & conditions of employment.
What is the basic salary percentage in UAE Labor Law 2024?
The UAE Labor Law 2024 does not specify any percentage for an employee’s basic salary. However, it is expected to be at least 60% of your total compensation package.
What is the new gratuity law in the UAE?
Under the new UAE labour laws, contracts are limited to a duration of five years. The gratuity is calculated based on the employee’s 21 days’ basic salary for each year of service. If an employee’s service exceeds five years, the gratuity is calculated as 30 days’ basic salary for every additional year beyond five years.
Is end-of-service gratuity mandatory in the UAE?
Yes. Employers in the UAE must pay an end-of-service gratuity to their employees who have completed at least one year of continuous service. It is typically paid after the employee leaves the organization.
Is there a maximum limit on gratuity in the UAE?
Yes. The amount of gratuity payable in the UAE cannot exceed the employee’s total salary for two years.
How is gratuity calculated for domestic workers in the UAE?
Under the UAE laws, domestic workers under limited-term contracts will get a gratuity of 14 days’ basic salary for each year of service. Domestic workers under unlimited-term contracts receive a gratuity of one month’s salary for each year of service.
