The UAE has established clear regulations regarding end-of-service benefits to ensure fair treatment of employees upon termination of employment. Understanding gratuity calculations and legal entitlements is crucial for both employers and employees to comply with labor laws and avoid disputes. This article provides a detailed guide on end-of-service benefits, including the latest updates to UAE gratuity laws, practical examples, and how ProAct can assist businesses in ensuring compliance while optimizing their workforce management.
What Is End-of-Service Benefits in the UAE?
End-of-service benefits (EoSB) are statutory payments provided to employees upon the completion or termination of their employment contracts. These benefits mainly consist of gratuity payments, which are calculated based on an employee’s length of service and final salary.
The UAE labor law (Federal Decree-Law No. 33 of 2021) governs gratuity calculations and legal entitlements, ensuring that employees receive fair compensation when they leave an organization. For official details, refer to the MOHRE website.
Who Is Eligible for End-of-Service Benefits?
Employees in the UAE are entitled to gratuity payments if they meet the following conditions:
- They have completed at least one year of continuous service.
- Their employment contract is terminated either by resignation or employer-initiated termination.
- They are not dismissed due to serious misconduct (as per Article 44 of UAE Labor Law).
Gratuity is applicable to full-time employees but does not cover temporary, part-time, or freelance workers unless explicitly stated in their contracts.
How to Calculate Gratuity in the UAE
The gratuity calculation depends on the length of service and the reason for termination. Below are the key factors that determine gratuity payouts:
Gratuity Calculation for Fixed-Term Contracts
Since the introduction of Federal Decree-Law No. 33 of 2021, all contracts in the UAE are now fixed-term, replacing the previously used unlimited contracts. Gratuity for fixed-term contracts is calculated as follows:
| Years of Service | Gratuity Entitlement |
|---|---|
| 1 to 5 years | 21 days of basic salary per year |
| More than 5 years | 30 days of basic salary per year beyond the first five years |
Example: If an employee’s basic salary is AED 10,000 and they complete 7 years of service, the gratuity calculation is:
- First 5 years: (21 days × 5 years × 10,000) / 30 = AED 35,000
- Additional 2 years: (30 days × 2 years × 10,000) / 30 = AED 20,000
- Total Gratuity: AED 55,000
Free Zone Gratuity Rules
While the federal law applies broadly, certain free zones have specific gratuity rules that may differ. Employers in free zones should check with their respective free zone authorities for any variations in gratuity calculations.
What Happens if an Employee Resigns?
Under the new labor law, if an employee resigns before completing five years of service, they are still entitled to gratuity based on the same calculation as above. There are no longer reduced entitlements for employees who resign, as was the case under previous regulations.
Common Mistakes in Gratuity Calculation
Many companies miscalculate gratuity due to:
- Incorrectly including allowances instead of only the basic salary.
- Using an outdated gratuity formula.
This can lead to legal disputes and financial penalties. ProAct helps businesses calculate gratuity accurately, ensuring compliance with UAE labor laws and preventing costly errors.
Legal Entitlements Beyond Gratuity
Apart from gratuity, employees are entitled to:
- Unpaid Salary – Wages for the last working month.
- Unused Annual Leave Compensation – If the employee has unused leave.
- Repatriation Ticket – If specified in the contract.
- End-of-Service Certificate – Upon request, employers must provide an official certificate.
Employers must settle all dues within 14 days of termination to avoid fines and legal action.
Frequently Asked Questions (FAQ)
1. Is gratuity calculated on basic salary or total salary?
Gratuity is calculated based on basic salary only, excluding allowances like housing, transport, or bonuses.
2. Can an employer refuse to pay gratuity?
Employers cannot withhold gratuity unless an employee is terminated due to gross misconduct under Article 44 of the UAE labor law.
3. How can businesses ensure accurate gratuity payments?
By using ProAct’s expert payroll management services, businesses can avoid miscalculations and ensure compliance with UAE laws.
4. What is the maximum gratuity an employee can receive?
Gratuity is capped at two years’ salary under UAE labor law.
5. Are part-time employees eligible for gratuity?
No, gratuity applies only to full-time employees unless specified otherwise in the contract.
6. How is gratuity calculated if an employee worked for less than one year?
Employees with less than one year of service are not eligible for gratuity.
7. Can gratuity be paid in installments?
No, gratuity must be paid in full within 14 days of termination.
8. Are free zone employees entitled to gratuity?
Yes, but some free zones have specific gratuity rules that employers must check.
9. What happens if an employer delays gratuity payment?
Employers may face fines and legal action for delays in gratuity payment.
10. Is gratuity taxable in the UAE?
No, gratuity is not subject to tax in the UAE.
11. Can an employee challenge an incorrect gratuity calculation?
Yes, employees can file a complaint with MOHRE if they believe gratuity has been miscalculated.
12. How is gratuity affected by absences or unpaid leave?
Only the period of active service is considered for gratuity calculation.
13. Can an employer deduct amounts from gratuity?
Yes, deductions can be made for unpaid loans or liabilities owed to the employer.
14. Can gratuity be paid in a different currency?
Gratuity is generally paid in AED, unless otherwise agreed in the contract.
15. Does gratuity apply to domestic workers?
No, domestic workers follow different regulations under UAE domestic labor laws.
16. Are bonuses included in gratuity calculations?
No, gratuity is calculated only on basic salary, excluding bonuses and allowances.
17. Can an employee withdraw gratuity before leaving a company?
No, gratuity is paid only upon termination of employment.
18. How is gratuity calculated for employees on commission?
If basic salary is fixed, gratuity is based on that amount. If salary is commission-based, an average is used.
19. Is gratuity applicable during probation periods?
No, gratuity applies only after completing one year of service.
20. Can an employee negotiate gratuity terms?
Employers must follow UAE labor laws, but additional end-of-service benefits may be negotiated.
Conclusion
Understanding end-of-service benefits in the UAE is crucial for businesses and employees alike. With constantly evolving labor laws, accurate gratuity calculations and compliance with legal entitlements are essential to avoid disputes and penalties. ProAct’s team of HR experts stays up-to-date on the latest labor law changes, providing accurate gratuity calculations and expert guidance on compliance, ensuring businesses operate smoothly while safeguarding employee rights. For companies looking for a reliable recruitment agency in the UAE, ProAct offers comprehensive workforce solutions, including gratuity calculations, legal consultancy, and HR management. Our expertise ensures that businesses comply with UAE labor laws while efficiently managing their human capital.
Get in Touch with ProAct
Looking for a trusted recruitment partner? Contact ProAct today to streamline your gratuity payments and workforce management while staying fully compliant with UAE regulations.