One of the many perks of employment in the UAE is that the UAE has gratuity laws. This means that at the end of your service with a company you are eligible for some kind of bonus, generally termed as an end-of-service payment or gratuity.
However, your gratuity varies depending on your salary and your time of employment. That is why in this article we will teach you how to calculate gratuity in the UAE. We will also tell you about the eligibility criteria and any terms and conditions that may apply.
What is Gratuity?
Gratuity or end-of-service payment is a sum of money paid to the employee at the end of their employment period with a company. It is given as a gesture of appreciation by the company to the employee for their service to the company.
Eligibility Criteria for getting Gratuity
As per UAE labor laws, every employee who has worked for a company for a certain period of time is eligible for gratuity. However, the exact amount paid to the employee depends on a number of factors and they are as follows.
- Type of contract.
- Length of service.
- Termination or Resignation.
- Basic Salary.
These will be explained below when calculating gratuity for the different types of contracts.
Types of Contracts
Two types of contracts exist in the UAE under its labor laws. These are limited-term contracts and unlimited-term contracts and here is the difference between the two.
Limited-term Contract
A limited-term contract has a set period of time for employment, meaning the employer higher an employee for a set amount of time and after that time has passed the employment contract will automatically end. So, in a limited-term contract, there is a set date for the start and end of employment.
Unlimited-term Contract
An unlimited-term contract is an open-ended contract with no specified end date and the employee works with the employer until his termination, resignation, or termination with mutual consent. In an unlimited-term contract, both parties are obligated to honor the terms of their contract for the duration of the service.
Calculating gratuity for limited-term contract
The amount of money paid in gratuity is calculated based on the employee’s base salary from the last year and depending on how long he has worked in the company, the type of contract, and whether he is being terminated or resigning here is how to calculate gratuity in UAE for a limited-term contract.
- Less than 1 year of service: Employee is not eligible for gratuity pay.
- 1 to 5 years of service: The employee is paid 21 calendar days of his last year’s base salary for every year he has worked for the company.
- 5 plus years of service: The employee is paid 30 calendar days of his last year’s base salary for every year he has worked for the company following the first five years.
- In case of Resignation or termination the employee is still eligible for gratuity under the condition mentioned above.
- The total amount paid in gratuity is capped at two year’s total salary of the employee.
Calculating gratuity for unlimited-term contract
Gratuity for the unlimited-term contract is still calculated the same as a limited-term contract and is still based on the last year’s base salary of the employee. However, the time period of the employment has now changed and whether an employee resigns or is terminated also affects the gratuity.
In case of Termination
In case the employee is terminated, the following criteria apply to gratuity payments.
- 1 to 5 years of service: The employee is paid 21 calendar days of his last year’s base salary for every year he has worked for the company.
- 5 plus years of service: The employee is paid 30 calendar days of his last year’s base salary for every year he has worked for the company following the first five years.
- Again, the total amount paid in gratuity is capped at two year’s total salary of the employee.
In case of Resignation
In case the employee resigns, the following criteria for gratuity payment apply.
- Less than 1 year of service: Employee is not eligible for gratuity pay.
- 1 to 3 years of service: The employee is paid one-third (1/3) of his 21 calendar days base salary of last year for every year he has worked for the company.
- 3 to 5 years of service: The employee is paid two-thirds (2/3) of his 21 calendar days base salary of last year for every year he has worked for the company.
- 5 plus years of service: The employee is paid 21 calendar days of his last year’s base salary for every year he has worked for the company following the first five years
- Again, the total amount paid in gratuity is capped at two year’s total salary of the employee.
Step-by-step guide to calculate gratuity
Here is a step-by-step guide for calculating gratuity for both limited-term and unlimited-term contracts.
For Limited-term Contract
If an employee has a monthly wage of AED 7500 and has worked in the company for 4 years then his gratuity will be calculated as:
Daily Wage for 30 days:
7500 ÷ 30 = AED 250
Multiplied by 21 (for 1 to 3 years of service):
250 x 21 = AED 5,250
* For 5 plus years of service you will multiply with 30 instead of 21.
Multiplied by 4 (years of service):
5,250 x 4 = AED 21,000
So, if an employee has worked for 4 years and has a base salary of AED 7500, his gratuity will come out to be AED 21,000.
For unlimited-term contract
In case of termination, the process to calculate gratuity will be the same as we did for the limited-term contract. However, in case of resignation, the process will slightly change. Here are the steps for calculating gratuity then.
If an employee has a monthly wage of AED 7500 and has worked in the company for 4 years then his gratuity will be calculated as:
Daily Wage for 30 days:
7500 ÷ 30 = AED 250
Multiplied by 21 and 2/3 (for 3-5 years of service):
250 x 21 = AED 5,250
5,250x 2/3 = AED 3,500
* For 1 to 3 years of service instead of multiplication by 2/3 you will multiply by 1/3.
Multiplied by 4 (years of service):
3,500 x 4 = AED 14,000
So, if an employee has worked for 4 years and had a base salary of AED 7500, his gratuity will come out to be AED 14,000 in case he resigns.