How To Calculate Gratuity In UAE?

As an employee, it’s inevitable to leave your job at some point in time. This could be due to relocation, retirement, or perhaps simply seeking new challenges and opportunities. 

Regardless of the reasons, employers are obliged to pay employees an end-of-service gratuity payment as per UAE labor law upon completion of their employment contract.

However, calculating the gratuity amounts can be quite tricky and complex. To help simplify the process, we’ve compiled a guide on how to accurately calculate your gratuity in the UAE. 

On top of that, we’ll walk you through the; 

• Basic definitions
• Eligibility requirements for the gratuity payout
• Key factors influencing the gratuity amount
• Differences in gratuity calculation based on various types of contracts 

Ready? Let’s get started!

What Is Gratuity?

Gratuity, or end-of-service benefits, is a payment legally awarded to an employee by the employer upon leaving the organization. Simply put, it is a token of appreciation for the services they rendered during their term with the company. 

The UAE Labor Law dictates that any employee who has worked for a company is entitled to gratuity, provided they meet all the prerequisites outlined in the law.

The amount of gratuity payable depends on the employee’s monthly basic salary. Usually, it is paid during retirement, but it is possible to claim it before that, although it depends on the organization’s terms and conditions.

Who Is Eligible for Gratuity in UAE?

Under the UAE labor law, not every employee is entitled to gratuity payments. The following conditions need to be met for gratuity benefits to be applicable: 

• There should be an employment labor contract (limited or unlimited) in place
• The employee must have worked continuously for at least one year or more with an employer
• An employee on an unlimited contract may not receive the end-of-service benefit if they resign without completing the notice period, fail to prove the employer’s non-fulfilment of legal obligations, or cannot provide evidence of assault by the employer or their representatives
• Both UAE nationals and expatriates can receive gratuity 
• An employee dismissed under Article 120 of the UAE’s Labour Law, specifically for non-compliance with the matters stated in the Article, may not be eligible for the gratuity payment.

Factors to Consider for Gratuity Pay Calculation

1. Type of Contract

There are two main types of employment contracts in UAE: limited and unlimited. Both contracts are similar, but the rules for calculating gratuity differ under each type of contract, which we will discuss in detail below.

2. Last Basic Salary

When calculating end-of-service benefits in UAE, only the last basic salary that the employee received prior to the termination of their contract is considered. The basic salary does not include any additional benefits or allowances that an employee was receiving. 

For instance, if an employee receives a salary package of AED 4,000, inclusive of fuel allowance, housing, or overtime, only AED 4,000 is considered as their basic salary.

Also, any additional deductions from one’s salary, such as salary sacrifice schemes, are not included in the basic salary either. 

3. Duration of Employment

Under the UAE Labour Law, the gratuity payment is provided to employees who have been with the organization for at least one year. 

The tenure is based on the actual number of days worked and does not include extended periods of leave such as sabbaticals. This is because the gratuity calculator assumes continuous service between the first and last working day. 

The UAE Ministry of Human Resources and Emiratisation (MoHRE) specifies that a one-year employment period must not include any unpaid breaks or holidays during the employee’s service.   

What are the Types of Contracts?

Before calculating your gratuity, you should be aware of the types of contracts that you had with your former employer. According to the UAE Labour Law, there are two types of contracts — limited or unlimited. The difference between these two lies in the terms for the end of service benefits and termination.  

1. Limited Contracts

Limited-term or fixed contracts are contracts with a set term or time period that are typically adopted when an employer needs to engage an employee for a specific project or duration. This type of contract clearly states the start and end dates of the employment period. 

When the contract expires, it gets automatically canceled unless it is purposefully renewed. For instance, project workers who are hired for a particular project would leave the workplace once the project is completed. 

In other words, limited or fixed contact means:

• The employee commits to stay with the company/organization for the specified duration.

• If you resign before the end of this period, you may face a labor ban, loss of labor rights, or have to compensate your employer.

2. Unlimited Contracts

Unlike the limited contract,  an unlimited-term contract is open-ended and more flexible with no specified period of years the employee has to work with the company. 

Generally, it is the one more commonly used in the UAE and can be terminated with mutual consent or a  notice period of one to three months from either side. During the notice period, all parties involved are supposed to honor their obligations. 

In a nutshell:

• An unlimited contract has no fixed end date 
• A notice period of one to three months is applicable for the termination of the contract from either the employee or employer
• The gratuity calculation is based on the duration of service.

Gratuity Pay Calculation for Limited Contracts

In both types of contracts, your gratuity calculation is broken down into various tiers based on whether you resign or get fired. 

For employees on limited contracts, gratuity calculations are also based on the length of service and the nature of the termination. Thus, the payment tiers are broken down into: 

• Contract completion with less than 5 years of service
• More than 5 years of service

If you, as an employee, are fired under a limited contract, the tiers change into:

• 1-5 years of service
• 5 years or more of service

In the event of resignation:

• You are not entitled to any gratuity pay if you resign before completing one year of service

• Employees who have completed their less than 5 years contract are eligible for a gratuity of 21 days of basic salary for each year of service.
• Employees who have served for 5 years or more are entitled to a gratuity of 21 days of basic salary for the first 5 years and an additional 30 days of salary for each year beyond their 5-year mark.

In the event of termination:

• Gratuity for employees with 1-5 years of service is calculated based on their basic salary, with 21 days provided for each year of service
• Employees with more than 5 years of service receive a gratuity of 21 days of basic salary for up to their  5^th year and 30 days’ basic pay for each year beyond their  5^th year.

In all cases, the total figure should not exceed two years’ total salary wage.

Steps to Calculate Gratuity for Limited Contracts

Let’s assume your basic salary is AED 15,000, and you’ve worked in the company for 4 years. Here is a simplified step-by-step guide to calculating your gratuity pay:

1. Determine your daily wage: This is done by dividing your monthly basic salary by 30 (the approximate number of days in a month). 

i.e. 15,000 ÷30 = 500. Your daily wage is AED 500

2. Multiply it by 21 (since the total years of service in the company is less than 5 years).

i.e. 500 × 21 = AED 10, 500 

• For more than 5 years of service:

500 × 30 = AED 15,000

So a 21-day salary is AED 10, 500 while a 30-day salary is AED 15,000

3. Multiply it by 4 (the total number of years of services in that company)

i.e. 10,500 × 4 = AED 42,000

The gratuity that would be given at the end of the service, which is 4 years(Limited contract), amounts to AED 42,000. 

Gratuity Pay Calculations for Unlimited Contracts

For employees on unlimited contracts, the gratuity is calculated differently depending on the nature of termination — resignation or termination because of misconduct or poor performance. Again, the tiers apply here based on the duration of service:

• 1-3 years of service 
• 3-5 years of service 
• 5 years or more years of service 

However, only two tiers are applicable, suppose the employee is terminated. As a result, the gratuity calculation rules change as the employee moves from one tier to another. These tiers are:

• 1-5 years of service 
• 5 years or more of service 

In the event of resignation

If an employee under an unlimited contract resigns, their gratuity calculation will be as follows:

• Employees with less than one year of service are not entitled to any gratuity.
• Those with 1-3 years of service are entitled to 1/3rd of their 21-day gratuity pay for each service year
• Employees with 3-5 years of service receive a gratuity of 2/3rd of their 21-day gratuity pay for each service year
• Employees who have worked for over 5 years in the company receive a full 21-day basic salary for each service year as their gratuity.

In the event of termination

Suppose the employer terminates an employee under an unlimited contract, the gratuity calculation rules will be as follows:

• Employees with less than one year of service are not entitled to any gratuity.
• If an employee has served for over 1 year but less than 5 years, they are entitled to a gratuity of 21 calendar days’ basic salary for each of those years.
• For those who have served over 5 years, the gratuity increases to 30 calendar days’ basic salary for each additional year.

Steps to Calculate Gratuity for Unlimited Contracts

Just like in the case of fixed-term contracts, the rules of gratuity calculation for unlimited contracts are more or less the same. For example, let’s assume your basic salary is AED 15, 000 and you worked in the company for 4 years. You can simply use the formula below to calculate your gratuity payouts.

1. Calculate your daily wage: 

15000 ÷ 30 = AED 500 per day 

2. Multiply it by 21(since the total work period is less than 5 years):

500 × 21 = AED 10, 500 

3. Get the ⅔ rd figure of the result( since the work experience is between 3 -5 years):

⅔ of 10,500 = AED 7000

4. Multiply with 4 (total years of service in the company):

7000 × 4 = AED 28000

So the total gratuity payable at the end of the service for a 4 year service under an unlimited contract is AED 28,000

How to Calculate Gratuity When Employee Contract Resigns

While the formulas for gratuity calculation for unlimited and limited contracts are almost similar, there is a slight difference when the employee under an unlimited contract resigns. 

As mentioned, they are only entitled to ⅓ or ⅔ of the gratuity payouts depending on their service period.

For example, assuming your basic salary is 20,000, and you worked with the company for 3 years, you can use these formulas  when calculating your total gratuity payable:

•  For 1-3 years of service

 (1/3^rd of their basic salary of 21 days × basic salary × years worked) ÷ 30 

i.e. (7 days × 20,000 × 3) ÷ 30 = AED 14,000

• For service between 1-5 years:

( 2/3rd of your 21-day gratuity pay ×  basic salary × years worked) ÷ 30 

i.e. (14 days  × 20,000 × 3)  ÷  30 = AED 28,000

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