Introduction to gratuity in the UAE
Gratuity & end of service benefits in the UAE - image showing the word “End of…”
Image credit - Unsplash
In the UAE, employees get a certain lumpsum amount called gratuity at the end of their service with a particular employer, based on the number of years of service.
In absence of a pension after retirement age, this acts as a lumpsum amount during every job change/end.
Calculation of gratuity in the UAE
Gratuity becomes due after 1 year of completed service, and the calculation is done based on the duration, as below:
(i) Service up to the first 5 years - 21 days for every year completed
(ii) After completion of 5 years - 30 days for every additional year completed
Gratuity is calculated based on basic salary, which is one of the reasons why basic salaries are much lesser than the total salary, and salaries are structured as basic salary + allowances.
Break in service is excluded from this benefit.
Earlier under the old labour laws, it used to be more complex, where the calculation would change at 3 years and then again at 5 years, however, that has changed now. Also, earlier the calculation used to be based on whether the exit was due to resignation or termination, with resignation getting lesser amount, that has also changed now - it’s become more consistent, unified and simpler.
The maximum payout cannot exceed more than 24 months of basic salary.
As an example on the maximum cap - if someone has worked in an organization for 29 years, with their last total salary being AED 10,000, and the last basic was AED 5,000, the payout will be limited to the maximum which is AED 5,000 x 24 = AED 120,000, while the actual calculation exceeds it. The maximum limit is exceeded in very rare cases - in occasional legacy employees such as in this example, since the average duration of employment in today’s world is substantially lesser due to the changing environments, and the payout is not exceeded with even long tenures of service like 10-15 years.
The amounts can vary a bit based on whether it’s calculated based on number of days in a month or in a year:
Method 1 of calculation of UAE gratuity:
If someone calculates it as 5,000 (monthly basic salary) divided by 30 (number of days in a month), then the daily wage is AED 166.7.
Method 2 of calculation of UAE gratuity:
If someone calculates it by AED 5,000 (monthly basic salary) x 12 months (number of months in a year) = AED 60,000 for the annual basic salary, then divided by 365 for the number of days in a year, then the daily wage becomes AED 164.4.
The daily wage will then further be multiplied by either 21 or 30, as per the above, based on the duration. The more complex calculation will be the pro-rata calculation, since rarely anyone leaves at the end of the year.
Based on the method of calculation, as above - the daily wage and hence the final calculation differs. It’s better to calculate as per Method 2, in my opinion, since Method 1 will not cover the months having different durations properly - 30, 31, 28, etc., while the second method is more uniform and takes into account 365 days, which is the total number of days in most years. At the same time, Method 1 is commonly used as well. Hence, it’s best to check with your HR team which method to use, as an employee.
There are quite a few gratuity calculators online, which can help with giving or validating at least an approximate calculation, while the exact calculation needs to be checked with the HR team, as mentioned above.
HR teams & professionals need to ensure that their method of calculation can be justified, and can’t be challenged.
This also differs between mainland and free zones. Certain free zones like DIFC have their own gratuity calculations, under their specific labour laws.
Other full and final settlement dues in the UAE
Full & final settlement and end of service benefits in the UAE - image showing a cheque being signed
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Salary is to be paid until the last working day (including the notice period), along with accrued leave, based on a pro-rata calculation. One way repatriation ticket is due too, but that becomes due only if the employee is leaving the country. Hence most former employees ask the erstwhile employee to share their new visa/work permit within a certain period from their exit, so that they can close the file regarding the repatriation ticket if the employee has indeed joined a new job in the country.
All dues need to be paid within 14 days of the last employment day. Bearing in mind, this final credit happens with the description of a full and final settlement by the bank, hence if you have any liabilities with the bank, even if it’s just a credit card with a small credit limit, the bank usually freezes the account or at least a certain portion of it, if no new employment documents are shared with them within 30 days of that credit.
In practice it can get a bit complicated, because if a person joins a new job on 21st of a month, then they will not be able to get their first salary in that kind of a short timeframe. Since salaries are credited in bulk, they will get their salary at the end of the next month, which places them in the risky window of account being frozen. Also, many times people suffer lay-offs and might take time to get a new job. Some other times, people might be taking a short break and figuring out other options like starting their own company. Either way, the resolutions for this are - get the full and final settlement as a cheque from your employer to avoid triggering such automatic freezing, or, have another bank account to access while the freezing is sorted out.
The term end of service benefits is used loosely - whether people can use it for gratuity or the entire bucket of final dues, as above. It’s best to clarify context based on facts and situation.
Forfeiture of gratuity & other final dues in the UAE
In certain serious breaches, gratuity and/or other final dues can be forfeited, however, under the new labour laws (2021/2022), this is no longer as easy as it used to be before under the historical 1980 labour laws. Now it can’t be assumed that termination for cause/breach of employee will automatically lead to forfeiture of such amounts, hence HR teams must be careful, follow the regulatory requirements and processes and consult MOHRE before considering withholding any of the end of service amounts. Furthermore, forfeiture of gratuity and accrued leave are treated differently from forfeiture of notice period salary.
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