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Step by Step process to calculate gratuity in UAE

In the UAE, an employer must pay his employee a gratuity under the gratuity law UAE. In this case, said bonus will be by the type of contract that the worker has in the company. Therefore, each employer must know very well how to make all calculations for end-of-service payments.

In this article, we will show you what is gratuity and what the calculation of said termination benefit consists of. Thus, with what you can see here, you can make these calculations more accurately to pay your employees fairly.

Fundamentals of UAE Labor Law Gratuity

gratuity law uae

The United Arab Emirates has very strict laws regarding the payment of free end-of-service gratuity. In this way, employees ensure compensation for loss of employment, whether due to resignation or dismissal. However, only employees who have been with a company for at least one year can receive the end of service gratuity UAE.

  • Employees will receive a termination payment for a fraction of the year as long as they have been with the company for at least one year.
  • The gratuity law UAE states that the basis of payment calculation depends, among other things, on the last base salary of the employee. Therefore, allowances for housing, transportation, services, and furniture, among others, do not apply to the calculation.
  • The employer can deduct from the bonus any debts that the employee owes to the company.
  • Employers must pay the gratuity to their workers within 14 days after the termination of the contract.

Additionally, Federal Law No. 33 of 2021 regarding gratuity in UAE establishes that the payment is for private sector workers.

Basics of UAE Labor Law

Every worker who works in a company will have the right to a gratuity under the gratuity law UAE. Likewise, to receive it, the employee must meet the requirements that the law requires for this bonus. Furthermore, this bonus will depend on the base monthly salary earned by the worker.

Also, the employer must pay this benefit following its terms and conditions of employment. However, you must pay it upon the retirement of the worker or the end of the contract for legal reasons.

Crucial Gratuity Rules in UAE

Under the gratuity law UAE, the employer does not have to pay compensation to all employees. Hence, for an employee to receive the benefits, they must meet the following conditions:

  • You must have a current limited or unlimited employment contract.
  • A worker must work continuously for at least 1 year with the same employer.

Likewise, if the employee with an indefinite contract does not comply with the notice when resigning, he will not receive the end of service benefits UAE. Similarly, the worker will not receive compensation if he cannot demonstrate any breach of labor obligations by the employer.

Also, you will not receive the reward if you allege mistreatment by the employer without presenting any proof of the aggression. On the other hand, Emirati citizens and expatriates in the country will be able to receive the UAE labor law gratuity equally.

Finally, an employer must not pay gratuity if the employment contract is terminated by Article 120 of the Labor Law. That is, if you do not comply with the provisions of this article, you are not eligible to receive payment.

Finalizing Your Gratuity Calculation

Being clear about the aspects that delimit the gratuity calculation in UAE will allow you to obtain an accurate amount and avoid inconveniences. Therefore, we offer you the aspects that define the calculation method, to certify a fair payment.

Ensuring Accuracy in Gratuity Calculation

The gratuity law UAE establishes the characteristics and details of their payment in different cases. Therefore, there are several factors that affects the final calculation of said employee benefit. These factors are the following:

Type of contract

One of the factors that influence the gratuity calculation in UAE is the type of contract of the employee in question. Thus, according to the labor law of the Emirates, there are two types of contracts: limited and unlimited. Both types of agreements have their essential differences which also affect the payment of the bonus.

These types of employment contracts differ in the termination time that each one has. Next, we show you the characteristics of each of this type of agreement defined in the law:

Limited contracts

These contracts are for a fixed-term period and are usefull when the employer needs labor for a particular project. Therefore, the employer will put the start and end dates of the work term in a contract as appropriate. Furthermore, upon termination of the contract, it automatically ends if the employer requires it.

Otherwise, the latter may renew it if it still requires the service of the worker to complete the project. Therefore, the employee agrees to remain at his or her workplace until the time established in the contract. Consequently, if you decide to resign early, you will have to pay compensation to the employer, lose your employment rights, or face the inability to work again.

In addition, this type of contract requires that the employer pays a final settlement UAE labor law at the end of the service.

Unlimited contracts

The unlimited contract does not have a set time for its completion, which makes it very flexible. Furthermore, this type of contract is the most used in the emirates and can be terminated by mutual consent between employer and employee.

However, if either party decides to terminate the contract, they must comply with a notice period ranging from 1 to 3 months. Likewise, the employer must comply with the gratuity law UAE upon termination of the contract.

Last basic salary

Another factor to consider and one of the most relevant, for gratuity in UAE is the last basic salary received. In calculating said payment, employers must only take into account the last salary received by the employee. Thus, it is the one you received just before the termination of the contract in the company.

Thus, when we talk about basic salary, it does not include additional benefits or subsidies received by the worker. For example, a worker earns a salary of AED 5,000 and also receives accommodation, overtime, or other allowances. In this case, only AED 5000 should be considered in the calculation for the end of service payment.

Likewise, salary deductions also do not count towards UAE labor law gratuity calculation.

Duration of employment

The length of employment determines the amount the employee will receive as part of the bonus. In this sense, the gratuity law UAE establishes that only those who have worked for at least 1 year with the same employer can receive the payment.

Tips for a Smooth Gratuity Claim Process

If your employer does not want to pay the benefit or made an incorrect payment without following the guidelines of the gratuity law UAE, you can make a claim. To do this, you must go to the Ministry of Human Resources and Emiratization or a labor court in the country. However, you should discuss the situation with your employer first before going to any of these instances.

Key Steps to Calculate Gratuity

gratuity law uae

Labor law sets out several key steps on how to calculate gratuity based on the contract and reason for termination. Below, you can see how the calculation is in the case of resignation or dismissal.

In case of resignation with an indefinite contract

Workers who have an indefinite contract and who resign from their jobs will receive compensation as follows:

  • If the worker has been with the company for less than 1 year, they will not receive any payment.
  • Those who have worked for between 1 and 3 years are entitled to 1/3 of 21 days of pay for each year of service.
  • Workers with between 3 and 5 years of service are entitled to 2/3 of the 21-day bonus payment for each year.
  • Workers with 5 or more years of service in the same company receive full pay for 21 days each year.

In case of termination with an indefinite contract

If the employer dismisses the employee with a permanent contract, the gratuity law UAE states the following:

  • If the worker has less than one year of service, he or she is not entitled to the end-of-service benefit.
  • Employees with between 1 and less than 5 years of service are entitled to 21 days of salary for each year of service.
  • For 5 or more years of service, the bonus is 30 days of salary for each additional year of service.

In case of resignation with a defined contract

As with permanent contracts, the gratuity law UAE establishes various levels depending on whether the employee resigns or is fired. Therefore, payment depends on the length of service but also the reason for the termination of the employment agreement. The levels for payment of the end-of-service benefit consist of the following:

  • For less than one year of service, the worker will not receive compensation.
  • For a period of service of less than 5 years, the worker will receive 21 days of salary for each year in the company.
  • If the worker has completed 5 or more years of work, he or she will receive 21 days of salary for each of the first 5 years. Likewise, they will receive 30 days of salary for each year after the first 5.

In case of termination with a defined contract

If the employer terminates the defined contract or if it ends, the payment will be as follows:

  • With between 1 and 5 years of service, the employee will receive 21 days of salary for each year of work in the company.
  • For more than 5 years of service, the employee will receive 21 days of salary for these first 5 years. Additionally, you will receive 30 days of salary for each year of service after the first 5 years of work.

However, in any case, the gratuity payment in UAE cannot exceed 2 years of full salary.

Calculating Length of Service

As established by the gratuity law UAE, the days counted for payment are those counted as actual days worked. Therefore, it does not include long-term periods, such as leaves or sabbaticals. That is, to calculate full payment, you must assume continuous days from the first business day of work to the last.

Thus, the Ministry of Human Resources and Emiratization or MoHRE establishes the mechanisms to consider 1 year of work. Thus, for this account, you should not consider unpaid breaks or vacations during service.

Determining Average Salary

Knowing what the basic salary consists of is essential to know what basis to apply in the calculation. This is because, as part of the gratuity rules in UAE, it is this salary that will define the amount to be paid. Thus it is one of the most important points to define the payment to the employee regardless of the type of contract and the length of service.

Therefore, the worker cannot afford to make mistakes in this regard if he or she claims the employer. In this case, the employer in the UAE established the basic salary without taking into account subsidies, expenses, or other benefits. Thus, contracts in the country must specify the amount of the basic salary that the employee will receive.

In the labor law (Article 1) it establishes that the basic salary must appear in the contract and that the employee receives for his work. Additionally, the employer can pay the salary daily, weekly, monthly, or for each job. Finally, it specifies that this salary does not include any subsidies or benefits in kind.

Therefore, the gratuity law UAE establishes all the rules for the calculation and payment of this job termination benefit. In this way, employers have a regulatory framework so that their employees receive fair payment. Therefore, as a business owner, you must be aware of compliance in this regard.

Likewise, as an employee, you must be aware of each of these rules to be clear about the payment you should receive. Otherwise, you can choose legal mechanisms so that your rights to this benefit are not violated. If you would like more information about this or other employment issues, do not hesitate to contact us.

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    Connect Staffing is established by Connect Group to connect you with life-giving opportunities and discover solutions to your tough hiring challenges, whether you’re establishing a career or a business.

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