Last Updated on May 24, 2023 by user
Gratuity calculation in the UAE is an essential function of the HR department. When an employee resigns or is terminated, the legal formalities need to be carried out properly. But getting the gratuity pay calculation in the UAE just right depends on a few factors. Here’s a quick guide to gratuity calculation.
Let’s start with the basics. You’ll need to understand what gratuity is before you can start calculating it.
What is gratuity?
A gratuity is a sum of money given to an employee at the end of their contract. How much is given depends on whether the worker is an Emirati or a foreign national. There are also differences in terms of employment type and length.
Our guide to gratuity will examine the private sector and those who are foreign nationals working here. You can find more information about the rights of Emiratis in the public sector here.
Who is eligible for gratuity?
As per the UAE End of Service Gratuity Law, any employee who has spent one or more years in continuous service of your organization is entitled to an end of service gratuity. Therefore, most workers in the country would receive a gratuity at the end of employment.
However, there are situations where an employee is not entitled to gratuity. These include:
- The employment terminates before the employee has completed one year of continuous service
- The employee is dismissed by the employer for gross misconduct for reasons set out in the UAE Labour Law
- The employee has opted to be part of the organization’s pension scheme and receives a pension as an alternative to the gratuity
Alternatively, as you will see below, there are certain other contractual situations where gratuity might not be paid.
In general, the important part to understand is that gratuity calculation in the UAE depends on the length of employment and the type of contract. Knowing the differences in contract types is a fundamental part of understanding gratuity calculations for various labour laws.
Here are the rules regarding different employment contract types:
Limited or Fixed Term contract
A limited employment contract outlines the start and end dates of the employment period. Limited contracts have a minimum and maximum period of 2 years and can be renewed upon the agreement of both the employer and the employee.
Under a limited contract, an employee is entitled to 21 days salary for every year of employment for less than 5 years, and 30 days salary for each year of employment over 5 years, up to a maximum of 2 years salary.
The gratuity depends, therefore, on the length of time the employee has worked:
Less than 1 year: If the employee leaves work before completing one year, you do not need to pay them a gratuity.
1 year – 5 years: If the employee has worked for more than a year, but less than 5 years, you have to pay him or her gratuity based on 21 days of salary.
More than 5 years: If the employee has worked more than 5 years, you are required to pay him or her gratuity based on 30 days’ salary for every year of work. The maximum is 2 years full salary.
It’s worth noting that if the employee resigns without the completion of the limited or renewed limited contract, then no gratuity pay is paid out. However, if the employee resigns after completing at least an additional year’s service with a notice period on the renewed limited contract, then gratuity pay is paid according to the above rules.
If the employer terminates the renewed limited contract at any point during the extended period, then they need to pay gratuity according to the above rules.
Unlimited Contract
Unlimited employment contracts or standard employee contracts specify the start date but there is no defined end date. It offers a degree of flexibility and is usually offered when an employee is hired on a permanent basis.
Gratuity calculation in the UAE on unlimited contracts depends a little on the years of service, as well as the situation for the determination.
If an employee resigns under an unlimited contract, then gratuity is calculated like this:
- 1 year – 3 years of service: Gratuity pay equivalent to 1/3rd of the 21-day basic salary for each year.
- 3 years – 5 years of service: Gratuity pay equivalent to 2/3rd of the 21-day basic salary for each year.
- 5 years: Gratuity pay is equivalent to the full 21-day basic salary for each year.
- 5+ years of service: Gratuity pay is equivalent to the full 21-day basic salary for the first five years and 30 days basic salary for the number of years of service after that.
If the employer terminates the unlimited contract, then gratuity is calculated like this:
- 1 year – 3 years of service: Gratuity pay equivalent to the full 21-day basic salary for each year.
- 3 years – 5 years of service: Gratuity pay equivalent to the full 21-day basic salary for each year.
- 5 years: Gratuity pay is equivalent to the full 21-day basic salary for each year.
- 5+ years of service: Gratuity pay is equivalent to the full 21-day basic salary for the first five years and 30 days basic salary for the number of years of service after that.
Steps to gratuity calculation in the UAE
Calculating gratuity is essential and you want to get it right. It is important to note that gratuity in the UAE is calculated based on the basic salary of the employee. If the employee owes any money to the employer, the amount shall be deducted from the employee’s gratuity.
So what are the steps to calculating gratuity in the UAE? Here are the five things to do:
1. Know the employee’s basic salary
You need to start with the basic salary. This is the amount paid to an employee excluding any additions or allowances such as housing, transport, commissions, bonuses, etc. Gratuity is always calculated based on the basic salary of an employee.
2. Check the contract type
Next, you want to check the contract type. As you can see from the above examples, the amount of gratuity depends on the contract type. So make sure to check whether the contract is:
- Limited contract
- Renewed limited contract
- Unlimited contract
Once you have this information, you know just how many days you need to pay and you can start making the calculations.
3. Calculate the daily wage
Once you know the basic salary, you can then calculate the daily wage.
For example, let’s assume the basic salary of the employee is AED 10,000. The daily wage can be determined by dividing the basic salary by 30 (normal monthly workdays). So 10,000 / 30 = AED 333.33.
4. Multiply the daily wage appropriately
Depending on the contract type and the years of service, you can now calculate the gratuity.
If the employee was under a limited or renewed contract, you would essentially need to multiply the daily wage with the correct number of days.
For example, if the employee worked with the organization for less than five years, they’d be entitled to 21 days worth of gratuity. So 21 x 333.33 = AED 6,999.30.
You’ll need to multiple this based on the years of service. So if the employee worked for three years, the total gratuity would be 6,999.30 x 3 = AED 20,997.00.
If the employee was under a limited contract, then your gratuity calculation could look like this. If the employee worked between 1-3 years, then they would be entitled to 1/3rd of the 21 days of gratuity pay. So if the basic salary was AED 10,000, then the 21 days salary would be AED 6,999.30. The final gratuity would be 6,999.30 x 1/3 = AED 2,333.10.
5. Use a Bayzat’s gratuity calculator
Calculating gratuity manually can be a bit tedious. It’s also important you don’t make any errors while calculating. Opting for a robust HR solution such as Bayzat’s Employee Management System not only helps to automate gratuity calculations but will streamline your organization’s administration, payroll and benefits. We offer an HR platform that automates your HR administrative tasks, payroll processing, and time-off management.
As part of our goal to provide a world-class employee experience for all SMEs in the UAE, we have put together a quick and useful online tool that automatically calculates the gratuity for your employees approaching the end of their service.
The Bayzat Gratuity Calculator allows you to easily see what you need to pay. Simply enter your employee’s contract details and hit the “calculate” button! You will then instantly be able to view a breakdown of their salary entitlement whether it is gratuity, reimbursements or commissions.
Click here to start using the Bayzat gratuity calculator for free!
With the Bayzat gratuity calculator, you can now accurately calculate the end-of-service remuneration for employees at the click of a button!